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 Preface to this edition:

‘Fun is just another word for Learning’- Raphael Koster (Creative Director Star Wars Galaxies)

There are so many topics, What to study & What to leave?

What if I’m unable to cover the syllabus in last 1.5 days?
Everyone says learning Key Words is important, but how to identify them?

As a CA Student I was always bogged down by all such dilemmas, then I thought how magical it’d be if someone
could make the notes for me which would make the revision a cakewalk in last 1.5 days.

But as Gandhi Ji says, “Be the change you want to see”, so I decided that I myself should sit down with the
Material & finally the journey of these notes began. It was fun in bringing down a chapter from 60 pages to 6
pages, but trust me it’s all the hard work I did during my CA Final Preparation which paved way for this Smart
Work.

I never thought that such bulky material could be summarised in such concise manner but as they say,
“Where there’s a Will, there’s a Way”.

It’s my gratitude to Almighty for showering their blessings which helped me clear CA Exams with All India
Rank 8 & secure 71 Marks in Audit.

Having secured an Exemption at both levels in this paper, I knew that the game is all about Key Words, so why
not share the Cheat Code with everyone!

I’m sure that this book coupled with the Right study strategy can easily help you get an Exemption in this paper
& turn your Fear into Love for Audit.

This book is dedicated to every student who’s working hard day night with full Willpower & Josh to become a
Chartered Accountant.

This is a colour-coded book for easy understanding

• Black- Headings
• Blue- Main Concept
• Red- Important Points
• Green- Amendments

Thankful to my parents, CA Gobind Ram Keswani & Mrs. Rekha Keswani & my sister, Dakksha Keswani for their
continuous support.

Thanks to makemydelivery.com for publishing this book. I would also like to thank Bhanwar Borana Sir for
believing in my skill & will to make ‘Audit a Fun Learning Experience for Students’.

Wishing you all the best for your career ahead.

Happy Learning!

Regards,
CA Shubham Keswani
AIR 8 CA Final & AIR 29 CA IPCC
B.Com(H), Shri Ram College of Commerce

For any concerns, feel free to reach out to me at cashubhamkeswani@gmail.com.

 Topic wise weightage in Previous 4 Attempts
Topic Name July’21 Jan’21 Nov’20 Nov’19

Standards on Auditing 25 24 34 18

Audit planning 5

Risk Assessment & Internal Control 5 5 5

Automated Environment 5 4 4

Company Audit + CARO + Schedule III 10 9 10

Audit Committee & Corporate Governance 5 5 5

Consolidated Financial Statements 5 5

Bank Audit 5 5 5 5

NBFC 5 5

Insurance Audit 4 4

PSU Audit 5 5

Liabilities of Auditor

Internal, Management & Operational Audit 5 5

DD, Investigation & Forensic Audit 9 5 4 4

Peer & Quality Review 5

Audit under Fiscal Laws

Direct Tax Audit 4 4 4

GST Audit (Excluded) 4 4

Professional Ethics 12 17 12 14

Total (Inclusive of Optional Ques.) 88 88 88 84

 Last Day Revision Planner
Hooray! You are already half way through in Group 1, now only 2 papers left J

Just take some rest, freshen up, drink water & eat some fresh fruits/snacks to get the energy for kickstart
your preparation for Audit.

Start sharp at 7 with Professional Ethics complete it by 9:30 have your Dinner & resume at 10 again.

Now you just need to complete revision of 3 topics Peer/Quality Review, PSU Audit & Ch-2 Audit Planning.

Sleep around 12 & wake up by 6 am. Freshen up, stretch your body, drink lots of water, have fresh fruits &
start your studies.

Now we’ll cover 3 Fun Topics:

• PSU Audit (30 Mins)
• Internal, Mgt & Operational Audit with SA 610 (1 hr)
• DD, Investigation & Forensic Audit (1.5 hrs)

Time should be around 10 am, take bath, have your Breakfast & resume at 11 sharp.

Now is the time to do financial Audits:

• Bank Audit (1.5 hrs)
• NBFC Audit (30 Mins)
• Insurance Audit (30 Mins)

Time should be around 2 pm, stretch your body, have water & enjoy your Lunch. Do go for a walk after the
Lunch and freshen up your mind.

Start afresh around 3 pm

Now we just need to cover the easiest & scoring topics of the lot:
• Company Audit + CARO (1.5 hrs)
• SA 700 Series (1.5 hrs)
• Consolidated Financial Statements (30 Mins)

Time should be around 7pm, take a break now to have some healthy snacks, chai & whatever you like. Take a 10
min walk outdoors & get back to resume at 7:30.

Now you just need to cover SAs before you sleep, I used to follow the below order, with 15-20 mins break
between each series:

• SA 500 Series (2 hrs)

• SA 600 Series (45 mins)
• SA 400 Series (30 Mins)
• SA 200 Series

Sleep around 12 & wake up next day at 6 sharp. Congo it’s the exam day i.e. Show time, follow the morning
routine I discussed & start with following topics:
• SEBI LODR
• Automated Environment
• Ch-3 with SA 315 & 330
Go through the latest MTPs & RTPs before you leave for exam hall.

On the way to exam hall just glance through the provisions of tax audit. All the Best! J
 Index
S No. Topics- Content Page No.
1 Standards on Auditing 1-88
SQC-1 1
SA 200 6
SA 210 11
SA 220 13
SA 230 14
SA 240 16
SA 250 20
SA 260 22
SA 265 24
SA 299 27
SA 300 (Covered with Ch-2) -
SA 315 29
SA 330 33
SA 320 35
SA 402 36
SA 450 38
SA 500 40
SA 501 43
SA 505 46
SA 510 49
SA 520 51
SA 530 53
SA 540 56
SA 550 61
SA 560 64
SA 570 66
SA 580 70
SA 600 72
SA 620 74
SA 700 78
SA 701 83
SA 705 84
SA 706 86
SA 710 87
SA 720 89
2 Audit Planning, Strategy & Execution 92-96
3 Risk Assessment & Internal Control 97-104
4 Audit in Automated Environment 105-109
5 Company Audit 110-126
6 CARO 2020 127-131
7 Schedule III 132-145
8 Audit Committee & Corporate Governance 146-153
S No. Topics-Content Page No.
9 Consolidated Financial Statements 154-158
10 Bank Audit 159-172
11 NBFC Audit 173-178
12 Insurance Audit 179-187
13 PSU Audit 188-193
14 Liabilities of Auditor 194-195
15 Internal Audit 196-199
16 SA 610 200-201
17 Management Audit 202-205
18 Operational Audit 206-208
19 Due Diligence 209-210
20 Investigation 211-219
21 Forensic Audit 220-224
22 Peer Review 225-229
23 Quality Review 230-234
24 Direct Tax Audit 235-245
25 Reports vs Certificates 246
26 Professional Ethics 247-283
Fundamental Principles 247
Types of Threats 248
Membership provisions 250
Branch Office 253
KYC Norms 233
First Schedule
Part I 255
Part II, III, IV 267-268
Second Schedule
Part I 268
Part II & III 272
Council General Guidelines 273
Recommendatory Self-Regulatory Measures 277
Disciplinary Proceedings 278
NOCLAR 279
List of All Clauses 281
 SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements”

All firms to have system of quality control that provides reasonable assurance that:
(a) Firm & personnel comply with professional standards, regulatory & legal requirements, &
(b) Reports issued by firm or partners are appropriate in circumstances.

Definitions:-
• Engagement partner –partner or other person in the firm who is member of ICAI and is in full
time practice and responsible for engagement and its performance, and for report that is issued
on behalf of firm, and who has appropriate authority from professional, legal or regulatory body.

• Engagement quality control review –process designed to provide objective evaluation, before
report is issued, of significant judgments that engagement team made and conclusions they
reached in formulating the report.

• Engagement quality control reviewer –partner, person in firm, qualified external person, or team
of individuals, with experience and authority to objectively evaluate, before report is issued,
significant judgments the engagement team made and conclusions they reached in formulating
report. However, in case the review is done by a team of individuals, such team should be headed
by a member of ICAI.

Elements of a System of Quality Control

a) Leadership responsibilities for quality within firm
b) Ethical requirements
c) Acceptance and continuance of client relationships and specific engagements
d) Human resources
e) Engagement performance
f) Monitoring

Leadership Responsibilities for Quality within Firm

The actions of EP and appropriate msgs to the other members of engagement team, in taking
responsibility for overall quality on each audit engagement, emphasise:
(a) The importance to audit quality of:
(i) Performing work that complies with Professional stds and Regulatory and Legal requirements;
(ii) Complying with the firm’s quality control policies and procedures as applicable;
(iii) Issuing auditor’s reports that are appropriate in the circumstances; and
(iv) The engagement team’s ability to raise concerns without fear of reprisals; and
(b) The fact that quality is essential in performing audit engagements.

Independence
Policies & procedures should enable firm to:
● Communicate independence requirements to personnel & others.
● Identify & evaluate circumstances creating threat to independence.
● Take appropriate action to eliminate threats/withdrawal from engagement.

CA SHUBHAM KESWANI 1
 Policies & Procedures in case of breach of Independence requirements
The policies and procedures should include requirements for:
(a) All who are subject to independence requirements to promptly notify firm of independence
breaches;
(b) Firm to promptly communicate identified breaches to:
(i) Engagement partner who, with the firm, needs to address the breach; and
(ii) Other relevant personnel in firm and those subject to independence requirements who need to
take appropriate action; and
(c) Prompt communication to the firm, if necessary, by engagement partner and other individuals of
actions taken to resolve the matter, so that firm can determine whether it should take further action.

Notes:
● At least annually, firm should obtain written confirmation of compliance with policies and
procedures on independence from all firm personnel in terms of requirements of Code.
● The familiarity threat is particularly relevant in context of F.S. audits of listed entities. For
these audits, engagement partner should be rotated after a pre-defined period, normally not
more than 7 years.

Evaluating the Integrity of Client

With regard to integrity of a client, matters that firm considers include, for example:
• The identity and business reputation of client’s principal owners, key mgt, related parties and
TCWG.
• The nature of client’s operations, including business practices.
• Info concerning attitude of client’s principal owners, key mgt and TCWG towards such matters
as aggressive interpretation of A/C stds and internal control environment.
• Whether client is aggressively concerned with maintaining firm’s fees as low as possible.
• Indications of inappropriate limitation in scope of work.
• Indications that client might be involved in money laundering or other criminal activities.
• Reasons for proposed appointment of firm and non-reappointment of previous firm.

Information on integrity of client that the firm obtains may come from, for example:
• Communications with existing or previous providers of professional accountancy services to client
in accordance with the Code, and discussions with other third parties.
• Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry
peers.
• Background searches of relevant databases.

Matters to be considered in determining if firm has capabilities, competence, time and resources to
undertake new engagement:
• Firm personnel have knowledge of relevant industries or subject matters;
• Firm personnel have experience with regulatory or reporting requirements, or ability to gain
necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary capabilities and competence;
• Experts are available, if needed;
• Individuals meeting criteria and eligibility requirements to perform EQCR are available and
• The firm be able to complete engagement within reporting deadline.

CA SHUBHAM KESWANI 2
 Withdrawal from Engagement
Policies and procedures on withdrawal from engagement include following:
• Discussing with client’s mgt and TCWG regarding action that firm might take based on
relevant facts and circumstances.
• If firm determines that it is appropriate to withdraw, discussing with appropriate level of
client’s mgt and TCWG withdrawal and reasons for the withdrawal from engagement.
• Considering professional, regulatory or legal requirement for firm to remain in place, or for
firm to report withdrawal, together with reasons for withdrawal, to regulatory authorities.
• Documenting significant issues, consultations, conclusions and basis for conclusions.

Human Resources
Establish policies/procedures to reasonable assure that:
• Firm has sufficient personnel with capabilities, competence & commitment (CCC) to ethical
principles; &
• Engg partner to issue appropriate report.
The firm’s performance evaluation, compensation and promotion procedures give due recognition and
reward to development and maintenance of competence and commitment to ethical principles.

In particular, the firm:

• Makes personnel aware of firm’s expectations regarding performance and ethical principles;
• Provides personnel with evaluation, and counseling on, performance, progress and career
development;&
• Helps personnel understand promotion depends on performance quality and adherence to
ethical principles, and failure to comply with firm’s policies and procedures may result in
disciplinary action.

Assignment of Engagement Teams

The firm establishes procedures to assess its staff’s capabilities and competence.

Capabilities and competence considered when assigning engagement teams, and determining level of
supervision reqd, include following:
• Understanding, and practical experience with, engagements of similar nature and
complexity through appropriate training and participation.
• An understanding of professional stds and regulatory and legal requirements.
• Appropriate technical knowledge, including knowledge of relevant information technology.
• Knowledge of relevant industries in which clients operate.
• Ability to apply professional judgment.
• Understanding of firm’s quality control policies and procedures.

Engagement Performance
Review responsibilities are determined on basis that more experienced engagement team members,
including engagement partner, review work performed by less experienced team members.

Reviewers consider whether:

a) Work has been performed in accordance with professional stds and regulatory and legal
requirements;
b) Significant matters have been raised for further consideration;
c) Appropriate consultations have taken place and resulting conclusions have been documented
and implemented;
d) There is a need to revise the nature, timing and extent of work performed;

CA SHUBHAM KESWANI 3
 e) The work performed supports conclusions reached and is appropriately documented;
f) The evidence obtained sufficient and appropriate to support report; and
g) The objectives of engagement procedures have been achieved.

Supervision includes following:

● Tracking progress of engagement
● Considering capabilities and competence of individual members of engg team, whether they have
sufficient time to carry out work, understand their instructions and work is being carried out
in accordance with planned approach to engagement.
● Addressing significant issues arising during engagement, considering their significance and
appropriately modifying planned approach appropriately.
● Identifying matters for consultation or consideration by more experienced engagement team
members.

Consultation
The firm should establish policies and procedures designed to provide it with reasonable assurance
that:
a) Appropriate consultation takes place on difficult or contentious matters;
b) Sufficient resources are available to enable appropriate consultation to take place;
c) The nature and scope of such consultations are documented; and
d) Conclusions resulting from consultations are documented and implemented.

Engagement Quality Control Review (EQCR)

Review Responsibility:
EP shall take responsibility for reviews being performed in accordance with firm’s review policies and
procedures.
For audits of F.S. of listed entities, engagement partner shall:
• Determine that an engagement quality control reviewer (EQCR) has been appointed;
• Discuss significant matters arising during audit engagement, with EQCR; and
• Not date auditor’s report until the completion of EQCR i.e. EQCR should be completed before
Audit Report is issued.

An EQCR for audits of F.S. of listed entities includes considering the following:
• Engagement team’s evaluation of firm’s independence in relation to specific engagement.
• Significant risks identified during the engagement and the responses to those risks.
• Judgments made, particularly with respect to materiality and significant risks.
• Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and conclusions arising from them.
• The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
• The matters to be communicated to management and TCWG and regulatory bodies. (SA 260)
• Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
• The appropriateness of report to be issued.

The firm’s policies and procedures are designed to maintain objectivity of EQCR.
For example, engagement quality control reviewer:
a) Is not selected by engagement partner;
b) Does not participate in engagement during period of review;
c) Does not make decisions for engagement team; and

CA SHUBHAM KESWANI 4
 d) Is not subject to other considerations that would threaten reviewer’s objectivity.

Can EP consult EQCR during engagement? Yes as long as it doesn’t affect quality of engagement.
Reviewer’s objectivity should be maintained.

Engagement Documentation (ED)

Assembly of final engagement files on a timely basis. In the case of audit, such a time limit is
ordinarily not more than 60 days after date of auditor’s report.
Retention period ordinarily is no shorter than 7 years from date of the auditor’s report, or, if later,
the date of the group auditor’s report.

Ownership of Engagement Documentation (ED)

ED is property of firm. Firm may, at its discretion, make portions of, or extracts from ED available
to clients, provided such disclosure does not undermine validity of work performed, or, in case of
assurance engagements, independence of the firm or its personnel.

Complaints and Allegations

(i) Firm should establish policies and procedures designed to provide it with reasonable assurance
that it deals appropriately with: (types of complaints)
a) Complaints and allegations that work performed by firm fails to comply with professional
standards and regulatory & legal requirements; and
b) Allegations of non-compliance with the firm’s system of quality control.

(ii) Complaints and allegations may originate from within or outside the firm. They may be made by
firm personnel, clients or other 3rd parties. (within or outside?)

(iii) Firm establishes clearly defined channels for firm personnel to raise any concerns in manner that
enables them to come forward without fear of reprisals. (how we receive them?)

(iv) Firm investigates such complaints and allegations in accordance with established policies and
procedures. Investigation is supervised by partner with sufficient authority & experience within firm
but not involved in engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use qualified external person or another firm to carry out investigation. Complaints,
allegations and responses to them are documented. (Investigate & document)

(v) Where results of investigations indicate deficiencies in design or operation of the firm’s quality
control policies and procedures, or non-compliance with firm’s SQC by individual or individuals, firm
takes appropriate action. (Action)

CA SHUBHAM KESWANI 5
SA 200 Overall Objectives of Independent Auditor and Conduct of an Audit in
Accordance with Standards on Auditing

In conducting an audit of F.S., overall objectives of the auditor are:

(a) To obtain reasonable assurance about whether F.S. as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling auditor to express an opinion on whether F.S. are
prepared, in all material respects, in accordance with applicable FRF; &
(b) To report on F.S., and communicate as required by SAs, in accordance with auditor’s findings.

In all cases when reasonable assurance cannot be obtained and qualified opinion is insufficient for
purposes of reporting to intended users of F.S., SAs require that auditor disclaim an opinion or
withdraw from engagement, where withdrawal is legally permitted.

Definitions
● Applicable financial reporting framework (FRF) – The financial reporting framework adopted by
mgt and, where appropriate, TCWG in preparation and presentation of F.S. that is acceptable in
view of nature of entity and objective of F.S., or that is required by law or regulation.

“fair presentation framework” refer to FRF that requires compliance with requirements of
framework and:
(i) Acknowledges, to achieve fair presentation of F.S., it may be necessary for mgt to provide
disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for mgt to depart from a requirement of
framework to achieve fair presentation of F.S. Such departures are expected to be necessary only in
extremely rare circumstances.

The term “compliance framework” is used to refer to a FRF that requires compliance with
requirements of framework, but does not contain acknowledgements in (i) or (ii) above.

● Financial statements – A structured representation of historical financial information, including

related notes, intended to communicate an entity’s economic resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial reporting
framework.

● Misstatement – A difference between the amount, classification, presentation, or

disclosure(a/c/p/d) of a reported financial statement item & the amount, classification,
presentation, or disclosure(a/c/p/d) that is required for the item to be in accordance with the
applicable FRF. Misstatements can arise from error or fraud.

● Those charged with governance – The person(s) or organisation(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. (Executive Members-CEO/CFO/MD)

Ethical Requirements Relating to Audit of Financial Statements

• The auditor shall comply with relevant ethical requirements, including those pertaining to
independence.
• Independence comprises both independence of mind and independence of appearance.
• Independence enhances auditor’s ability to act with integrity, be objective and maintain
attitude of professional skepticism.

CA SHUBHAM KESWANI 6
 Professional Skepticism
An attitude that includes a questioning mind (?), being alert to conditions (!) which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Professional skepticism includes being alert to, for example:

• Audit evidence that contradicts other audit evidence obtained. (Bank Statement vs
Confirmation)
• Information that brings into question reliability of documents and responses to inquiries to be
used as audit evidence. (Got to know management is unethical)
• Conditions that may indicate possible fraud. (Internal control weak)
• Circumstances that suggest need for audit procedures in addition to those required by SAs.

Maintaining professional skepticism throughout audit is necessary if auditor wants to reduce risks of:
• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing, and extent(NTE) of the
audit procedures and evaluating the results thereof.

Professional judgment
• The application of relevant training, knowledge and experience,
• within the context provided by auditing, accounting and ethical standards,
• in making informed decisions about the courses of action
• that are appropriate in circumstances of audit engagement.

Professional judgment is necessary in particular regarding decisions about:

• Materiality and audit risk.
• The nature, timing, and extent(NTE) of audit procedures used to meet the requirements
of SAs and gather audit evidence.
• Evaluating whether sufficient appropriate audit evidence (SAAE) has been obtained, and
whether more needs to be done to achieve objectives of SAs and thereby, overall objectives
of auditor.
• The evaluation of management’s judgments in applying entity’s applicable FRF.
• The drawing of conclusions based on audit evidence obtained, for eg, assessing
reasonableness of estimates made by management in preparing F.S.

Sufficient & Appropriate Audit Evidence (SAAE)

To obtain reasonable assurance, auditor shall obtain SAAE to reduce audit risk to an acceptably low
level and draw reasonable conclusions on which to base auditor’s opinion
● Reasonable assurance – In context of audit of F.S, a high, but not absolute, level of assurance.
● Audit evidence – Info. used by auditor in arriving at conclusions on which auditor’s opinion is
based.
(i) Sufficiency is measure of quantity of audit evidence. Quantity is affected by auditor’s
assessment of risks of material misstatement (ROMM) and also by quality of such audit
evidence.
(ii) Appropriateness is measure of quality of audit evidence; that is, its relevance and its
reliability in providing support for conclusions on which auditor’s opinion is based.

CA SHUBHAM KESWANI 7
 Audit Risk
The risk that auditor expresses inappropriate audit opinion when F.S. are materially misstated. Audit
risk is function of the risks of material misstatement and detection risk.

Risk of material misstatement (ROMM) - The risk that F.S. are materially misstated prior to audit.
This consists of two components, described as follows at assertion level:

Inherent Risk Control Risk

The susceptibility of an assertion about a class The risk that a misstatement that could occur in
of transaction, account balance or disclosure to an assertion about a class of transaction,
a misstatement that could be material, either account balance or disclosure and that could be
individually or when aggregated with other material, either individually or when aggregated
misstatements, before consideration of any with other misstatements, will not be prevented,
related controls. or detected and corrected, on a timely basis by
entity’s internal control.

The ROMM may exist at two levels:

The overall F.S. level i.e. relate to F.S. as a whole The assertion level for classes of transactions,
potentially affecting many assertions account balances, and disclosures.

ROMM at assertion level are assessed in order to determine NTE of further audit procedures
necessary to obtain SAAE. This evidence enables auditor to express an opinion on F.S. at an acceptably
low level of audit risk.

Detection risk – The risk that procedures performed by auditor to reduce audit risk to acceptably low
level will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements i.e. Risk of not detecting a material misstatement.

Scope of Audit
The auditor’s opinion on F.S. deals with whether the F.S. are prepared, in all material respects, in
accordance with the applicable FRF.
• Such an opinion is common to all audits of F.S.
• The auditor’s opinion therefore does not assure, future viability of entity nor the efficiency or
effectiveness with which mgt has conducted affairs of entity.
• In some cases, however, applicable laws and regulations may require auditors to provide opinions
on other specific matters, such as effectiveness of internal control, or consistency of a separate
management report with the F.S.
• While SAs include requirements and guidance in relation to such matters to the extent they are
relevant to forming an opinion on F.S., auditor would be required to undertake further work if
auditor had additional responsibilities to provide such opinions.

The Premise (Responsibilities of Mgt & TCWG)

(i) For preparation and presentation of financial statements (PPFS) in accordance with applicable FRF;
this includes design, implementation and maintenance(DIM) of internal control(IC) relevant to
preparation and presentation of financial statements(PPFS) that are free from material misstatement,
whether due to fraud or error; &
(ii) To provide the auditor with:
(a) All information, such as records and documentation, and other matters that are relevant to
PPFS;
(b) Any additional info that auditor may request from mgt and, where appropriate, TCWG; and

CA SHUBHAM KESWANI 8
 (c) Unrestricted access to those within entity from whom auditor determines necessary to obtain
audit evidence.

As part of their responsibility for PPFS, mgt and, TCWG are responsible for:
• The identification of applicable FRF , in context of any relevant laws or regulations.
• The PPFS (Preparation & Presentation of F.S.) in accordance with that framework.
• An adequate description of that framework in F.S.

The preparation of F.S. requires mgt to exercise judgment in making accounting estimates that are
reasonable in circumstances, as well as to select and apply appropriate accounting policies. These
judgments are made in the context of applicable FRF.

The F.S. may be prepared in accordance with a FRF designed to meet:

• The common financial information needs of a wide range of users (i.e., “general purpose F.S.”); or
• The financial information needs of specific users (i.e., “special purpose F.S.”).

Inherent Limitations of Audit

The auditor is not expected to, and can’t, reduce audit risk to zero and cannot therefore obtain
absolute assurance that F.S. are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of audit evidence on
which auditor draws conclusions and bases auditor’s opinion being persuasive rather than conclusive.

(1) The nature of financial reporting:

The preparation of F.S. involves judgment by mgt in applying requirements of applicable FRF to facts
and circumstances of entity. For eg: Accounting estimates

(2) The nature of audit procedures:

• Possibility that Management & others do not provide complete info relevant to Preparation &
Presentation of Financial Statements (PPFS)
• Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
• Audit is not an official investigation into alleged wrongdoings. He doesn’t have spl legal powers eg.
search.

(3) Timeliness of Reporting & Balance between Benefit and Cost:

Relevance of information, and thereby its value, tends to diminish over time, and there is a balance to
be struck between the reliability of information and its cost.
Because of inherent limitations of audit, there is unavoidable risk that some material misstatements
of F.S. may not be detected, even though audit is properly planned and performed in accordance with
SAs.

(4) In case of certain assertions or subject matters, potential effects of inherent limitations on
auditor’s ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
• Fraud, particularly fraud involving senior management or collusion.
• The existence and completeness of related party relationships and transactions.
• The occurrence of non-compliance with laws and regulations.
• Future events or conditions that may cause an entity to cease to continue as a going
concern.

CA SHUBHAM KESWANI 9
 Conduct of an Audit in accordance with SAs

• Complying with SAs Relevant to the Audit:

Ø The auditor shall comply with all SAs relevant to the audit.
Ø An SA is relevant to the audit when the SA is in effect and the circumstances
addressed by the SA exist.
Ø The auditor shall have an understanding of the entire text of an SA including
application
Ø The auditor shall not represent compliance with SAs in auditor’s report unless auditor
has complied with requirements of this SA and all other SAs relevant to the audit.

• Objectives Stated in Individual SAs:

Ø Achieve overall objective à using objectives of relevant SAs
Ø Having regard to interrelationships among SAs:
• Determine if any audit procedure in addition to that required by SAs is
necessary.
• Evaluate whether SAAE has been obtained

• Complying with Relevant Requirements

Ø The auditor shall comply with each requirement of an SA unless, in circumstances of
audit:
a. An SA is not relevant;(Eg. SA 610 not applicable if not internal audit fn) or
b. There’s conditional requirement & condition doesn’t exist.
Ø In exceptional circumstances, auditor may depart from relevant requirement in SA. In
such circumstances, auditor shall perform alternative audit procedures to achieve the
aim of that requirement. The need for auditor to depart from relevant requirement is
expected to arise only where requirement is for specific procedure to be performed and,
in specific circumstances of audit, that procedure would be ineffective in achieving aim
of requirement.

• Failure to achieve an Objective

Ø Evaluate if it prevents auditor from achieving overall objective &
Ø Requires to modify opinion or withdraw from engagement
Ø It’s a significant matter requiring documentation as per SA 230

CA SHUBHAM KESWANI 10
 SA 210: Agreeing the terms of Audit Engagement

Objective
Objective of auditor is to accept or continue audit engagement only when basis upon which it is to be performed
has been agreed, through:

(a) Establishing whether preconditions for audit are present; and

(b) Confirming that there is common understanding b/w auditor and mgt and, where appropriate, TCWG of terms
of audit engagement.
Preconditions of Audit
The auditor shall:-
(a) determine whether FRF is acceptable

(b) Obtain agreement of mgt that it acknowledges and understands its responsibility:
(i) For preparation of F.S. in accordance with applicable FRF
(ii) For such Internal Control (IC) as mgt determines necessary to enable preparation of F/S free
from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with: (AAU)
a. Access to all information of which management is aware that is relevant to preparation of F/S
such as records, documentation and other matters;
b. Additional information that auditor may request from mgt for purpose of audit; and
c. Unrestricted access to persons within entity from whom auditor determines necessary to obtain
audit evidence.

If preconditions not present, auditor shall discuss matter with management:

Unless required by law or regulation to do so, auditor shall not accept proposed audit engagement:
(a) If auditor has determined that FRF to be applied in preparation of F/S is unacceptable; or
(b) If agreement has not been obtained.

Limitation on Scope Prior to Audit Engagement Acceptance

If mgt or TCWG impose limitation on scope of auditor’s work in terms of a proposed audit engagement such
that auditor believes à result in auditor disclaiming an opinion on F/S , shall not accept such audit engagement,
unless required by law or regulation.

Contents of Agreement on terms of Audit engagement

Agreed terms of audit engagement shall be recorded in audit engagement letter or other written agreement
and shall include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of applicable FRF for preparation of F.S.; and
(e) Reference to expected form and content of any reports to be issued by auditor and a statement that there
may be circumstances in which a report may differ from its expected form and content.

Recurring Audits: New engagement letter each time?

The auditor may decide not to send new audit engagement letter or other written agreement each period.

However, following factors make it appropriate to revise terms of audit engagement or to remind entity of
existing terms:

● Any indication that entity misunderstands objective and scope of audit.

CA SHUBHAM KESWANI 11
● Any revised or special terms of audit engagement.
● A recent change of senior management.
● A significant change in ownership.
● A significant change in nature or size of the entity’s business.
● A change in legal or regulatory requirements.
● A change in the FRF adopted in the preparation of F.S.
● A change in other reporting requirements.

Acceptance of a Change in Terms of Audit Engagement

The auditor shall not agree to change in terms of audit engagement where there is no reasonable justification
for doing so. If, prior to completing audit engagement, auditor is requested to change audit engagement to an
engagement that conveys lower level of assurance, determine whether there is reasonable justification for
doing so.

If terms are changed, auditor and management agree on and record new terms of engagement in engagement
letter or other suitable form of written agreement.

If auditor unable to agree to change of terms and not permitted by mgt to continue, the auditor shall:
(a) Withdraw from audit engagement where possible under law or regulation; and
(b) Determine whether there is obligation, either contractual or otherwise, to report circumstances to other
parties, such as TCWG, owners or regulators

FRF Prescribed by Law or Regulation—Other Matters Affecting Acceptance

If auditor has determined à FRF prescribed by law or regulation would be unacceptable but for the fact that
it is prescribed by law or regulation, auditor shall accept the audit engagement only if following conditions are
present:
(a) Management agrees to provide additional disclosures in F.S. and

(b) It is recognised in terms of audit engagement that:

(i) The auditor’s report on F/S will incorporate an Emphasis of Matter paragraph, drawing users’ attention to
the additional disclosures, in accordance with SA 706 &
(ii) Unless auditor is required by law or regulation to express auditor’s opinion on the F/S by using the
phrases “present fairly, in all material respects”, or “give a true and fair view” in accordance with applicable
FRF , auditor’s opinion on F.S. will not include such phrases.

If above conditions not present and auditor required by law or regulation to undertake audit engagement, he
shall:
(a) Evaluate effect of misleading nature of F.S. on auditor’s report; and
(b) Include appropriate reference to this matter in terms of audit engagement.

Factors that are relevant to auditor’s determination of acceptability of financial reporting framework to be
applied in preparation of financial statements include:
• The nature of entity (for example, whether it is a business enterprise, or a not for profit organization);
• The purpose of F.S. (for example, whether they are prepared to meet the common financial information
needs of a wide range of users or the financial information needs of specific users);
• The nature of F.S. (for example, whether the financial statements are a complete set of financial
statements or a single financial statement); and
• Whether law or regulation prescribes applicable FRF.

CA SHUBHAM KESWANI 12
 Audit of Components
When auditor of parent entity also auditor of component, factors that may influence decision whether to send
separate audit engagement letter to the component include the following:

• Who appoints component auditor;

• Whether a separate auditor’s report is to be issued on the component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management from the parent entity.

SA 220 Quality Control for an Audit of F.S.

(The points covered here are in addition to SQC-1)

SCQ related to quality control measures that apply on Firm level & SA 220 is limited to Audit
engagement level.

What info is required by EP to determine, whether to accept & continue Client Engagement?
Following info assists engagement partner in determining whether conclusions reached regarding
acceptance and continuance of client relationships and audit engagements are appropriate:

• The integrity of principal owners, key management and TCWG of entity;

• Whether engagement team is competent to perform audit engagement and has necessary
capabilities, including time and resources;

• Whether firm and engagement team can comply with relevant ethical requirements; and

• Significant matters that have arisen during current or previous audit engagement, and their
implications for continuing relationship.

Differences of Opinion:
It may arise:
• Within the Engagement Team,
• With those consulted, or
• Between the EP and EQC Reviewer.

Engagement Team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.

CA SHUBHAM KESWANI 13
 SA 230 “Audit Documentation”

Record of
• audit procedures(AP) performed,
• relevant audit evidence obtained, and
• conclusions the auditor reached” (commonly known as working papers).

Purposes of Audit Documentation

1. Assisting engagement team to plan and perform the audit.
2. Assisting members of the engagement team responsible for supervision to direct and supervise
the audit, and to discharge their review responsibilities.
3. Enabling engagement team to be accountable for its work.
4. Retaining record of matters of continuing significance to future audits.
5. Enabling conduct of quality control reviews and inspections.
6. Enabling conduct of external inspections.

Form, Content and Extent of Audit Documentation

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor to
understand:
(a) The nature, timing, and extent of audit procedures;
(b) The results of audit procedures performed, and audit evidence obtained; and
(c) Significant matters arising during audit and conclusions reached thereon, significant professional
judgments made in reaching those conclusions.

In documenting nature, timing and extent of audit procedures performed, auditor shall record:
(i) The identifying characteristics of the specific items or matters tested
(ii) Who performed audit work and date such work was completed; and
(iii) Who reviewed audit work performed and date and extent of such review

Factors effecting Form, content and extent of audit documentation

1. The size and complexity of entity.

2. The nature of the audit procedures to be performed.

3. The identified risks of material misstatement.

4. The significance of the audit evidence obtained.

5. The nature and extent of exceptions identified.

6. The need to document a conclusion or the basis for a conclusion not readily determinable from
documentation of work performed or audit evidence obtained.

7. The audit methodology and tools used.

8. Timely preparation of Audit Documentation.

Departure from a Relevant Requirement

If, in exceptional circumstances, auditor judges it necessary to depart from relevant requirement in
SA, auditor shall document
• reasons for departure and
• alternative procedures performed.

CA SHUBHAM KESWANI 14
 Documentation of Matters Arising after Date of the Auditor’s Report
If, in exceptional circumstances, auditor performs new or additional audit procedures or draws new
conclusions after date of auditor’s report, auditor shall document:
1. The circumstances encountered;
2. The new or additional audit procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
3. When and by whom the changes to audit documentation were made and reviewed.

Assembly of Final Audit File

After assembly of final audit file has been completed, auditor shall not delete or discard audit
documentation of any nature before end of its retention period i.e. 7 Years.

The auditor shall assemble audit documentation in audit file and complete administrative process of
assembling file on timely basis after date of auditor’s report i.e. after 60 days.

In circumstances where auditor finds necessary to modify existing audit documentation or add new
audit documentation after assembly of final audit file completed, auditor shall, regardless of nature
of modifications or additions, document:
(a) The specific reasons for making them; and
(b) When and by whom they were made and reviewed.

CA SHUBHAM KESWANI 15
 SA 240 (Revised): Auditor’s Responsibilities relating to
Fraud in an Audit of Financial Statements

Responsibility for Prevention and Detection of Fraud

• The primary responsibility à TCWG and management.
• Management, with TCWG, place strong emphasis on fraud prevention, and fraud
deterrence
• This involves commitment to creating culture of honesty and ethical behaviour.

Objectives of Auditor
a) To identify and assess the ROMM in F.S. due to fraud;
b) To obtain SAAE about assessed ROMM due to fraud, through designing and implementing
appropriate responses; and
c) To respond appropriately to identified or suspected fraud.

Techniques: Fraudulent Financial Reporting (FFR), Management Override of Controls &

Misappropriation of Assets

Fraudulent financial reporting may be accomplished by following:

i. Manipulation, falsification (including forgery), or alteration of a/c records or supporting
documentation from which F.S. are prepared.
ii. Misrepresentation in or intentional omission from, F.S. of events, transactions or other significant
info.
iii. Intentional misapplication of a/c principles relating to amts, classification, manner of
presentation, or disclosure.

It often involves management override of controls, misappropriation of assets etc that otherwise
may appear to be operating effectively.

Fraud can be committed by management overriding controls using such techniques as:
(i) Recording fictitious journal entries, close to end of accounting period, to manipulate
operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
(iii) Omitting, advancing or delaying recognition in F.S. of events and transactions that have
occurred during reporting period.
(iv) Concealing, or not disclosing, facts that could affect amounts recorded in F.S.
(v) Engaging in complex transactions structured to misrepresent financial position or financial
performance of entity.
(vi) Altering records and terms related to significant and unusual transactions.
(vii) Embezzling receipts (misappropriating collections from debtors)
(viii) Stealing physical assets or intellectual property
(ix) Causing entity to pay for goods and services not received (for eg, payments to fictitious
vendors, payments to fictitious employees).
(x) Using entity’s assets for personal use (for example, using the entity’s assets as collateral
for a personal loan or a loan to a related party).

CA SHUBHAM KESWANI 16
 Risk Factors Relating to Misstatements Arising from Misappropriation of Assets:

1. Incentives/Pressures: Personal financial obligations may create pressure on mgt or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between entity and employees with access to cash or other assets susceptible
to theft may motivate employees to misappropriate those assets.

For eg, adverse relationships may be created by following:

Ø Known or anticipated future employee layoffs.
Ø Recent or anticipated changes to employee compensation or benefit plans.
Ø Promotions, compensation or other rewards inconsistent with expectations.

2. Opportunities: Certain circumstances increase susceptibility of assets to misappropriation.

For example, opportunities to misappropriate assets increase in case of following:

Ø Inventory items that are small in size, of high value, or in high demand.
Ø Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
Ø Inadequate internal control over assets may increase susceptibility of misappropriation of
assets.
Ø Inadequate segregation of duties or independent checks.

3. Attitudes/Rationalizations
Ø Disregard for need for monitoring or reducing risks related to misappropriations of assets.
Ø Disregard for internal control over misappropriation of assets by overriding existing controls
or failing to take remedial action on known deficiencies.
Ø Behavior indicating displeasure or dissatisfaction with entity or its treatment of employee.
Ø Changes in behavior or lifestyle that may indicate assets have been misappropriated.

Responsibilities of the Auditor

Auditor is responsible for obtaining reasonable assurance that F.S. taken as a whole are free from
material misstatement, whether caused by fraud or error.
• Owing to inherent limitations of audit as per SA 200à unavoidable risk some material
misstatements of F.S may not be detected, even though audit is planned and performed as per
SAs.
• Risk of not detecting material misstatement resulting from fraud > error. Because fraud may
involve sophisticated and carefully organized schemes designed to conceal it, such as forgery,
deliberate failure to record transactions, or intentional misrepresentations being made to
auditor.
• The risk of auditor not detecting material misstatement resulting from management fraud >
employee fraud as mgt is in position to directly or indirectly manipulate a/c records or present
fraudulent financial information.

Auditor’s duties for prevention and detection of fraud

• Auditor is responsible for maintaining attitude of professional scepticism throughout audit.
• Auditor should recognize possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of honesty and integrity of entity’s mgt and TCWG
• Unless doubtful situations present, auditor may accept records and documents as genuine.
• If conditions cause auditor to believe that document may not be authentic or terms have been
modified, he shall investigate further.

CA SHUBHAM KESWANI 17
 • Where responses to inquiries of mgt or TCWG are inconsistent, he shall investigate
inconsistencies.

Considering Whether an Identified Misstatement may be Indicative of Fraud

If there is indication à consider implications of misstatement in relation to other aspects of audit,
particularly reliability of management representations (SA 580).

Communication
• If auditor identified a fraud or has indication of fraud, communicate à mgt, TCWG &,
• In some circumstances, if required by laws and regulations à regulatory and enforcement
authorities also.

Auditor Unable to Complete Engagement

If auditor concludes à not possible to continue performing audit as result of misstatement resulting
from fraud or suspected fraud, auditor should:

i. consider professional and legal responsibilities, including requirement for to report to person(s)
who made audit appointment or regulatory authorities;

ii. consider possibility of withdrawing from engagement; and

iii. If auditor withdraws:

• discuss with mgt and TCWG, withdrawal from engagement and reasons; &
• consider professional or legal requirement to report to person(s) who made audit
appointment or regulatory authorities, withdrawal and reasons for withdrawal.

Management Representation
1. Acknowledges responsibility for design, implementation and maintenance(DIM) of internal control
to prevent and detect fraud.
2. Have disclosed results of mgt’s fraud risk assessment w.r.t. F.S.
3. Have disclosed knowledge of fraud or suspected fraud affecting entity involving:
• Management;
• Employees who have significant roles in internal control; or
• Others where fraud could have a material effect on the FS.
4. Have disclosed knowledge of any allegations of fraud, or suspected fraud, affecting entity’s FS.

Documentation
• Understanding of Entity and environment as per SA 315.
• Responses to Assessed Risks.
• Communications with mgt. and TCWG.
• Reasons for non-applicability of presumption of ROMM relating to revenue recognition.

Enquiring about Management Assessment of Fraud Risk

The auditor shall make inquiries of management regarding:

(a) Management’s assessment of ROMM due to fraud;
(b) Management’s process for identifying & responding to risks of fraud in entity
(c) Management’s communication to TCWG; and
(d) Management’s communication to employees regarding its views on business practices and ethical
behaviour.
(e) For entities having internal audit function, make inquiries of internal auditor.

CA SHUBHAM KESWANI 18
Appropriateness of making inquiries of management

Ø Mgt is responsible for entity’s internal control and preparation of F.S. à appropriate for auditor
to make inquiries of management regarding management’s own assessment of risk of fraud and
controls in place to prevent and detect it.

Ø The nature, extent and frequency of mgt’s assessment are relevant to auditor’s understanding of
entity’s control environment. For example, fact management has not made assessment of risk of
fraud may be indicative of lack of importance that mgt places on internal control.

Identification and Assessment of Risks of Material Misstatement Due to Fraud

• In accordance with SA 315, auditor shall identify and assess ROMM due to fraud at F.S. level, and
at assertion level for classes of transactions, account balances and disclosures.
• Auditor based on presumption that there are risks of fraud in revenue recognition, evaluate which
types of revenue, revenue transactions or assertions give rise to such risks.
• Auditor shall obtain understanding of entity’s related controls, including control activities, relevant
to such risks.

Audit Procedures Responsive to Risks Related to Management Override of Controls

Mgt is in unique position to perpetrate fraud because of its ability to manipulate A/c records and
prepare fraudulent F.S. by overriding controls that otherwise appear to be operating effectively. Due
to unpredictable way in which such override could occur, it is a ROMM due to fraud and thus a
significant risk.

Irrespective of auditor’s assessment of risks of management override of controls, auditor shall design
and perform audit procedures to:

(a) Test appropriateness of journal entries recorded in general ledger and other adjustments in F.S.
In designing and performing audit procedures for such tests, auditor shall:
(i) Make inquiries of individuals involved in financial reporting process about inappropriate
or unusual activity relating to processing of journal entries and other adjustments;
(ii) Select journal entries and other adjustments made at end of a reporting period; and
(iii) Consider need to test journal entries and other adjustments throughout period.

(b) Review accounting estimates for biases and evaluate whether circumstances producing bias
represent ROMM due to fraud.
In performing this review, auditor shall:
(i) Evaluate whether judgments and decisions made by mgt in making accounting estimates
included in F.S, indicate possible bias on part of entity’s mgt that may represent a ROMM
due to fraud. If so, auditor shall re-evaluate a/c estimates taken as a whole; and
(ii) Perform retrospective review of mgt judgments and assumptions related to significant
a/c estimates reflected in F.S. of prior year.

(c) For significant transactions o/s normal course of business or appear to be unusual given auditor’s
understanding of entity and its environment, evaluate whether business rationale (or lack thereof) of
transactions suggests they have been entered to engage in fraudulent financial reporting or conceal
misappropriation of assets.

CA SHUBHAM KESWANI 19
 SA 250 (Revised) “Consideration of Laws and Regulations in an
Audit of Financial Statements”

Management Responsibility for compliance with laws and regulation

The following are procedures entity implement to assist in prevention and detection of non-
compliance with laws and regulations:

a) Monitoring legal requirements and ensuring that operating procedures are designed to meet
these requirements.
b) Instituting and operating appropriate systems of internal control.
c) Developing, publicising and following a code of conduct.
d) Ensuring employees are properly trained and understand code of conduct.
e) Monitoring compliance with code of conduct and acting appropriately to discipline employees
who fail to comply with it.
f) Engaging legal advisors to assist in monitoring legal requirements.
g) Maintaining register of significant laws and regulations with which entity has to comply within
its particular industry and a record of complaints

Auditor’s responsibility in relation to Compliance with Laws & Regulations (L&Rs)

This SA distinguishes auditor’s responsibilities in relation to compliance with 2 different categories
of laws and regulations as follows:

(a) Provisions of those L&R having a direct effect on determination of material amounts and
disclosures in F.S. such as tax and labour laws; and

(b) Other laws and regulations that don’t have direct effect on determination of amounts and
disclosures in F.S., but compliance with which may be fundamental to operating aspects of business.

• For 1st category referred, auditor’s responsibility is to obtain SAAE about compliance with Laws
& Regulations.
• For second category, auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those L&Rs that may have material effect on F.S.

Auditor’s Consideration of Compliance with Laws and Regulations

Understanding SAAE Non-Compliance Remain Alert WR

1. The auditor shall obtain a general understanding of:

(a) legal and regulatory framework applicable to entity and industry in which entity operates; and
(b) How entity is complying with that framework.

2. The auditor shall obtain SAAE regarding compliance with those laws and regulations generally
recognized to have a direct effect on determination of material amounts and disclosures in F.S.

3.The auditor shall perform following audit procedures to identify instances of noncompliance with
other laws and regulations that may have a material effect on the F.S:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with relevant licensing or regulatory authorities.

4. During audit, auditor shall remain alert to possibility that other audit procedures applied may bring
instances of non-compliance or suspected non-compliance with laws and regulations to auditor’s
attention.

CA SHUBHAM KESWANI 20
5. Obtain written representation that known instances of non-compliance with L&Rs have been
disclosed to auditor

Audit Procedures When Non-compliance is Identified or Suspected

If auditor becomes aware of info concerning instance of non-compliance with L&Rs, auditor shall
obtain:
(a) Understanding of nature of act & circumstances in which it has occurred; and

(b) Further information to evaluate possible effect on F.S.

• If auditor suspects there may be non-compliance, auditor shall discuss matter with mgt
and TCWG.
• If management or TCWG don’t provide sufficient info. auditor shall consider need to
obtain legal advice.
• If sufficient info about suspected non-compliance cannot be obtained, auditor shall
evaluate effect of lack of SAAE on auditor’s opinion.

Reporting of Identified or Suspected Non-Compliance

Reporting Non Compliance to TCWG:
• If, non-compliance is intentional and material, communicate matter to TCWG as soon as practicable.

• If auditor suspects mgt or TCWG involved in noncompliance, communicate matter to next higher
level of authority at entity, such as audit committee or supervisory board. Where no higher authority
exists, or if auditor believes communication may not be acted upon, obtain legal advice.

Reporting Non-Compliance in the Auditor’s Report on Financial Statements

• If auditor concludes that non-compliance has a material effect on F.S. and has not been adequately
reflected in F.S. , auditor shall, express a qualified or adverse opinion on F.S.

• If auditor is precluded by MGT or TCWG from obtaining SAAE, auditor shall express a qualified
opinion or disclaim an opinion.

• If auditor is unable to determine whether non-compliance has occurred because of limitations

imposed by circumstances rather than by mgt or TCWG, auditor shall evaluate effect on auditor’s
opinion.

Reporting Non-Compliance to Regulatory and Enforcement Authorities

If auditor has identified or suspects non-compliance with L&Rs, auditor shall determine whether he
has a responsibility to report identified or suspected non-compliance to parties outside the entity.

Indicators of Non-Compliance with laws and regulations

• Investigation by regulatory organisations, Govt deptt or payment of fines, additional taxes or
penalties.
• Payments for unspecified services or Loans to consultants, RPs, employees or govt employees.
• Sales commission or Agent’s fees that appear excessive in relation to ordinarily paid by entity
• Purchases at Prices Significantly above or below market price.
• Unusual Payments in Cash, purchases in form of cashiers’ cheques payable to bearer or transfers
to numbered bank accounts.
• Unusual payments towards legal and retainerShip fees.
• Unusual transactions with companies registered in Tax Haven.
• Adverse Media comment

CA SHUBHAM KESWANI 21
 SA 260 (Revised) “Communication with Those Charged With Governance”

Scope of SA
• SA 260 deals with auditor’s responsibility to communicate with TCWG in audit of F.S.
• Nothing in this SA preclude auditor from communicating any other matters to TCWG.

Role of communication
Effective two-way communication is important in assisting:
a) Auditor and TCWG in understanding matters related to audit in context, and in developing a
constructive working relationship.
b) Auditor in obtaining from TCWG info relevant to audit. For eg, TCWG may assist auditor in
understanding entity and its environment, in identifying appropriate sources of audit evidence,
and providing info about specific transactions or events; and
c) TCWG in fulfilling their responsibility to oversee financial reporting process, thereby
reducing ROMM of F.S
Auditor’s Objective
• To communicate clearly with TCWG responsibilities of auditor and planned scope and timing of
audit.
• To obtain from TCWG info relevant to audit.
• To provide TCWG with timely observations significant and relevant in overseeing final reporting
process.
• To promote effective two-way communication between auditor and TCWG

When All of TCWG are involved in Managing the Entity

• In some cases, all of TCWG are involved in managing entity, for eg, small business where single
owner manages entity and no one else has governance role.
• In these cases, matters already communicated need not be communicated again with those same
person(s) in their governance role.

Matters to be communicated
• The Auditor’s responsibilities in relation to F.S. Audit
(a) The auditor is responsible for forming and expressing an opinion on F.S.; and
(b) The audit of F.S. does not relieve mgt or TCWG of their responsibilities

• Planned Scope & Timing of Audit

It may include:
(a)How auditor plans to address the significant ROMM, whether due to fraud or error.
(b)How auditor plans to address areas of higher assessed ROMM.
(c)Auditor’s approach to internal control.
(d)Application of concept of materiality

• Significant Findings from the Audit : The auditor shall communicate with TCWG:
(a) The auditor’s views about significant qualitative aspects of entity’s a/c practices, including
a/c policies, a/c estimates and F.S. disclosures.
(b) Significant difficulties, if any, encountered during the audit;

CA SHUBHAM KESWANI 22
Examples of Significant difficulties:
• Significant delays by mgt to provide required info
• An unnecessarily brief time to complete audit
• Extensive unexpected effort required to obtain SAAE
• Unavailability of expected info
• Restrictions imposed on auditor by mgt
• Mgt’s unwillingness to make or extend assessment of entity’s ability to continue as going
concern when requested.

(c) Unless all of TCWG are involved in managing the entity:

• Significant matters, arising from audit that were discussed, or subject to correspondence
with mgt; &
• Written representations auditor is requesting; and

(d) Circumstances that affect form and content of auditor’s report, if any (Audit Report)

(e) Any other significant matters that in the auditor’s professional judgment, are significant
to the oversight of the financial reporting process

Auditor Independence
In case of listed entities, the auditor shall communicate with TCWG:

(a) A statement that engagement team and others in firm has complied with relevant ethical
requirements regarding independence; and
(b) All relationships and other matters between firm, network firms, and entity that bear on
independence.; and

(c) Related safeguards applied to eliminate identified threats to independence or reduce them to
acceptable level.

Factors affecting mode of communication

• Whether discussion of the matter will be included in auditor’s report, e,g, KAM.
• Whether the matter has been satisfactorily resolved.
• Whether mgt has previously communicated the matter.
• In case of an audit of special purpose F.S, whether auditor also audits entity’s general purpose
F.S.
• Legal requirements.
• Expectations of TCWG, including arrangements made for periodic meetings or communications
with auditor.

CA SHUBHAM KESWANI 23
 SA 265 “Communicating Deficiencies in Internal Control to
Those Charged With Governance & Management”

Scope of SA
• Communicate deficiencies in Internal control (IC) which significant
• Auditor is required to obtain understanding of internal control relevant to audit when
identifying and assessing ROMM.

In making those risk assessments, auditor considers internal control in order to design audit
procedures, but not for purpose of expressing an opinion on effectiveness of IC.

Auditor may identify deficiencies in IC not only during risk assessment process(RAP) but also at
other stages.

This SA specifies which identified deficiencies auditor is required to communicate to TCWG & mgt.

Auditor’s Objective
To communicate appropriately to TCWG and mgt, deficiencies in internal control that auditor has
identified during audit and in auditor’s professional judgment are of sufficient importance to merit
their respective attentions.

Requirements
• Auditor shall determine whether, on basis of audit work performed, he has identified one or
more deficiencies in IC.

• If identified one or more deficiencies in IC, determine, on basis of work performed, whether,
individually or in combination, they constitute significant deficiencies.

• The auditor shall communicate in writing significant deficiencies in IC identified during audit
to TCWG on a timely basis.

• The auditor shall also communicate to mgt at an appropriate level of responsibility on a timely
basis:
a. In writing, significant deficiencies in IC that auditor has communicated or intends to
communicate to TCWG, unless it would be inappropriate to communicate directly to mgt in
circumstances; and
b. Other deficiencies in internal control identified during audit that have not been
communicated to mgt by other parties and that, in auditor’s professional judgment, are of
sufficient importance to merit mgt’s attention.

• Written communication to TCWG

Auditor shall include in written communication of significant deficiencies in internal control:

(a) A description of deficiencies and an explanation of their potential effects; and

(b) Sufficient information to enable TCWG and mgt to understand context of communication.

In particular, auditor shall explain that:

(i) Purpose of audit was to express an opinion on F.S;

(ii) Audit included consideration of IC relevant to preparation of F.S. in order to design audit
procedures that are appropriate in circumstances, but not for purpose of expressing opinion
on effectiveness of IC; &

(iii) Matters reported are limited to deficiencies that auditor identified during audit and has
concluded are of sufficient importance to merit being reported to TCWG.

CA SHUBHAM KESWANI 24
 How to decide if Deficiency is Significant or Not?

Examples of matters that auditor may consider in determining whether a deficiency or combination
of deficiencies in internal control constitutes a significant deficiency include:

• The likelihood of deficiencies leading to MM in F.S. in future.

• The susceptibility to loss or fraud of related asset or liability.

• The F.S. amounts exposed to deficiencies.

• The volume of activity that has occurred or could occur in account balance or class of
transactions exposed to deficiency or deficiencies.

• The importance of controls to financial reporting process; for example:

Ø General monitoring controls (such as oversight of management).
Ø Controls over the prevention and detection of fraud.
Ø Controls over the selection and application of significant accounting policies.
Ø Controls over significant transactions with related parties.
Ø Controls over significant transactions o/s entity’s normal course of business.
Ø Controls over the period-end financial reporting process (such as controls over non-
recurring journal entries).

• The interaction of deficiency with other deficiencies in internal control.

How to determine if there are significant deficiencies in Internal Control?

Indicators of significant deficiencies in internal control include, for eg:

Ø Evidence of ineffective aspects of control environment, such as:

a) Identification of mgt fraud, whether or not material, not prevented by entity’s IC.
b) Management’s failure to implement appropriate remedial action on significant deficiencies
previously communicated.
c) Absence of a risk assessment process (RAP) within entity where such process would
ordinarily be expected to have been established.

Ø Evidence of ineffective entity risk assessment process (RAP), such as management’s failure to
identify a ROMM that auditor would expect entity’s risk assessment process to have
identified.

Ø Evidence of ineffective response to identified significant risks (e.g., absence of controls over
such a risk).

Ø Misstatements detected by auditor’s procedures that were not prevented, or detected and
corrected(P/D/C), by entity’s IC.

Ø Disclosure of material misstatement due to error or fraud as prior period items in current
year’s P&L.

Ø Evidence of mgt’s inability to oversee the preparation of F.S.

CA SHUBHAM KESWANI 25
 How Detailed should be our Communication of Significant Deficiencies?

The level of detail at which to communicate significant deficiencies is matter of auditor’s professional
judgment in circumstances.

Factors that the auditor may consider in determining an appropriate level of detail for the
communication include, for eg:

• The nature of entity. For instance, the communication required for a public interest entity may be
different from that for a non-public interest entity.

• The size and complexity of the entity. For instance, the communication required for a complex
entity may be different from that for an entity operating a simple business.

• The nature of significant deficiencies that the auditor has identified.

• The entity’s governance composition. For instance, more detail may be needed if TCWG include
members who do not have significant experience in the entity’s industry or in the affected areas.

• Legal or regulatory requirements regarding the communication of specific types of deficiency in

internal control.

When to communicate?
• Listed Entities: Before date of approval of F.S.
• Other Entities: Before assembly of audit file (60 days from date of audit report)

Notes:
● If previously communicated significant deficiency remains, current year’s communication may
repeat description from previous communication, or simply reference previous communication.
● May communicate orally before writing.

CA SHUBHAM KESWANI 26
 SA 299 (Revised) “Joint Audit of Financial Statements”
‘Joint Audit’ and ‘Joint Auditors’
A joint audit is audit of F.S. of entity by 2 or more auditors appointed with objective of issuing audit
report. Such auditors are described as joint auditors.

Audit Planning, Risk Assessment and Allocation of Work

• The EP and other key members of team from each of joint auditors involved in planning.
• The joint auditors jointly establish overall audit strategy that sets scope, timing and direction
(STD) of audit, and guides development of audit plan.
• Prior to commencement of audit, joint auditors shall discuss and develop a joint audit plan.

In developing joint audit plan, joint auditors shall:

a. Identify division of audit areas and common audit areas amongst joint auditors that define scope
of work of each joint auditor;
b. Ascertain reporting objectives of engagement to plan timing of audit and nature of
communications reqd;
c. Communicate among all joint auditors factors significant in directing engagement team’s efforts;
d. Consider results of preliminary engagement activities and, knowledge gained on other
engagements performed earlier by respective EP(s) for relevant entity(s).
e. Ascertain NTE of resources necessary to perform engagement.

• At this stage, RoMM need to be considered and assessed by each of joint auditors and
communicated to other joint auditors, and documented, whether pertaining to overall F.S.
level or to area of allocation among other joint auditors.
• Joint auditors discuss and document NTE of audit procedures for common and specific
allotted areas of audit to be performed by each of them and communicate to TCWG.
• Joint auditors shall obtain common Engg Letter (EL) and common mgt representation letter
(WR).
• After identification and allocation of work among joint auditors, work allocation document
shall be signed by all joint auditors and communicated to TCWG.

Responsibility and Co-ordination among Joint Auditors

• In respect of audit work divided, each joint auditor shall be responsible only for work
allocated.

• All the joint auditors shall be jointly and severally responsible for:

a. audit work not divided among joint auditors and is carried out by all joint auditors;

b. decisions taken by all joint auditors under audit planning

c. in respect of common audit areas concerning the NTE of audit procedures to be performed
by each of them.

d. matters which are brought to notice of joint auditors by any one of them and on which there
is agreement among them;

e. examining that F.S. of entity comply with requirements of relevant statutes;

f. presentation and disclosure of F.S. as required by applicable FRF;

g. ensuring that A/R complies with requirements of relevant statutes, SAs and pronouncements
issued by ICAI.

CA SHUBHAM KESWANI 27
 • Where a joint auditor comes across matters relevant to areas of responsibility of others and
deserve their attention, or require disclosure or discussion with, or application of judgment by
other joint auditors, he shall communicate same to all other joint auditors in writing prior to
completion of audit.

• It shall be responsibility of each joint auditor to determine NTE of audit procedures to be

applied in relation to areas of work allocated to said joint auditor. It is individual
responsibility of each joint auditor to study and evaluate system of internal control and
assessment of risk relating to areas of work allocated to said joint auditor.

Audit Conclusion and Reporting

The joint auditors are required to issue common audit report, however, where joint auditors are in
disagreement with regard to opinion or any matters to be covered by audit report, they shall express
their opinion in a separate audit report.

A joint auditor is not bound by the views of majority of joint auditors regarding opinion or matters
to be covered in audit report and shall express opinion formed by the said joint auditor in separate
audit report in case of disagreement.

In such circumstances, audit report(s) issued by joint auditor(s) shall make a reference to separate
audit report(s) issued by other joint auditor(s).

Further, separate audit report shall also make reference to audit report issued by other joint
auditors.

Such reference shall be made under heading “Other Matter Paragraph” as per Revised SA 706,
“Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.

Each joint auditor is entitled to assume that:

a. Other joint auditors have carried out their part of audit work in accordance with SAs. It is not
necessary for joint auditor to review work performed by other joint auditors or perform any tests in
order to ascertain whether work has actually been performed in such a manner.

b. The other joint auditors have brought to said joint auditor’s notice any departure from applicable
FRF or significant observations noticed in course of audit.

Where F.S. of a division/branch are audited by one of joint auditors, other joint auditors are
entitled to proceed on basis that such F.S. comply with all legal and regulatory requirements and
present a true and fair view of state of affairs and of results of operations of division/branch
concerned.

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

Communication with TCWG

When the joint auditors expect to modify opinion, communicate with TCWG circumstances that led
modification and proposed wording of modification to ensure compliance with Revised SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.

If JAs expect to include an EOM or OM para, communicate with TCWG to ensure compliance with
Revised SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report”.

CA SHUBHAM KESWANI 28
SA 315: Identifying and Assessing the Risk of Material Misstatement (ROMM)
through understanding the Entity and its Environment

Objective of Auditor is to:

● identify and assess RMM, whether due to fraud or error,
● at F.S. and assertion levels,
● through understanding entity and its environment, including entity’s internal control,
● thereby providing basis for designing and implementing responses to assessed ROMM.

This will help auditor to reduce ROMM to an acceptably low level.

Meanings:
Assertions – Representations by mgt, embodied in F.S, used by auditor to consider different types of
potential misstatements that may occur.

Assertions about classes of transactions and events for the period under audit: (OCACC)
(i) Occurrence—transactions and events recorded have occurred and pertain to entity.
(ii) Completeness—all transactions and events that should have been recorded à recorded.
(iii) Accuracy—amounts and recorded transactions and events à recorded appropriately.
(iv) Cut-off—transactions and events recorded à correct accounting period.
(v) Classification—transactions and events recorded à proper accounts

(b) Assertions about account balances at the period end: (ERCV)

(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—rights to assets, and liabilities are obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have been recorded have
been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in F.S. at
appropriate amounts and any resulting valuation appropriately recorded.

(c) Assertions about presentation and disclosure: (OCCA)

(i) Occurrence and rights and obligations—disclosed events, transactions, and other matters have
occurred and pertain to entity.
(ii) Completeness—all disclosures that should have been included in F.S. have been included.
(iii) Classification and understandability—financial information is appropriately presented and
described, and disclosures are clearly expressed.
(iv) Accuracy and valuation—financial and other information are disclosed fairly and at appropriate
amounts.

Internal control –
The process designed, implemented and maintained (DIM) by TCWG, management and other
personnel to provide reasonable assurance about achievement of an entity’s objectives with regard to
● reliability of financial reporting (FR),
● effectiveness and efficiency of operations,
● safeguarding of assets, and
● compliance with applicable laws and regulations

CA SHUBHAM KESWANI 29
 What methods included in Auditor’s Risk assessment procedures (RAP)
The audit procedures performed to obtain understanding of entity and its environment, including
internal control, to identify and assess ROMM, whether due to fraud or error, at F.S. and assertion
levels.
The risk assessment procedures shall include following:
(a) Inquiries of mgt and others within entity who in auditor’s judgment may have info that is likely to
assist in identifying ROMM due to fraud or error.
(b) Analytical procedures.
(c) Observation and inspection.

The auditor shall obtain an understanding of following:

(a) Relevant industry, regulatory, and other external factors including applicable FRF.

(b) The nature of entity, including:

(i) its operations;
(ii) its ownership and governance structures;
(iii) types of investments that entity is making and plans to make, investments in special-
purpose entities; and
(iv) way that entity is structured and how it is financed; to enable auditor to understand classes
of transactions (COT), account balances(AB) , and disclosures (D) to be expected in F.S.

(c) The entity’s selection and application of accounting policies, including reasons for changes
thereto.

(d) The entity’s objectives and strategies, and those related business risks that may result in ROMM.

(e) The measurement and review of entity’s financial performance.

Auditor is required to obtain an understanding of Entity’s Risk Assessment Process (RAP)

a) Identifying business risks relevant to financial reporting objectives;
b) Estimating significance of risks;
c) Assessing likelihood of their occurrence; and
d) Deciding about actions to address those risks.

Auditor’s Process of Assessing the Risk of Material Misstatement:

(a) Identify risks throughout process of obtaining understanding of entity and its environment,
including controls that relate to risks, and considering classes of transactions, account balances, and
disclosures in F.S;

(b) Assess identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;

(c) Relate identified risks to what can go wrong at assertion level, taking account of relevant controls
that auditor intends to test; and

(d) Consider likelihood of misstatement, including possibility of multiple misstatements, and whether
potential misstatement is of magnitude that could result in material misstatement.

CA SHUBHAM KESWANI 30
 Understanding of Entity’s Info System Relevant to Financial Reporting
The auditor shall obtain an understanding of information system, including related business
processes, relevant to financial reporting, including following areas:

(a) SCoTs: The classes of transactions in entity’s operations that are significant to financial
statements;

(b)Procedures: The procedures, within both information technology (IT) and manual systems, by
which those transactions are initiated, recorded, processed, corrected as necessary, trfd to general
ledger and reported in financial statements;

(c)Records: The related accounting records, supporting information and specific accounts in the
financial statements that are used to initiate, record, process and report transactions; this includes
correction of incorrect information and how information is trfd to the general ledger. The records
may be in either manual or electronic form;

(d) Info system: How information system captures events and conditions, other than transactions,
that are significant to F.S.;

(e) FRP: The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures;

(f)Unusual Transactions: Controls surrounding journal entries, including non-standard JEs used to
record non-recurring, unusual transactions or adjustments.

IT Benefits

IT benefits an entity’s internal control by enabling an entity to:

• Consistently apply predefined business rules and perform complex calculations in processing
large volumes of transactions or data;

• Enhance timeliness, availability, and accuracy of information;

• Facilitate the additional analysis of information;

• Enhance ability to monitor performance of the entity’s activities and its policies and
procedures;

• Reduce risk that controls will be circumvented; and

IT Risks
Specific Risks related to IT an entity’s internal control, including, for example:
• Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.

• Unauthorised access to data that may result in destruction of data or improper changes to
data

• The possibility of IT personnel gaining access privileges beyond those necessary to perform
their assigned duties thereby breaking down segregation of duties.

• Unauthorised changes to data in master files.

• Unauthorised changes to systems or programs.

CA SHUBHAM KESWANI 31
 • Failure to make necessary changes to systems or programs.

• Inappropriate manual intervention.

• Potential loss of data or inability to access data as required.

Significant Risks
An identified and assessed RMM that, in auditor’s judgment, requires special audit consideration.

Examples of Significant Risk?

a. Whether the risk is a risk of fraud;

b. Whether the risk is related to recent significant economic, accounting, or other developments
like changes in regulatory environment, etc., and, therefore, requires specific attention;

c. The complexity of transactions;

d. Whether the risk involves significant transactions with related parties;

e. The degree of subjectivity in the measurement of financial information related to the risk,
especially those measurements involving a wide range of measurement uncertainty; and

f. Whether the risk involves significant transactions that are outside normal course of business
for the entity, or that otherwise appear to be unusual.

CA SHUBHAM KESWANI 32
 SA 330: The Auditor’s Responses to Assessed Risks

Substantive procedure –Audit procedure designed to detect material misstatements at assertion

level.
Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.

Test of controls – Audit procedure designed to evaluate operating effectiveness of controls in

preventing, or detecting and correcting (P/D/C), material misstatements at assertion level.

Further Audit Procedures in Response to assessed ROMM at assertion level

In designing further audit procedures to be performed, the auditor shall:
(a) Consider reasons for assessment given to RMM at assertion level for each class of transactions,
account balance, and disclosure, including:
(i) The likelihood of material misstatement due to particular characteristics of relevant class of
transactions, account balance, or disclosure (i.e., the inherent risk); and
(ii) Whether risk assessment takes into account relevant controls (i.e., the control risk), thereby
requiring auditor to obtain audit evidence to determine whether controls are operating effectively
(i.e., the auditor intends to rely on operating effectiveness of controls in determining nature, timing
and extent of substantive procedures); and
(b) Obtain more persuasive audit evidence higher auditor’s assessment of risk.

Should we test controls every time we do Audit?

Factors that warrant retest of controls:

• A deficient control environment.

• Deficient monitoring of controls.
• A significant manual element to the relevant controls.
• Personnel changes that significantly affect the application of the control.
• Changing circumstances that indicate the need for changes in the control.
• Deficient general IT-controls.

What will auditor consider while determining whether evidence of previous audits can be used for
Test of Controls?

a. The effectiveness of other elements of internal control, including the control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process;
b. The risks arising from characteristics of control, including whether it is manual or automated;
c. The effectiveness of general IT-controls;
d. The effectiveness of control and its application by entity, including nature and extent of
deviations in application of control noted in previous audits, and whether there have been
personnel changes that significantly affect application of control;
e. Whether lack of a change in a particular control poses a risk due to changing circumstances; and
f. The ROMM and extent of reliance on the control.

CA SHUBHAM KESWANI 33
If auditor plans to use audit evidence from previous audit, establish continuing relevance by obtaining
audit evidence about whether significant changes in controls have occurred subsequent to previous
audit.

Obtain this evidence by performing inquiry combined with observation or inspection, confirm
understanding of those specific controls, and:

(a) If there have been changes that affect continuing relevance of audit evidence from previous
audit, shall test controls in current audit.

(b) If there have not been such changes, auditor shall test controls at least once in every third audit.
Controls over Significant Risks to be tested in current period.

How to know, how much testing is to be done?

Matters auditor may consider in determining extent of tests of controls include following:
• The frequency of performance of control by entity during period.
• The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control.
• The expected rate of deviation from a control.
• The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
• The extent to which audit evidence is obtained from tests of other controls related to the
assertion.
Using audit evidence obtained during an interim period
When auditor obtains audit evidence about operating effectiveness of controls during interim period,
auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to interim period;
and
(b) Determine the additional audit evidence to be obtained for the remaining period.

Relevant factors in determining what additional audit evidence to obtain about controls that were
operating during period remaining after Interim period, include:
• The significance of assessed ROMM at assertion level.
• The specific controls that were tested during interim period, and significant changes to them.
• The degree to which audit evidence about operating effectiveness of controls was obtained.
• The length of remaining period.
• The extent to which auditor intends to reduce further substantive procedures based on reliance
of controls.
• The control environment.

CA SHUBHAM KESWANI 34
 SA 320: Materiality in Planning & Performing an Audit

Performance Materiality (PM) means

● amount or amounts set by auditor
● at less than materiality for F.S. as whole
● to reduce to appropriately low level probability that
● aggregate of uncorrected and undetected misstatements
● exceeds materiality for F.S. as a whole.
If applicable, PM also refers to amt or amounts set by auditor at less than materiality level or levels
for particular classes of transactions, account balances or disclosures.

Determining Materiality & Performance Materiality when planning Audit

When establishing overall audit strategy, auditor shall determine materiality for F.S. as whole.

If, there is one or more particular classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for FS as a whole could reasonably be expected to
influence economic decisions of users taken on the basis of F.S., auditor shall also determine
materiality level or levels to be applied to those particular classes of transactions, account balances
or disclosures.

The auditor shall determine performance materiality for purposes of assessing ROMM and
determining nature, timing and extent of further audit procedures.

Revision of Materiality
The auditor shall revise materiality for F.S. as a whole (& if applicable, materiality level for
particular classes of transactions, account balances or disclosures) in event of becoming aware of
info during audit that would have caused auditor to have determined different amount initially.

If auditor concludes lower materiality for F.S. as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances or disclosures) than initially
determined, auditor shall determine whether it is necessary to revise PM, and whether NTE of
further audit procedures remain appropriate.

Benchmark
Determining materiality involves exercise of professional judgment. A percentage is often applied to
a chosen benchmark as starting point in determining materiality for F.S. as a whole.

Factors that affect identification of an appropriate benchmark include following:

• The elements of F.S. (for eg, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which attention of users of particular entity’s F.S. tends to be
focused (for eg, for purpose of evaluating financial performance users may tend to focus on
profit, revenue or net assets);
• The nature of entity, where entity is in its life cycle, and industry and economic environment in
which entity operates;
• The entity’s ownership structure and way it is financed (for eg, if entity is financed solely by debt
rather than equity, users may put more emphasis on assets, and claims on them, than on entity’s
earnings); &
• The relative volatility of benchmark.

CA SHUBHAM KESWANI 35
 SA 402: Audit Considerations relating to an Entity Using a
Service Organisation
Ø Deals with user auditor’s responsibility to obtain SAAE when user entity uses services of one or
more service organisations.
Ø Many entities outsource aspects of business to organisations that provide services ranging from
performing a specific task under direction of entity to replacing entity’s entire business units or
functions, such as tax compliance function.
Ø Many of services provided by such organisations are integral to entity’s business operations;
however, not all those services are relevant to the audit.
Ø Services provided by service organisation are relevant to audit of a user entity’s F.S. when those
services, and controls over them, are part of user entity’s information system, including related
business processes, relevant to financial reporting.

How to know if SO’s services are relevant to user entity’s Financial Reporting?
A service organisation’s services are part of user entity’s information system, including related
business processes, relevant to financial reporting if these services affect any of the following:
a. The classes of transactions in the user entity’s operations that are significant to the user
entity’s financial statements;
b. The procedures, within both information technology (IT) and manual systems, by which the user
entity’s transactions are initiated, recorded, processed, corrected as necessary, transferred to
the general ledger and reported in the financial statements;
c. The related accounting records, either in electronic or manual form, supporting information and
specific accounts in the user entity’s financial statements that are used to initiate, record,
process and report the user entity’s transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger;
d. How the user entity’s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
e. The financial reporting process used to prepare the user entity’s financial statements, including
significant accounting estimates and disclosures; and
f. Controls surrounding journal entries, including non-standard journal entries used to record
nonrecurring, unusual transactions or adjustments. [Already studied in SA 315]

Auditor’s Objective
(a) To obtain understanding of nature and significance of services provided by service organisation
and effect on user entity’s internal control relevant to audit, sufficient to identify and assess
ROMM; and

(b) To design and perform audit procedures responsive to those risks.

Types of Reports
Type 1 Report: Description & design of Internal control
Type 2 Report: Description, design & Operating effectiveness of Internal Controls

Obtaining understanding of services provided by Service Organisation

a. Nature of services provided by service organisation and significance of those services to user
entity, including effect thereof on user entity’s internal control;

CA SHUBHAM KESWANI 36
 b. Nature and materiality of transactions processed or accounts or financial reporting processes
affected by service organisation;
c. Degree of interaction between activities of service organisation and those of user entity; and
d. Nature of relationship between user entity and service organisation, including relevant
contractual terms for activities undertaken by service organisation.

Auditor’s Considerations
User auditor shall evaluate design and implementation of controls at user entity that relate to services
provided by service organisation.

User auditor shall determine whether sufficient understanding of nature and significance of services
provided by service organisation and their effect on user entity’s internal control relevant to audit has
been obtained to provide basis for identification and assessment of ROMM.

If user auditor is unable to obtain sufficient understanding from user entity, perform following
procedures:
(a) Obtaining a Type 1 or Type 2 report, if available;
(b) Contacting service organisation, through user entity, to obtain specific info;
(c) Visiting service organisation and performing procedures that will provide info about controls at
service org;
(d) Using another auditor to perform procedures that will provide necessary info about controls at
service org.

Information w.r.t controls at Sub-Service Organisation (SSO)

If service organisation uses SSO, service auditor’s report may either include or exclude SSO’s relevant
control objectives and related controls in service organisation’s description of its system and in scope
of service auditor’s engagement.

These 2 methods of reporting are known as inclusive method and carve-out method, respectively.

If Type 1 or Type 2 report excludes controls at SSO, and services are relevant to audit of user entity’s
F.S., apply this SA in respect of SSO. (i.e. Type 1/2 report or visit or another auditor or contact SSO)

Nature and extent of work to be performed by user auditor regarding services provided by SSO
depend on nature and significance of those services to user entity and relevance of those services to
audit.

Reporting by User Auditor

• The user auditor shall modify opinion in user auditor’s report in accordance with SA 705 if user
auditor is unable to obtain SAAE regarding services provided by service organisation relevant to
audit of user entity’s F.S.

• The user auditor shall not refer to work of service auditor in user auditor’s report containing
unmodified opinion unless required by law or regulation. If such reference required by law or
regulation, indicate reference does not diminish user auditor’s responsibility for audit opinion.

• If reference to work of service auditor relevant to understand modification of opinion, user

auditor’s report shall indicate that such reference does not diminish user auditor’s responsibility
for that opinion.

CA SHUBHAM KESWANI 37
 SA 450: Evaluation of Misstatements Identified during the Audit

Objective
The objective of the auditor is to evaluate:
a. Effect of identified misstatements on audit; and
b. Effect of uncorrected misstatements, if any, on F.S.

Uncorrected misstatements – Misstatements that auditor has accumulated during audit and not
corrected.

Sources of Misstatements
a. An inaccuracy in gathering or processing data from which F.S. are prepared;

b. An omission of amount or disclosure;

c. An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts; and

d. Judgments of management concerning accounting estimates that the auditor considers

unreasonable or the selection and application of accounting policies that the auditor considers
inappropriate.

Consideration of Identified Misstatements as Audit Progresses

The auditor shall determine whether overall audit strategy and audit plan need to be revised if:

a. The nature of identified misstatements and circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with accumulated ones, could be material; or

b. The aggregate of misstatements accumulated approaches materiality determined as per SA 320.

If, at auditor’s request, mgt has examined and corrected misstatements that were detected, auditor
shall perform additional audit procedures to determine whether misstatements remain.

Communication and Correction of Misstatements

• The auditor shall communicate all misstatements accumulated during audit with appropriate
level of mgt.
• Request mgt to correct those misstatements.
• If mgt refuses, obtain understanding of reasons for not making corrections and evaluate
whether F.S. as whole are free from material misstatement.

CA SHUBHAM KESWANI 38
Discuss impact of uncorrected misstatements identified during audit and auditor's response to same

Prior to evaluating effect of uncorrected misstatements, auditor shall reassess materiality determined
in accordance with SA 320, to confirm whether it remains appropriate in context of entity’s actual
financial results.

In accordance with SA 450 “Evaluation of Misstatements identified during Audit”, auditor shall
determine whether uncorrected misstatements are material, individually or in aggregate. In making
this determination, the auditor shall consider- (size & effect)

(i) The size and nature of misstatements, both in relation to particular classes of transactions, account
balances or disclosures and F.S. as whole, and particular circumstances of their occurrence; &

(ii) The effect of uncorrected misstatements related to prior periods on relevant classes of
transactions, account balances or disclosures, and F.S. as a whole.

The auditor shall communicate with TCWG uncorrected misstatements and effect on opinion in
auditor’s report, unless prohibited by law or regulation.

Auditor’s communication shall identify material uncorrected misstatements individually. Auditor shall
request that uncorrected misstatements be corrected.

As per mgt, if effect is immaterial then auditor shall request for WR from mgt and TCWG that they
believe effects are immaterial to F.S. as a whole. A summary of such items shall be included in or
attached to the written representation.

If management refuses to adjust financial info and results of extended audit procedures do not enable
auditor to conclude that aggregate of uncorrected misstatements is not material, auditor should report
accordingly.

CA SHUBHAM KESWANI 39
 SA 500: Audit Evidence

Objective
The objective of auditor is to design and perform audit procedures in a way as to enable him to
obtain sufficient appropriate audit evidence(SAAE) to be able to draw reasonable conclusions on
which to base auditor’s opinion.

Management’s expert –Individual or organisation possessing expertise in a field other than

accounting or auditing, whose work in that field is used by entity to assist entity in preparing F.S.

Information to Be Used as Audit Evidence

Auditor shall consider relevance and reliability of information to be used as audit evidence.

Auditor’s responsibility when relying on Audit evidence prepared using Mgt Expert’s work:
(a) Evaluate competence, capabilities and objectivity of that expert;

Information regarding the competence, capabilities and objectivity of a management’s expert may
come from a variety of sources, such as:

• Personal experience with previous work of expert.

• Discussions with expert.

• Discussions with others who are familiar with expert’s work.

• Knowledge of expert’s qualifications, membership of professional body or industry association,

license to practice, or other forms of external recognition.

• Published papers or books written by that expert.

• Auditor’s expert, if any, who assists auditor in obtaining SAAE wrt info produced by mgt’s
expert.

(b) Obtain understanding of work of expert; and

Aspects of mgt’s expert’s field relevant to auditor’s understanding may include:

• Whether that expert’s field has areas of specialty within it that are relevant to audit.

• Whether any professional or other standards, and regulatory or legal requirements apply.

• What assumptions and methods are used by the management’s expert, and whether they are
generally accepted within that expert’s field and appropriate for financial reporting purposes.

• The nature of internal and external data or information the auditor’s expert uses.

(c) Evaluate appropriateness of that expert’s work as audit evidence for relevant assertion.

Considerations when evaluating the appropriateness of the management’s expert’s work as audit
evidence for the relevant assertion may include:

• The relevance and reasonableness of expert’s findings or conclusions, their consistency with
other audit evidence, and whether they have been appropriately reflected in F.S;

CA SHUBHAM KESWANI 40
• If expert’s work involves use of significant assumptions and methods, relevance and
reasonableness of those assumptions and methods; and

• If expert’s work involves significant use of source data, relevance, completeness, and accuracy
of that source data.

Matters affecting NTE of Audit Procedures in case of info. produced using work of mgt expert
• The nature and complexity of matter to which mgt’s expert relates.
• The ROMM in the matter.
• The availability of alternative sources of audit evidence.
• The nature, scope and objectives of mgt’s expert’s work.
• Whether mgt’s expert is employed by entity, or is party engaged by it to provide relevant
services.
• The extent to which management can exercise control or influence over work of mgt’s
expert.
• Whether mgt’s expert is subject to technical performance standards or other
professional or industry requirements.
• The nature and extent of controls within entity over mgt’s expert’s work.
• The auditor’s knowledge and experience of mgt’s expert’s field of expertise.
• The auditor’s previous experience of work of that expert.

Audit Procedures for Obtaining Audit Evidence

a. Risk assessment procedures; and
b. Further audit procedures, which comprise:
i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
ii) Substantive procedures, including tests of details and substantive analytical procedures

Methods of obtaining Audit Evidence

• Observation: Looking at a process or procedure being performed by others, for example, the
auditor’s observation of inventory counting by the entity’s personnel, or of the performance of
control activities.

• Inspection: Examining records or documents, whether internal or external, in paper form,

electronic form, or other media, or a physical examination of an asset.

• External Confirmation: Audit evidence obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.

• Recalculation: Checking the mathematical accuracy of documents or records. Recalculation may

be performed manually or electronically.

• Reperformance: auditor’s independent execution of procedures or controls that were originally

performed as part of the entity’s internal control.

• Analytical Procedures: evaluations of financial information made by a study of plausible

relationships among both financial and non-financial data.

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• Inquiry:
o Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
o Inquiry is used extensively throughout the audit in addition to other audit procedures.
o Inquiries may range from formal written inquiries to informal oral inquiries.
o Evaluating responses to inquiries is an integral part of the inquiry process
o Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls.
o In some cases, responses to inquiries provide a basis for the auditor to modify or perform
additional audit procedures.

Factors indicating Reliability of Audit Evidence

• Reliability of audit evidence increased when obtained from independent sources outside entity.

• Reliability of audit evidence generated internally increased when related controls are effective.

• Audit evidence obtained directly by auditor (for example, observation of application of control)
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about
application of control).

• Audit evidence in documentary form more reliable than obtained orally

• Audit evidence provided by original documents more reliable than audit evidence provided by
photocopies or facsimiles, or documents filmed, digitised or otherwise transformed into electronic
form

CA SHUBHAM KESWANI 42
 SA 501: Audit Evidence—Specific Considerations for Selected Items

The objective of auditor is to obtain SAAE regarding:

a. Existence and condition of inventory;
b. Completeness of litigation and claims involving entity; and
c. Presentation and disclosure of segment information in accordance with applicable FRF.

Inventory
When inventory is material to F.S, auditor shall obtain SAAE regarding existence and condition of
inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:

i) Evaluate mgt’s instructions and procedures for recording results of entity’s physical inventory
counting;

ii) Observe performance of mgt’s count procedures;

iii) Inspect the inventory; and

iv) Perform test counts; and

(b) Performing audit procedures over entity’s final inventory records to determine whether they
accurately reflect actual inventory count results.

Procedures in Special Circumstances

Physical inventory count at date other than date of F.S:

• Yes, it can be done for practical reasons.

• Mgt can determine inventory qty by annual physical inventory counting or maintains perpetual
inventory system.
• In either case, effectiveness of controls over changes in inventory determines whether conduct
of physical inventory counting at date other than date of F.S. is appropriate for audit purposes.
• Auditor shall perform audit procedures to obtain audit evidence about whether changes in
inventory between count date and date of F.S. are properly recorded.

Matters that Auditor shall consider when designing audit procedures to obtain audit evidence about
whether changes in inventory amounts are properly recorded include:
1. Whether perpetual inventory records are properly adjusted.
2. Reliability of entity’s perpetual inventory records.
3. Reasons for significant differences between info obtained during physical count and perpetual
records.

Auditor unable to attend inventory count:

• If auditor is unable to attend physical inventory counting due to unforeseen circumstances,
auditor shall make or observe some physical counts on an alternative date.

• Perform audit procedures to assess whether changes in inventory between date of physical count
and period end date are correctly recorded.

• The auditor would also verify procedure adopted, treatment given for discrepancies noticed
during the physical count.

CA SHUBHAM KESWANI 43
 • The auditor would also ensure that appropriate cut off procedures were followed by mgt.

• He should also get management’s written representation on

a. completeness of info provided regarding inventory, and
b. assurance with regard to adherence to laid down procedures for physical inventory
count.

If attendance is impracticable:

• This may be due to location & nature of inventory. Eg. Location pose threat to Auditor
• As per SA 200 à matter of difficulty, time, or cost involved is not a valid basis for auditor to
omit an audit procedure or settle for less than persuasive Audit Evidence.
• Perform alternative audit procedures to obtain SAAE regarding existence and condition of
inventory.
• For eg, inspection of documentation of subsequent sale of specific inventory items acquired or
purchased prior to inventory counting, may provide SAAE
• If not possible, modify opinion in auditor’s report in accordance with SA 705.

Inventory in custody of 3rd Party:

When inventory under custody of 3rd party is material to F.S, obtain SAAE regarding existence and
condition of inventory by performing one or both of following:

(a) Request confirmation from 3rd party as to quantities and condition of inventory held on behalf
of entity.

(b) Perform inspection or other audit procedures appropriate in circumstances.

If doubt over integrity & objectivity of 3rd party:

• Attending, or arranging another auditor to attend, 3rd party’s physical counting of inventory, if
practicable.

• Obtaining another auditor’s report, or service auditor’s report, on adequacy of 3rd party’s internal
control that inventory is properly counted and adequately safeguarded.

• Inspecting documentation regarding inventory held by 3rd parties, for eg, warehouse receipts.

• Requesting confirmation from other parties when inventory has been pledged as collateral.

How to Evaluate Management Instructions & Procedure?

Matters relevant in evaluating management’s instructions and procedures for recording and
controlling physical inventory counting include whether they address, for eg:

• Application of appropriate control activities, for example, collection of used physical inventory
count records, accounting for unused physical inventory count records, and count and re-count
procedures.
• Accurate identification of stage of completion of WIP, of slow moving, obsolete or damaged
items and of inventory owned by a third party, for example, on consignment.
• Procedures used to estimate physical quantities.
• Control over movement of inventory between areas and shipping and receipt of inventory before
and after cut-off date.

CA SHUBHAM KESWANI 44
 Litigation & Claims

The auditor shall identify litigation and claims through following procedures:
(a) Inquiry of mgt and, where applicable, others within entity, including in-house legal counsel;
(b) Reviewing minutes of meetings of TCWG and correspondence between entity and external legal
counsel; and
(c) Reviewing legal expense accounts.

Direct Communication with Entity’s external legal counsel

If auditor assesses
Ø ROMM regarding litigation or claims identified, or
Ø audit procedures performed indicate other material litigation or claims may exist à seek
direct communication with entity’s external legal counsel.

The auditor shall do so through letter of inquiry, prepared by mgt and sent by auditor, requesting
entity’s external legal counsel to communicate directly with auditor. If law, regulation or respective
legal professional body prohibits entity’s external legal counsel from communicating directly with
auditor, perform alternative audit procedures.

If: (a) Mgt refuses to give permission to communicate with entity’s external legal counsel, or legal
counsel refuses to respond appropriately to letter of inquiry, or is prohibited from responding; and

(b) auditor is unable to obtain SAAE by performing alternative audit procedures, auditor shall modify
opinion in auditor’s report in accordance with SA 705.

Written Representation from mgt & TCWG that all litigation and claims whose effects should be
considered when preparing the financial statements
• have been disclosed to auditor and
• appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework

Segment Information

Auditor shall obtain SAAE regarding presentation and disclosure of segment information in accordance
with applicable FRF by:

(a) Obtaining understanding of methods used by Mgt in determining segment information, and:
i) Evaluating whether such methods are likely to result in disclosure as per applicable FRF; and
ii) Where appropriate, testing application of such methods; and

(b) Performing analytical procedures or other audit procedures appropriate in circumstances.

‘Example of matters’ relevant when obtaining understanding of methods used by mgt in determining
segment information include:

i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
ii) Comparisons with budgets and other expected results, for eg, operating profits as a % of sales.
iii) Allocation of assets and costs among segments.
iv) Consistency with prior periods, and adequacy of disclosures w.r.t inconsistencies.

CA SHUBHAM KESWANI 45
 SA 505: External Confirmations

External confirmation – Audit evidence obtained as a direct written response to auditor from a 3rd
party (the confirming party), in paper form, or by electronic or other medium.

Exception – A response that indicates a difference between information requested to be confirmed,

or contained in the entity’s records, and information provided by the confirming party.

External Confirmation Procedures

When using external confirmation procedures, auditor shall maintain control over external
confirmation requests, including:
a. Determining information to be confirmed or requested;
b. Selecting appropriate confirming party;
c. Designing confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to auditor; and
d. Sending the requests, including follow-up requests when applicable, to the confirming party.

Factors to consider when designing confirmation requests include:

• The assertions being addressed.

• Specific identified ROMM, including fraud risks.

• The layout and presentation of the confirmation request.

• Prior experience on the audit or similar engagements.

• The method of communication (for example, in paper form, or by electronic or other medium).

• Management’s authorisation or encouragement to the confirming parties to respond to the auditor.

Confirming parties may only be willing to respond to a confirmation request containing
management’s authorisation.

• The ability of intended confirming party to confirm or provide the requested information (for
example, individual invoice amount versus total balance)

Management’s Refusal to Allow the Auditor to Send a Confirmation Request

If management refuses to allow auditor to send a confirmation request, auditor shall:

a. Inquire mgt’s reasons for refusal, and seek audit evidence of their validity and reasonableness;

b. Evaluate implications of mgt’s refusal on auditor’s assessment of ROMM, including risk of fraud,
and on NTE of other audit procedures; and

c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.

If auditor concludes that mgt’s refusal is unreasonable, or unable to obtain relevant and reliable
audit evidence from alternative audit procedures, communicate with TCWG in accordance with SA
260.

The auditor shall determine implications for audit and auditor’s opinion as per SA 705.

CA SHUBHAM KESWANI 46
 Positive Confirmation Requests
• A positive external confirmation request asks confirming party to reply in all cases, either by
indicating agreement with given info, or providing information.

• A response to positive confirmation request is expected to provide reliable audit evidence.

• There is risk that confirming party may reply without verifying if information is correct.

• The auditor may reduce this risk by not stating amt (or other info) on confirmation request, and
ask confirming party to fill amount or furnish other info.

• On other hand, use of this type of “blank” confirmation request may result in lower response rates
because additional effort is required by confirming parties.

Negative Confirmations
Negative confirmation request – A request that confirming party respond directly to auditor only if
confirming party disagrees with the information provided in the request.

Negative confirmations provide less persuasive audit evidence than positive confirmations.

Accordingly, auditor shall not use negative confirmation requests as sole substantive audit procedure
to address assessed ROMM at assertion level unless all of following are present:

(a) The auditor has assessed ROMM as low and obtained SAAE regarding operating effectiveness of
controls;

(b) Population comprises large number of small, homogeneous, account balances, transactions or
conditions;

(c) A very low exception rate is expected; and

(d) Auditor is not aware of circumstances that would cause recipients to disregard such requests.

No response in case of Negative confirmation:

• The failure to receive response does not indicate receipt by intended confirming party of
confirmation request or verification of accuracy of info contained in request.

• Accordingly, failure of confirming party to respond provides significantly less persuasive audit
evidence than positive confirmation request.

• Confirming parties also may be more likely to respond indicating their disagreement with
confirmation request when information in requested is not in their favour, and less likely to
respond otherwise.

Alternate Audit Procedures: Non-Responses

Examples of alternative audit procedures auditor may perform include:

• For accounts receivable balances – examining specific subsequent cash receipts, shipping
documentation, and sales near the period-end.
• For accounts payable balances – examining subsequent cash disbursements or correspondence
from third parties, and other records, such as goods received notes.

CA SHUBHAM KESWANI 47
 Topics related to External Confirmation given in SA 330

Areas where external confirmation procedures may be used:

• Bank balances and other information relevant to banking relationships.
• Accounts receivable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments held for safekeeping by third parties, or purchased from stockbrokers but not
delivered at the balance sheet date.
• Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
• Accounts payable balances and terms.

How to know if we can use External Confirmations as Audit Procedures?

Factors that may assist auditor in determining whether external confirmation procedures are to be
performed as substantive audit procedures include:

• The confirming party’s knowledge of subject matter

• The ability or willingness of the intended confirming party to respond – for example, the confirming
party:
Ø May not accept responsibility for responding to confirmation request;
Ø May consider responding too costly or time consuming;
Ø May have concerns about the potential legal liability resulting from responding;
Ø May account for transactions in different currencies; or
Ø May operate in environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.

• The objectivity of intended confirming party – if confirming party is related party of entity,
responses to confirmation requests may be less reliable.

CA SHUBHAM KESWANI 48
 SA 510: Initial Audit Engagements—Opening Balances

Initial audit engagement – An engagement in which either:

i) The F.S. for prior period à not audited; or
ii) The F.S. for prior period audited by a predecessor auditor.

Objective
In conducting initial audit engagement, objective of auditor with respect to opening balances is to
obtain SAAE about whether:

a) Opening balances contain misstatements that materially affect the current period’s F.S;

b) Appropriate accounting policies reflected in opening balances have been consistently applied in
current period’s F.S, or changes properly accounted for and adequately presented and disclosed
in accordance with FRF.

Opening balances –
• Those account balances that exist at beginning of period.
• Opening balances are based upon closing balances of prior period and reflect effects of
transactions and events of prior periods and accounting policies applied in the prior period.
• Opening balances also include matters requiring disclosure that existed at beginning of
period, such as contingencies and commitments.

Audit Procedures: Opening Balances

The auditor shall read most recent financial statements (MRFS), if any, and predecessor auditor’s
report thereon, if any, for info. relevant to opening balances, including disclosures.

The auditor shall obtain SAAE about whether opening balances contain misstatements that materially
affect current period’s F.S. by:
a) Determining whether prior period’s closing balances correctly brought forward to current period
or, when appropriate, any adjustments have been disclosed as prior period items in current year’s
P&L

b) Determining whether opening balances reflect application of appropriate accounting policies; and

c) Performing one or more of following:

i) Where prior year FS were audited, perusing copies of audited FS including other relevant
documents relating to prior period F.S;
ii) Evaluating whether audit procedures performed in current period provide evidence relevant to
opening balances; or
iii) Performing specific audit procedures to obtain evidence regarding opening balances.

If auditor obtains audit evidence that opening balances contain misstatements that could materially
affect current period’s F.S. à perform additional audit procedures appropriate in circumstances to
determine effect on current period’s F.S.

If auditor concludes that misstatements exist in current period’s FS, communicate misstatements with
mgt and TCWG in accordance with SA 450.

CA SHUBHAM KESWANI 49
 Consistency of Accounting Policies
Auditor shall obtain SAAE that:
• Accounting policies have been consistently applied in current period F.S. &
• whether any changes have been properly accounted for & adequately presented & disclosed as
per FRF.

Conclusion & Reporting

• Unable to obtain SAAE regarding opening balances à Qualify/Disclaimer of opinion as per SA

705
• Opening balance contain misstatement à materially affects current period FS & not properly
accounted for & disclosed à Qualified/Adverse Opinion as per SA 705
• A/c policy not applied consistently or change not properly accounted à Qualified /Adverse
opinion as per SA 705

CA SHUBHAM KESWANI 50
 SA 520: Analytical Procedures

Objectives of Auditor
a) Obtaining relevant and reliable audit evidence when using substantive analytical procedures; and

b) To design and perform analytical procedures near end of audit that assist auditor when forming
an overall conclusion as to whether FS are consistent with auditor’s understanding of entity.

Substantive Analytical Procedures (SAP)

When designing and performing SAP, either alone or in combination with TOD auditor shall:

a) Determine suitability of particular SAP for given assertions, taking account of assessed
ROMM and tests of details for these assertions;

b) Evaluate reliability of data from which auditor’s expectation of recorded amounts or ratios is
developed, taking account of source, comparability, and nature and relevance of information
available, and controls over preparation;

c) Develop expectation of recorded amounts or ratios and evaluate whether expectation is

sufficiently precise to identify misstatement that may cause F.S. to be materially misstated;
and

d) Determine amount of difference of recorded amounts from expected values that is

acceptable without further investigation.

Suitability of Particular Analytical Procedures for Given Assertions

1. Substantive analytical procedures are generally more applicable to large volumes of transactions
that tend to be predictable over time.

2. In some cases, even unsophisticated predictive model may be effective as analytical procedure.
For eg, where entity has known number of employees at fixed rates of pay throughout period, it may
be possible for auditor to use this data to estimate total payroll costs for period with high degree of
accuracy, providing audit evidence for significant item in F.S. and reducing need to perform TOD on
payroll.

3. Different types of analytical procedures provide different levels of assurance.

For eg, prediction of total rental income on building divided into apartments, taking rental rates, no.
of apartments and vacancy rates into consideration, provide persuasive evidence and eliminate need
for further verification. In contrast, calculation and comparison of gross margin percentages as means
of confirming revenue figure may provide less persuasive evidence, but may provide useful
corroboration if used in combination with other audit procedures.

4. The determination of suitability of particular SAP is influenced by nature of assertion and

auditor’s assessment of RMM.
For example, if controls over sales order processing are weak, the auditor may place more reliance on
tests of details rather than on substantive analytical procedures for assertions related to receivables.

CA SHUBHAM KESWANI 51
5. Particular SAP may be considered suitable when TOD are performed on same assertion.

For eg, when obtaining audit evidence regarding valuation assertion for accounts receivable balances,
auditor may apply analytical procedures to aging of customers’ accounts in addition to performing TOD
on subsequent cash receipts to determine collectability of receivables.

Analytical Procedures that Assist When Forming an Overall Conclusion

The auditor shall design and perform analytical procedures near end of audit that assist in forming
an overall conclusion as to whether FS are consistent with auditor’s understanding of entity.

Investigating Results of Analytical Procedures

If auditor identifies fluctuations or relationships that are inconsistent with other relevant info or
that differ from expected values by significant amt, auditor shall investigate such differences by:

(a) Inquiring of management and obtaining appropriate audit evidence relevant to mgt’s responses;
and

(b) Performing other audit procedures as necessary in circumstances.

• Audit evidence relevant to mgt’s responses may be obtained by evaluating responses taking into
account auditor’s understanding of entity and environment, and with other audit evidence obtained
during course of audit.
• The need to perform other audit procedures may arise when, mgt is unable to provide expln, or
expln, together with audit evidence obtained, is not considered adequate.

Techniques for Analytical Procedures

Trends: Analysing account fluctuations by comparing current year to prior year information and, also,
to information derived over several years.

Reasonableness: Tests are made by reviewing relationship of certain account balances to other
balances for reasonableness of amounts. Examples of accounts that may be reasonably tested are:
• Interest expense against interest bearing obligations
• Raw Material Consumption to Production (quantity)
• Wastage & Scrap % against production & raw material consumption (quantity)
• Work-in-Progress based on issued of materials & Sales (quantity)
• Sales discounts and commissions against sales volume
• Rental revenues based on occupancy of premises

Ratios: Analysis by computation of ratios includes study of relationships between FS amounts.

Commonly used ratios include:
• Elements of income or loss as a percentage of sales
• Gross profit turnover
• Accounts receivable turnover
• Inventory turnover
• Profitability, leverage, and liquidity

Structural Modelling: Modelling tool constructs a statistical model from financial and/or non-
financial data of prior-accounting periods to predict current account balances (e.g. linear regression).

CA SHUBHAM KESWANI 52
 SA 530: Audit Sampling

Objective:
The objective is to provide reasonable basis for auditor to draw conclusions about population from
which sample is selected.

Audit sampling (sampling) – The application of audit procedures to less than 100% of items within a
population such that all sampling units have a chance of selection in order to provide auditor with a
reasonable basis on which to draw conclusions about entire population.

Sampling risk – The risk that auditor’s conclusion based on sample may be different from conclusion
if entire population were subjected to same audit procedure.

Types of Sampling Risks?

Sampling risk can lead to 2 types of erroneous conclusions:

(i) In case of TOCs à controls are more effective than they actually are, or in case of TODs à
material misstatement does not exist when in fact it does.

The auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.

(ii) In case of TOCs à controls are less effective than they actually are, or in case of TODs, that
material misstatement exists when in fact it does not.

This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work
to establish that initial conclusions were incorrect.

Statistical sampling – An approach to sampling that has following characteristics:

(i) Random selection of sample items; and
(ii) The use of probability theory to evaluate sample results, including measurement of sampling risk.
Sampling approach that doesn’t have characteristics (i) & (ii) is considered non-statistical sampling.

Tolerable misstatement
• A monetary amount set by auditor in respect of which auditor seeks to obtain appropriate level of
assurance that the amount set by auditor isn’t exceeded by actual misstatement in population.
• Further, while designing a sample, auditor determines tolerable misstatement in order to address
risk that aggregate of individually immaterial misstatements may cause F.S. to be materially
misstated and provide a margin for possible undetected misstatements.

• Tolerable misstatement is application of performance materiality, to a sampling procedure.

Tolerable misstatement may be same amount or amount lower than performance materiality.

For eg:
I’ve set materiality as 5% of NP (100 Cr), Materiality = 5 Cr, let’s say PM = 1 Cr (less than materiality
for F.S. as whole). Now, Tolerable Misstatement can be equal to lower than PM, let’s say TM = 50 L,
now I’ll not check any amount in population which is less than 50 L as this is something I can tolerate.

CA SHUBHAM KESWANI 53
 Sample Design, Size and Selection of Items for Testing
i) When designing audit sample, consider purpose of audit and characteristics of population from which
sample will be drawn.
ii) The auditor shall determine sample size sufficient to reduce sampling risk to acceptably low level.
iii) The auditor shall select items for sample in a way that each sampling unit in population has chance
of selection.
Performing audit procedures
• The auditor shall perform audit procedures, appropriate to purpose, on each item selected.
• If audit procedure is not applicable to selected item, auditor shall perform procedure on
replacement item.
• If auditor is unable to apply designed audit procedures, or alternative procedures, to selected
item, auditor shall treat that item as deviation from prescribed control, in case of TOCs, or
misstatement, in case of TODs.

Nature and Cause of Deviations and Misstatements

• The auditor shall investigate nature and cause of any deviations or misstatements identified, and
evaluate possible effect on audit procedures and other areas of audit.

• In extremely rare circumstances when auditor considers a misstatement or deviation to be an

anomaly, auditor shall obtain high degree of certainty that such misstatement or deviation is not
representative of population. The auditor shall obtain this degree of certainty by performing
additional audit procedures to obtain SAAE that misstatement or deviation does not affect
remainder of population.

Sample Selection Methods

There are many methods of selecting samples. The principal methods are as follows:

(a) Random selection (applied through random number generators, for example, random number tables).
• Simple Random Sampling: Whole population has equal chance of selection
• Stratified Sampling: Dividing the population in few separate groups called strata & taking
samples from each of them.

(b) Systematic selection, in which the number of sampling units in the population is divided by the
sample size to give a sampling interval.

For eg, there are 5000 items & I want 100 samples, interval=5000/100= 50, and having determined a
starting point within first 50, each 50th sampling unit thereafter is selected.

Although the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerised random number generator or random number
tables.

(c) Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.

(d) Haphazard selection, in which auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first
or last entries on a page) and thus attempt to ensure that all items in the population have a chance of
selection. Haphazard selection is not appropriate when using statistical sampling.

CA SHUBHAM KESWANI 54
(e) Block selection involves selection of a block(s) of contiguous items from within the population. Block
selection cannot ordinarily be used in audit sampling because most populations are structured such that
items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.

Factors affecting sample size

TOCs
1. An increase in extent to which auditor’s risk assessment takes into account relevant controls:
Increase
2. An increase in tolerable rate of deviation: Decrease
3. An increase in expected rate of deviation of population to be tested: Increase
4. Increase in auditor’s desired level of assurance that tolerable rate of deviation is not exceeded by
actual rate of deviation in population: Increase
5. An increase in number of sampling units in population: Negligible effect

TODs
1. An increase in auditor’s assessment of risk of material misstatement: Increase
2. An increase in use of other substantive procedures directed at same assertion: Decrease
3. An increase in auditor’s desired level of assurance that tolerable misstatement is not exceeded by
actual misstatement in population: Increase
4. An increase in tolerable misstatement: Decrease
5. An increase in amount of misstatement the auditor expects to find in the population: Increase
6. Stratification of the population when appropriate: Decrease

Factors determining extent of checking on a Sampling Plan

(i) Size of organisation
(ii) State of Internal Control
(iii) Adequacy & reliability of books & records
(iv) Tolerable error range
(v) Degree of desired Confidence

CA SHUBHAM KESWANI 55
 SA 540: Auditing Accounting Estimates,
including Fair Value Accounting Estimates & Related Disclosures

Nature of Accounting Estimates: Some F.S. items cannot be measured precisely, can only be
estimated. For purposes of this SA, such items referred to as accounting estimates.

Information available to mgt à accounting estimate varies widely à affects degree of estimation
uncertainty.
Degree of estimation uncertainty affects à ROMM of accounting estimates.

Some A/C estimates involve relatively low estimation uncertainty and give rise to lower ROMM:
• Accounting estimates arising in entities that engage in business activities that are not complex.

• Accounting estimates that are frequently made and updated because they relate to routine
transactions.

• Accounting estimates derived from data that is readily available, such as published interest rate
data or exchange-traded prices of securities. Such data may be referred to as “observable” in
context of fair value accounting estimate.

• Fair value (FV) accounting estimates where method of measurement prescribed by FRF is simple
and applied easily to asset or liability requiring measurement at fair value.

• FV accounting estimates where model used is well-known or generally accepted, provided that
assumptions or inputs to model are observable.

Accounting estimates with relatively high estimation uncertainty, based on significant assumptions,
for eg:
• Accounting estimates relating to outcome of litigation.

• FV accounting estimates for derivative financial instruments not publicly traded.

• FV accounting estimates for which a highly specialised entity-developed model is used or for
which, there are assumptions or inputs that cannot be observed in marketplace. Accounting
estimates in cases of Wage Revision Agreements wherein negotiations with Trade Unions is on
the way or Government’s sanction is awaited leading to uncertainty.

Examples of situations where accounting estimates, other than fair value accounting estimates, may
be required include:
• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment where there is uncertainty regarding its
recoverability.
• Outcome of long term contracts.
• Financial Obligations / Costs arising from litigation settlements and judgments.

Examples of situations where fair value accounting estimates may be required include:
• Complex financial instruments, which are not traded in an active and open market.
• Share-based payments.
• Property or equipment held for disposal.

CA SHUBHAM KESWANI 56
• Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
• Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration, for eg. non-monetary exchange of plant facilities in different lines of
business.

Risk Assessment Procedures & Related Activities

How auditor minimizes Risk of Material Misstatement?
• Obtain understanding of
Ø requirements of FRF
Ø How mgt identifies those transactions, events or conditions that may give rise to
accounting estimates by making inquiries

• The estimation making process of mgt:

i. The method used in making accounting estimate;
ii. Relevant controls;
iii. Whether mgt has used an expert;
iv. The assumptions underlying accounting estimates;
v. Whether there has been change from prior period in methods for making accounting
estimates, and if so, why; and
vi. Whether and, if so, how mgt has assessed effect of estimation uncertainty.

Inquiries from Management

• Inquiries of management about changes in circumstances may include, for example, inquiries
about whether:
• The entity has engaged in new types of transactions that may give rise to accounting
estimates.
• Terms of transactions that gave rise to accounting estimates that have changed.
• Accounting policies relating to accounting estimates have changed, as a result of changes
to the requirements of applicable FRF or otherwise.
• Regulatory or other changes outside control of management occurred that may require
management to revise, or make new, accounting estimates.
• New conditions or events have occurred that give rise to need for new or revised
accounting estimates.

During audit, auditor may identify transactions, events and conditions that give rise to need for
accounting estimates that mgt failed to identify. SA 315 deals with circumstances where auditor
identifies RMM that mgt failed to identify, including determining whether there is significant
deficiency in internal control with regard to entity’s RAP.

Evaluation of Accounting Estimate with Significant Risk

For accounting estimates that give rise to significant risks, in addition to other substantive procedures
performed to meet requirements of SA 330, auditor shall evaluate following:

(i) How mgt has considered alternative assumptions or outcomes, and why rejected them, or how mgt
otherwise addressed estimation uncertainty in making accounting estimate.

(ii) Whether significant assumptions used by management are reasonable.

CA SHUBHAM KESWANI 57
(iii) Where relevant to reasonableness of significant assumptions used by mgt or appropriate
application of applicable financial reporting framework, management’s intent to carry out specific
courses of action and ability to do so.

(iv) If, in auditor’s judgment, mgt has not adequately addressed effects of estimation uncertainty on
accounting estimates that give rise to significant risks, auditor shall develop a range to evaluate
reasonableness of accounting estimate.

What factors influence degree of Estimation Uncertainty?

But what is Estimation Uncertainty?
The susceptibility of accounting estimate and related disclosures to an inherent lack of precision in
its measurement.

The degree of estimation uncertainty associated with accounting estimate may be influenced by
factors such as:
• The extent to which accounting estimate depends on judgment.
• The sensitivity of accounting estimate to changes in assumptions.
• The existence of recognised measurement techniques that may mitigate estimation
uncertainty.
• The length of forecast period, and relevance of data drawn from past events to forecast
future events.
• The availability of reliable data from external sources.
• The extent to which accounting estimate is based on observable or unobservable inputs.

Review of Outcome of Accounting Estimates

Ø Auditor shall review outcome of accounting estimates included in prior period F.S., or, their
subsequent re-estimation for purpose of current period.
Ø Nature and extent of auditor’s review takes account of
• nature of accounting estimates, and
• whether info obtained from review would be relevant to identifying and assessing
ROMM of accounting estimates made in current period F.S.

Ø However, review is not intended to question judgments made in prior periods that were based
on info available at that time.

Ø The outcome of accounting estimate will often differ from accounting estimate recognised in
prior period F.S.

By performing RAP to identify and understand reasons for such differences, auditor may
obtain:

• Info regarding effectiveness of mgt’s prior period estimation process, from which auditor
can judge effectiveness of mgt’s current process.

• Audit evidence that is pertinent to re-estimation, in current period, of prior period

accounting estimates.

• Audit evidence of matters, such as estimation uncertainty, that may be required to be

disclosed in F.S.

Ø It may assist auditor, in current period, in identifying circumstances or conditions that

increase susceptibility of accounting estimates to possible management bias.

Ø Auditor’s professional scepticism assists in identifying such circumstances and determining

NTE of further audit procedures.

CA SHUBHAM KESWANI 58
 Identifying & Assessing ROMM
(a) In identifying and assessing ROMM as required by SA 315, auditor shall evaluate degree of
estimation uncertainty.
(b) Auditor shall determine whether any of those accounting estimate that have been identified as
having high estimation uncertainty give rise to significant risk.

Responses to Assessed Risks of Material Misstatement

(a) Based on assessed ROMM auditor, shall determine:
• Whether mgt has appropriately applied FRF relevant to accounting estimate; and
• Whether methods for making accounting estimates are appropriate and have been applied
consistently
• If changes in accounting estimates or in method from prior period, are those appropriate
in present circumstances.

(b) In response to assessed RMM, auditor shall undertake one or more of following:
• Determine whether events occurring up to date of auditor’s report provide sufficient audit
evidence regarding accounting estimate.

• Test check data used by mgt for making accounting estimate.

• The auditor shall also evaluate whether method used for measurement is appropriate and
assumptions made are reasonable in light of measurement objective of FRF.
This can be achieved by
Ø Testing extent to which data is accurate, complete and relevant and whether accounting
estimate has been properly determined using such data and management assumptions.
Ø Considering source, relevance and reliability of external data.
Ø Recalculating accounting estimate and reviewing information about accounting estimate
for internal consistency.
Ø Test checks effectiveness of controls over estimates used by management with
appropriate substantive procedure.

(c) While determining matters identified or responding to assessed RMM, auditor shall consider
whether specialized skills or knowledge in relation to one or more aspects of accounting estimates are
required in order to obtain SAAE.

Understanding of Assumptions
Matters that the auditor may consider in obtaining an understanding of assumptions underlying the
accounting estimates include, for example:
• The nature of assumptions, including which of the assumptions are likely to be significant
assumptions.

• How management assesses whether assumptions are relevant and complete (that is, that all
relevant variables have been taken into account).

• Where applicable, how management determines that assumptions used are internally consistent.

• Whether assumptions relate to matters within control of management (for eg, assumptions about
maintenance programs that may affect estimation of asset’s useful life), and how they conform
to entity’s business plans and external environment, or to matters that are outside its control
(for eg, assumptions about interest rates, mortality rates, potential judicial or regulatory actions,
or variability and the timing of future cash flows).

• The nature and extent of documentation, if any, supporting the assumptions.

CA SHUBHAM KESWANI 59
 Disclosures Related to Accounting Estimates
Auditor shall obtain SAAE about whether disclosures in FS related to accounting estimates are in
accordance with FRF. For accounting estimates that give rise to significant risks, evaluate adequacy
of disclosure of their estimation uncertainty in F.S. in context of applicable FRF

(a) The presentation of FS in accordance with applicable FRF includes adequate disclosure of material
matters.
These disclosures may include,
• The assumptions used.
• The method of estimation used, including any applicable model.
• The basis for selection of estimation.
• Any changes in method of estimation from prior period and its subsequent effect.
• The sources and implication of estimation uncertainty.

(b) In relation to accounting estimate having significant risk, even where disclosures are in accordance
with the applicable FRF, the auditor may conclude that the disclosure of estimation uncertainty is
inadequate in light of the circumstances and facts involved.

Written Representations (WR)

SA 580 discusses use of WR. Depending on nature, materiality and extent of estimation uncertainty,
WR about accounting estimates recognised or disclosed in F.S. may include representations:

• About appropriateness of measurement processes, including related assumptions and models,

used by mgt in determining accounting estimates in context of applicable FRF, and consistency in
application of processes.
• That assumptions appropriately reflect management’s intent and ability to carry out specific
courses of action on behalf of entity, where relevant to accounting estimates and disclosures.
• That disclosure related to a/c estimates are complete and appropriate under applicable FRF.
• That no subsequent event requires adjustment to a/c estimates and disclosures included in F.S.

CA SHUBHAM KESWANI 60
 SA 550: Related Parties (RP)

Responsibilities of auditor
• FRF establish a/c & disclosure requiremets à RP relationships, transactions & balances then
Auditor must perform Audit procedures to reduce RMM that entity doesn’t account & disclose RP
relationships, transn & balances as per FRF

• Even if FRF has no such requirement à Auditor shall obtain understanding of RP relationships &
transn to conclude FS give true & fair view & are not misleading

Objectives of Auditor
(a) Obtain understanding of RP relationships and transactions sufficient to be able:

(i) To recognise fraud risk factors, arising from RP relationships and transn relevant to
identification and assessment of ROMM due to fraud; and

(ii) To conclude whether FS:

a) Achieve true and fair presentation (for fair presentation frameworks); or
b) Are not misleading (for compliance frameworks); and

(b) In addition, where FRF establishes RP requirements, to obtain SAAE about whether RP
relationships and transn have been appropriately identified, accounted and disclosed in F.S. in
accordance with FRF

Related party – A party that is either:

(i) RP as defined in FRF; or

(ii) Where FRF establishes minimal or no related party requirements:

a. A person or other entity that has control or significant influence, over reporting entity;
b. Another entity over which reporting entity has control or significant influence, or
c. Another entity that is under common control with reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.

However, entities that are under common control by a state (i.e., a national, regional or local
government) are not considered related unless they engage in significant transactions or share
resources to significant extent with one another.

Understanding Entity’s Related Party Relationships and Transactions

The engagement team discussion shall include specific consideration of susceptibility of FS to material
misstatement that could result from entity’s RP relationships and transactions.

The auditor shall inquire of management regarding:

(a) The identity of entity’s RP, including changes from prior period;
(b) The nature of relationships between entity and these RP; and
(c) Whether entity entered into transactions with these RP during the period and, if so, type and
purpose of transactions.

The auditor shall inquire of management and others within entity, to obtain understanding of controls
that management has established to:
(a) Identify, account for, and disclose RP relationships and transactions in accordance with FRF;

CA SHUBHAM KESWANI 61
(b) Authorise and approve significant transactions and arrangements with RP; and
(c) Authorise and approve significant transactions and arrangements o/s normal course of business.

Maintain alertness for RP information when reviewing Records/Documents

Auditor shall remain alert, when inspecting records or documents, for arrangements or other info that
may indicate existence of RP relationships or transactions that mgt has not previously identified or
disclosed to the auditor.

Documents to be inspected for identifying RP

Auditor shall inspect following for indications of existence of RP relationships or transactions that
mgt has not previously identified or disclosed to auditor:

(a) Bank, legal and 3rd party confirmations obtained as part of auditor’s procedures;

(b) Minutes of meetings of shareholders and of TCWG; and

(c) Such other records or documents as auditor considers necessary in circumstances of entity.

During the audit, the auditor may inspect records or documents that may provide information about
related party relationships and transactions, for eg:

• Entity income tax returns.

• Internal auditors’ reports.

• Information supplied by the entity to regulatory authorities.

• Documents associated with the entity’s filings with a securities regulator (e.g, prospectuses).

• Shareholder registers to identify the entity’s principal shareholders.

• Records of the entity’s investments and those of its pension plans.

• Statements of conflicts of interest from mgt & TCWG.

• Contracts and agreements with key mgt or TCWG.

• Significant contracts re-negotiated by the entity during the period.

• Significant contracts and agreements not in the entity’s ordinary course of business.

If auditor identifies significant transactions o/s entity’s normal course of business when performing
audit procedures , he shall inquire of management about:
(a) The nature of transactions; and
(b) Whether RP could be involved.

Fraud Risk Factors Associated with a Related Party with Dominant Influence
Domination of mgt by single person or small group of persons without compensating controls is a
fraud risk factor.

Indicators of dominant influence exerted by a related party include:

• The related party has vetoed significant business decisions taken by mgt or TCWG.
• Significant transactions are referred to RP for final approval.
• There is little or no debate among mgt and TCWG regarding business proposals initiated by RP.
• Transactions involving RP are rarely independently reviewed and approved.

CA SHUBHAM KESWANI 62
 Identification of Previously Unidentified/Undisclosed RP or Significant RP Transactions
a) Promptly communicate to other members of engg team

b) Where FRF establishes RP requirements:

• Request mgt to identify all transn with newly identified RP
• Inquire as to why entity’s IC failed to identify or disclose RP relationship/transaction

c) Perform Substantive procedures relating to newly identified RP relationship/transaction

d) If non-disclosure appears intentional, evaluate implications for audit.

Examples of arrangements that indicate existence of RP relationships or transactions that

management has not previously identified or disclosed to auditor include:

• Participation in unincorporated partnerships with other parties.

• Agreements for provision of services to certain parties under terms and conditions that are o/s
entity’s normal course of business.

• Guarantees and guarantor relationships.

What if Identified Significant RP Transactions o/s Entity’s Normal Course of Business?

a) Inspect underlying contract/agreement & evaluate:

• Business rationale (or lack thereof) suggest transaction entered to engage in fraudlent
financial reporting or conceal misappropriation of assets
• Terms of transactions are consistent with mgt explaination &
• Transn accounted & disclosed as per FRF

b) Obtain Audit evidence that transn authorised & approved.

Examples of transactions outside entity’s normal course of business may include:

• Complex equity transactions, such as corporate restructurings or acquisitions.

• Transactions with offshore entities in jurisdictions with weak corporate laws.

• The leasing of premises or rendering of mgt services by entity to another party if no consideration
is exchanged.

• Sales transactions with unusually large discounts or returns.

• Transactions with circular arrangements, for example, sales with a commitment to repurchase.

• Transactions under contracts whose terms are changed before expiry.

CA SHUBHAM KESWANI 63
 SA 560: Subsequent Events

• Events occurring b/w date of FS & date of auditor’s report &

• Facts that become known to auditor after date of auditor’s report

Events occurring b/w date of Facts that become known to Facts which become known to
FS & date of Audit Report auditor after date of Audit auditor after FS are issued
report but before F.S. are
issued
a) Auditor shall obtain SAAE to a) Auditor has no obligation to a) After FS have been issued
ensure the events which perform any procedure auditor has no obligation.
require adjustment or regarding FS after issue of AR.
disclosure in FS have been b) However if any fact becomes
identified. b) However, if a fact becomes known to auditor, had it been
known to auditor that had been know at date of AR, he may
b) In determining NTE of Audit known before issue of AR, it have amended the AR, he shall:
procedures, he shall: may have amended the AR, he • Discuss with mgt &
• Obtain understanding of shall: TCWG
mgt procedures of • Discuss matter with mgt & • Determine if FS need
identifying subsequent TCWG amendment & if so,
events • Determine if FS need • Inquire how mgt intends
• Inquiring of mgt as to amendment & if so to address the matter
occurrence of subs. Events • Inquire how mgt intends to
which affect FS address the matter in FS c) If mgt amends the FS,
• Read minutes mgt meetings auditor shall:
held after date of FS c) If mgt amends FS, he shall, • Carry out audit procedures
• Read latest subsequent • Carry our audit procedures necessary in circumstances
interim FS, if any on amendment of amendment
• If auditor identifies events • Extend these procedures to • Review steps taken by mgt
which require adjustment or date of new AR that everyone in receipt of
disclosure in FS, then • Provide a new AR on amended previously issued FS with
determine if it is FS dated not earlier than AR has been informed of
appropriately adjusted or date of approval of amended the situation
disclosed in FS FS • Extend audit procures to
• Written Representation date of new AR, dated no
from mgt that all events d) If law or reg. or FRF doesn’t earlier than date of approval
occurring subsequent to prohibit mgt from restricting of amended FS
date of FS & that require amendment of FS to • Provide a new AR on
adj or discl have been subsequent event, auditor is amended FS
adjusted or disclosed. permitted to restrict audit • In New or amended AR
procedures to that amendment. include EOM/OM para
Auditor shall either: referring to note in FS
• Amend AR to include an discussing reasons for
additional date restricted to amendment in FS & AR
amendment in FS.
d) If mgt doesn’t amend FS &
• Provide a new or amended AR inform users about the
that includes EOM/OM para situation à auditor shall notify
that conveys audit mgt & TCWG that auditor seek
procedures on subsequent

CA SHUBHAM KESWANI 64
 events restricted to to prevent future reliance on
amendments in FS. AR

e) If mgt doesn’t amend FS If despite such notification,

when auditor requires: mgt & TCWG don’t take steps,
auditor shall take action to
• If AR not provided to entity,
prevent reliance on AR (obtain
modiy opinion as per SA 705 &
legal advice)
provide AR

• If AR provided, then notify

mgt & TCWG to not issue FS
to 3rd parties. If mgt still
issues FS, auditor shall take
action to prevent reliance on
AR (obtain legal advice)

Specific inquiries to be made from mgt:

• Whether new commitments, borrowings or guarantees have been entered into.

• Whether sales or acquisitions of assets have occurred or are planned.
• Whether any assets have been appropriated by govt or destroyed, for eg, by fire or flood.
• Whether any events have occurred that are relevant to recoverability of assets.
• Whether there have been increases in capital or issuance of debt instruments, such as issue of
new shares or debentures, or an agreement to merge or liquidate has been made or is planned.
• Whether there have been any developments regarding contingencies.
• Whether any unusual accounting adjustments have been made or are contemplated.
• Whether any events have occurred or are likely to occur that will bring into Question (?)
appropriateness of accounting policies used in F.S, for eg, if such events call into question
validity of going concern assumption.
• Whether any events have occurred that relevant to measurement of estimates or provisions
made in F.S.

CA SHUBHAM KESWANI 65
 SA 570: Going Concern

Going Concern Basis of Accounting

• FS are prepared on assumption that entity will continue operations for foreseeable future.
• General purpose FS are prepared using going concern basis of accounting, unless mgt either intends
to liquidate entity or to cease operations, or has no realistic alternative but to do so.
• Special purpose F.S. may or may not be prepared in accordance with FRF for which going concern
basis of accounting is relevant.
• When use of going concern basis of accounting is appropriate, assets and liabilities are recorded on
basis that entity will be able to realize its assets and discharge liabilities in normal course of
business.

Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern

a) It is mgt responsibility à assess entity’s ability to continue as going concern even if FRF does not
include explicit requirement.

b) Mgt’s assessment of entity’s ability to continue as going concern involves making judgment, at
particular point in time, about inherently uncertain future outcomes of events or conditions.

c) The following factors are relevant to that judgment:

• The degree of uncertainty associated with outcome of an event or condition.
• The size and complexity of entity, nature and condition of business and degree to which it is
affected by external factors.
• Any judgment about future is based on information available at the time at which judgment is
made. Subsequent events may result in outcomes that are inconsistent with judgments that
were reasonable at time they were made.

Auditor’s Responsibilities
• Auditor’s responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of
going concern basis of accounting in preparation of FS
• To conclude, based on audit evidence obtained, whether a material uncertainty exists about the
entity’s ability to continue as a going concern.
• These responsibilities exist even if FRF used in preparation of FS does not include explicit
requirement for mgt to make specific assessment of entity’s ability to continue as a going concern.
• The absence of reference to material uncertainty about entity’s ability to continue as going concern
in auditor’s report cannot be viewed as a guarantee as to entity’s ability to continue as a going
concern.

Requirements of SA 570

When performing RAP as per SA 315, auditor shall consider whether events or conditions exist that
may cast significant doubt on entity’s ability to continue as a going concern.

In doing so, determine whether mgt has already performed a preliminary assessment of entity’s ability
to continue as a going concern, &
a) If assessment performed à discuss the assessment with mgt and determine whether mgt has
identified events or conditions that, individually or collectively, cast significant doubt on entity’s
ability to continue as going concern and, if so, mgt’s plans to address them; or
b) If assessment not performed à discuss with mgt basis for use of going concern basis of
accounting, and inquire whether events or conditions exist that, individually or collectively, may
cast significant doubt on entity’s ability to continue as going concern.

CA SHUBHAM KESWANI 66
The auditor shall remain alert throughout audit for audit evidence of events or conditions that cast
significant doubt over entity’s ability to continue as going concern.

Evaluating mgt assessment of Going Concern

• Auditor shall evaluate management’s assessment of entity’s ability to continue as going concern.
• Auditor shall cover same period as used by mgt to make its assessment as required by applicable
FRF, or by law or regulation if it specifies longer period.
• If mgt’s assessment of entity’s ability to continue as going concern covers less than 12 months
from date of FS, request mgt to extend assessment period to at least 12 months.
• In evaluating mgt’s assessment, consider whether it includes all relevant info of which auditor is
aware as result of audit.

Additional Audit Procedures When Events or Conditions Are Identified

a) Where mgt has not yet performed assessment of entity’s ability to continue as going concern,
requesting mgt to make its assessment.

b) Evaluating mgt’s plans for future actions, whether outcome of these plans likely to improve situation
and whether management’s plans are feasible in the circumstances.

c) Where entity has prepared cash flow forecast, and analysis of forecast is a significant factor in
considering future outcome of events or conditions:
i. Evaluating reliability of underlying data generated to prepare forecast; and
ii. Determining whether there is adequate support for assumptions underlying forecast.

d) Considering whether any additional facts or info become available since date on which mgt made
its assessment.

e) Requesting written representations from mgt and TCWG , regarding their plans for future
actions and feasibility of these plans.

Mgt Written
Plans Cash flow forecast Add. Facts/info
Assessment Representations

Additional procedures:
• Analysing and discussing cash flow, profit and other relevant forecasts with mgt.
• Analysing and discussing entity’s latest available interim financial statements.
• Reading terms of debentures and loan agreements and determining whether any have been
breached.
• Reading minutes of meetings of shareholders, TCWG and committees for reference to
financing difficulties.
• Inquiring of entity’s legal counsel regarding existence of litigation and claims and
reasonableness of mgt’s assessments of their outcome and estimate of financial implications.
• Confirming existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing financial ability of such parties
to provide additional funds.
• Evaluating entity’s plans to deal with unfilled customer orders.
• Performing audit procedures regarding subsequent events to identify those that either mitigate
or otherwise affect entity’s ability to continue as a going concern.
• Confirming existence, terms and adequacy of borrowing facilities.
• Obtaining and reviewing reports of regulatory actions.
• Determining adequacy of support for any planned disposals of assets.

CA SHUBHAM KESWANI 67
 Auditor’s Conclusion
• The auditor shall evaluate whether SAAE has been obtained & conclude on, appropriateness of
mgt’s use of going concern basis of accounting in preparation of FS.
• Based on audit evidence obtained, conclude whether material uncertainty exists related to events
or conditions that, individually or collectively, may cast significant doubt on entity’s ability to
continue as a going concern.
• A material uncertainty exists when magnitude of impact and likelihood of occurrence is such that,
appropriate disclosure of nature and implications of uncertainty is necessary for:
a) In case of a fair presentation FRF à fair presentation of FS,or
b) In case of compliance framework, FS not to be misleading.

Adequacy of Disclosures When Events or Conditions Have Been Identified and a Material Uncertainty
Exists
If auditor concludes that mgt’s use of going concern basis of accounting is appropriate in
circumstances but material uncertainty exists, auditor shall determine whether FS:

a) Adequately disclose principal events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and mgt’s plans to deal with these events or conditions;
and
b) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it
may be unable to realize its assets and discharge its liabilities in the normal course of business.

Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material
Uncertainty Exists
If events or conditions identified that may cast significant doubt on entity’s ability to continue as
going concern but, based on audit evidence obtained, auditor concludes that no material uncertainty
exists, auditor shall evaluate whether, in view of the requirements of FRF, F.S. provide adequate
disclosures about these events or conditions.

Implications for Reporting

Use of Going Concern Basis of Accounting Is Inappropriate

If FS have been prepared using going concern basis of accounting but, in auditor’s judgment, mgt’s use
of the going concern basis of accounting in the preparation of FS is inappropriate, auditor shall express
an adverse opinion.

Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists

Adequate Disclosure of a Material Uncertainty Is Made in Financial Statements à Auditor shall

express an unmodified opinion and report shall include separate section under the heading “Material
Uncertainty Related to Going Concern” to:

(a) Draw attention to note in F.S. that discloses the matters; and

(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is
not modified in respect of the matter.

Adequate Disclosure of a Material Uncertainty Is Not Made in F.S. à If adequate disclosure about
material uncertainty is not made in financial statements, auditor shall:

CA SHUBHAM KESWANI 68
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and

(b) In Basis for Qualified (Adverse) Opinion section of auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the financial statements do not adequately disclose this matter.

Management Unwilling to Make or Extend Its Assessment à Auditor shall consider the implications
for auditor’s report.
Communication with TCWG
a) Whether events or conditions constitute a material uncertainty;
b) Whether mgt’s use of going concern basis of accounting is appropriate in preparation of F.S.;
c) The adequacy of related disclosures in F.S.; and
d) Where applicable, implications for auditor’s report.

Significant Delay in Approval of Financial Statements

Inquire reasons for delay. If delay could be related to events or conditions relating to going concern
assess. perform additional audit procedures & consider effect on auditor’s conclusion regarding
existence of a material uncertainty.

Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going
Concern

Financial
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
• Inability to pay creditors on due dates.
• Indications of withdrawal of financial support by creditors.
• Substantial operating losses or significant deterioration in value of assets used to generate
cash flows.
• Arrears or discontinuance of dividends.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Change from credit to cash-on-delivery transactions with suppliers.

Operating
• Management intentions to liquidate the entity or to cease operations.
• Loss of key mgt without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
• Labor difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.

Other
• Non-compliance with capital or statutory or regulatory requirements
• Pending legal or regulatory proceedings against entity that may result in claims that entity is
unlikely to satisfy.
• Changes in law or regulation or government policy expected to adversely affect entity.
• Uninsured or underinsured catastrophes when they occur.

CA SHUBHAM KESWANI 69
 SA 580: Written Representations (WR)

• A written statement by mgt provided to auditor to confirm certain matters or to support other
audit evidence.
• Written representations in this context do not include F.S., assertions therein, or supporting
books and records.
• WR provide necessary audit evidence, they don’t provide SAAE on their own about any of
matters with which they deal.

Objectives of Auditor

a) To obtain WR from mgt that they believes they have fulfilled their responsibility for
preparation of F.S and for completeness of information provided to auditor;
b) To support other audit evidence relevant to F.S. or specific assertions in F.S by means of WR,
if determined necessary by auditor or required by other SAs; and
c) To respond appropriately to WR provided by management or if management do not provide the
written representations requested by the auditor.

Date & Period covered by WR

As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
auditor’s opinion cannot be expressed, and auditor’s report cannot be dated, before the date of written
representations.

Furthermore, because auditor is concerned with events occurring up to date of auditor’s report that
may require adjustment to or disclosure in F.S, WR are dated as near as practicable to, but not after,
date of auditor’s report on F.S.

In some circumstances it may be appropriate for auditor to obtain a WR about a specific assertion in
F.S. during the course of audit. Where this is the case, it may be necessary to request an updated
written representation.

The written representations are for all periods referred in auditor’s report because mgt needs to
reaffirm that WR it previously made wrt prior periods remain appropriate. Auditor and mgt may agree
to a form of WR that updates WRs relating to prior periods by addressing whether there are any
changes to such written representations and, if so, what they are.

Situations may arise where current mgt were not present during all periods referred to in auditor’s
report. Such persons may assert that they are not in position to provide some or all of WRs because
they were not in place during prior period.

This fact, however, does not diminish such persons’ responsibilities for F.S. as a whole. Accordingly,
requirement for auditor to request written representations that cover whole of relevant period(s) still
applies.

CA SHUBHAM KESWANI 70
 Doubt as to the Reliability of Written Representations

If auditor has concerns about competence, integrity, ethical values or diligence (DICE) of mgt, auditor
shall determine effect that such concerns may have on reliability of representations (oral or written)
and audit evidence in general.

In particular, if WR are inconsistent with other audit evidence, auditor shall perform audit procedures
to attempt to resolve the matter. If matter remains unresolved, reconsider assessment of
competence, integrity, ethical values or diligence (DICE) of mgt and determine effect on reliability of
representations (oral or written) and audit evidence in general.

If auditor concludes that WR are not reliable, take appropriate actions, including determining possible
effect on opinion in auditor’s report in accordance with SA 705.

Requested Written Representations Not Provided

If mgt does not provide one or more of requested written representations, auditor shall:

a) Discuss matter with mgt;

b) Re-evaluate integrity of mgt and evaluate effect on reliability of representations (oral or
written) and audit evidence in general; and
c) Take appropriate actions, including determining possible effect on the opinion in auditor’s report
in accordance with SA 705,.

The auditor shall disclaim an opinion in accordance with SA 705 if:

a) The auditor concludes that there is sufficient doubt about integrity of management such that
WR are not reliable; or
b) Management does not provide WR required.

CA SHUBHAM KESWANI 71
 SA 600: Using the work of Other Auditor

Principal Auditor

• Auditor who uses work performed by other auditors is Principal auditor.

• Auditor with responsibility for reporting on financial information of an entity
• when that financial information includes financial information of one or more components
audited by another auditor.

Acceptance as principal Auditor

The auditor should consider following before accepting his position as principal auditor:

a) materiality of portion of financial information which principal auditor audits;

b) principal auditor's degree of knowledge regarding business of components;

c) risk of material misstatements in financial information of components audited by other auditor;

and

d) performance of additional procedures as set out in this SA regarding components audited by

other auditor resulting in principal auditor having significant participation in such audit.

Principal Auditor’s Procedures

1. Right to visit component & examine books of accounts & records, if necessary.

2. If planning to use work of other auditor evaluate his competence if he’s not member of ICAI

3. Perform procedures to obtain SAAE that work of other auditor is adequate for principal auditor’s
purpose.
• Advise other auditor of use of his work & co-ordinate at planning stage.
• Inform auditor about areas requiring spl. consideration, procedures for identifying inter-
component transaction, & time table for audit completion.
• Advise other auditor about significant accounting, auditing & reporting requirements & obtain
representation as to compliance with them.

4. Principal Auditor might discuss with other auditor procedures applied or review written summary
of his audit procedures in form of questionnaire or checklist. May also plan to visit other auditor.
NTE of audit procedures would depend on his knowledge of professional competence of other
auditor that can be enhanced from review of his previous audit work.

Role of Principal & Other Auditor (Coordination b/w Auditors)

As per SA 600 “Using the Work of Another Auditor”, there should be sufficient liaison between
principal auditor and other auditor

Role of Principal Auditor:

i. It is necessary to issue written communication(s) as principal auditor to other auditor.

ii. The principal auditor should advise other auditor of any matters that come to his attention
that may have important bearing on other auditor’s work.

CA SHUBHAM KESWANI 72
 iii. When considered necessary by him, principal auditor may require other auditor to answer a
detailed questionnaire regarding matters on which principal auditor requires information for
discharging his duties.

Role of Other Auditor:

i. The other auditor, knowing context in which his work is to be used by principal auditor, should
co-ordinate with principal auditor. For example, by bringing to principal auditor’s immediate
attention any significant findings requiring to be dealt with at entity level, adhering to time-
table for audit of component, etc.
ii. He should ensure compliance with relevant statutory requirements.
iii. The other auditor should respond to questionnaire sent by Principal Auditor on a timely basis.

Reporting Considerations

When principal auditor concludes, that work of other auditor can’t be used and he has not been able
to perform sufficient additional procedures regarding financial information of component audited by
other auditor, express a qualified or disclaimer of opinion because there is limitation on scope of audit.

In all circumstances, if other auditor issues, or intends to issue, modified auditor's report, principal
auditor should consider whether subject of modification is of such nature and significance, in relation
to financial information of entity that it requires modification of principal auditor's report.

Division of Responsibility

The principal auditor would not be responsible in respect of work entrusted to other auditors, except
in circumstances which should have aroused his suspicion about reliability of work performed by other
auditors.

When principal auditor has to base his opinion on FS of entity as a whole relying upon statements and
reports of other auditors, report should state clearly division of responsibility for financial
information of entity by indicating extent to which financial information of components audited by
other auditors included in financial information of entity, e.g., number of
divisions/branches/subsidiaries or other components audited by other auditors.

CA SHUBHAM KESWANI 73
 SA 620: Using the work of Auditor’s Expert

SA 620 deals with auditor’s responsibilities regarding use of work in a field of expertise other than
accounting or auditing when that work is used to assist the auditor in obtaining SAAE.

Types of report or opinions Auditor can obtain from Auditor’s expert?

• The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.

• The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.

• The estimation of oil and gas reserves.

• The valuation of environmental liabilities, and site clean-up costs.

• The interpretation of contracts, laws and regulations.

• The analysis of complex or unusual tax compliance issues.

Objectives of Auditor
(a) To determine whether to use work of an auditor’s expert; and
(b) If using work of an auditor’s expert à determine whether that work is adequate for auditor’s
purposes.

Areas where Auditor’s expert can assist the auditor

• Obtaining an understanding of entity and its environment, including its internal control. (SA 315)
• Identifying and assessing ROMM. (SA 315)
• Determining and implementing overall responses to assessed risks at F.S. level. (SA 330)
• Designing and performing further audit procedures to respond to assessed risks at assertion level,
comprising tests of controls or substantive procedures. (SA 330)
• Evaluating sufficiency and appropriateness of audit evidence obtained in forming an opinion on F.S.
(SA 500)

Considerations when deciding to use the work of Auditor’s Expert

• Whether management has used a management’s expert in preparing F.S.

• The nature and significance of matter, including its complexity.

• The ROMM in matter.

• The expected nature of procedures to respond to identified risks, including auditor’s knowledge
of and experience with work of experts in relation to such matters; and availability of alternative
sources of audit evidence.

When management has used a management’s expert

When mgt has used management’s expert in preparing F.S, auditor’s decision on whether to use an
auditor’s expert may also be influenced by such factors as: [Same as SA 500]

• The nature, scope and objectives(NSO) of the management’s expert’s work.

• Whether mgt’s expert is employed by entity, or is a party engaged by it to provide relevant
services.

CA SHUBHAM KESWANI 74
 • The extent to which mgt can exercise control or influence over the work of the management’s
expert.
• The management’s expert’s competence and capabilities.
• Whether mgt’s expert is subject to technical performance standards or other professional or
industry requirements.
• Any controls within entity over management’s expert’s work.

Nature, Timing & Extent of Audit Procedures when using work of Auditor’s Expert
The NTE of auditor’s procedures will vary depending on circumstances. The auditor shall consider
matters including:

a) The nature of matter to which that expert’s work relates;

b) The risks of material misstatement in the matter to which that expert’s work relates;
c) The significance of that expert’s work in the context of the audit;
d) The auditor’s knowledge of and experience with previous work performed by that expert; and
e) Whether that expert is subject to the auditor’s firm’s quality control policies and procedures.

The following factors may suggest the need for different or more extensive procedures than would
otherwise be the case:

• The work of auditor’s expert relates to significant matter that involves subjective and complex
judgments.

• The auditor has not previously used work of auditor’s expert, and has no prior knowledge of expert’s
competence, capabilities and objectivity.

• The auditor’s expert is performing procedures integral to audit, rather than being consulted to
provide advice on individual matter.

• The expert is auditor’s external expert and not subject to firm’s quality control policies and
procedures.

Competence, Capability & Objectivity of Auditor’s Expert

Information regarding competence, capabilities and objectivity of auditor’s expert may come from a
variety of sources: [Similar to SA 500]
• Personal experience with previous work of that expert.
• Discussions with that expert.
• Discussions with other auditors or others who are familiar with that expert’s work.
• Knowledge of that expert’s qualifications, membership of a professional body or industry
association, license to practice, or other forms of external recognition.
• Published papers or books written by that expert.
• The auditor’s firm’s quality control policies and procedures.

Evaluating the objectivity of an auditor’s external expert

When evaluating objectivity of auditor’s external expert, it may be relevant to:

a) Inquire entity about any known interests or relationships that it has with auditor’s external
expert.

b) Discuss with that expert any applicable safeguards, including professional requirements that
apply to him; and evaluate adequacy of safeguards to reduce threats to acceptable level.

CA SHUBHAM KESWANI 75
Interests and relationships that may be relevant to discuss with the auditor’s expert include:
• Financial interests.
• Business and personal relationships.
• Provision of other services by expert
• In some cases, it may also be appropriate for auditor to obtain written representation from
auditor’s external expert about interests or relationships with entity of which that expert is
aware.

Agreement with the Auditor’s Expert

The auditor shall agree, in writing when appropriate, on following matters with the auditor’s expert:

a) The nature, scope and objectives of that expert’s work;

b) The respective roles and responsibilities of auditor and expert;

c) The nature, timing and extent of communication between auditor and expert, including form of
report to be provided by expert; and

d) The need for auditor’s expert to observe confidentiality requirements.

The following factors suggest need for more detailed agreement or written agreement:

• The auditor’s expert will have access to sensitive or confidential entity information.
• The respective roles or responsibilities of auditor and auditor’s expert are different from
those normally expected.

• Multi-jurisdictional legal or regulatory requirements apply.

• The matter to which auditor’s expert’s work relates is highly complex.

• The auditor has not previously used work performed by that expert.

• The greater the extent of auditor’s expert’s work, and its significance in context of audit.

Evaluating Adequacy of Auditor’s Expert Work

Specific procedures to evaluate adequacy of auditor’s expert’s work for auditor’s purposes may include:

• Inquiries of auditor’s expert.

• Reviewing auditor’s expert’s working papers and reports.

• Corroborative procedures, such as:

o Observing the auditor’s expert’s work
o Examining published data, such as statistical reports from reputable, authoritative
sources;
o Confirming relevant matters with third parties
o Performing detailed analytical procedures; and
o Re-performing calculations.

• Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.

• Discussing the auditor’s expert’s report with management.

CA SHUBHAM KESWANI 76
 Use of Significant assumptions & methods (Relevance & Reasonableness)
Factors relevant to the auditor’s evaluation of those assumptions and methods include whether they
are:
• Generally accepted within auditor’s expert’s field;
• Consistent with requirements of applicable FRF;
• Consistent with those of management, and if not, reason for, and effects of, differences.
• Dependent on use of specialised models;

Source Data (Relevance, Completeness & Accuracy)

• Verifying origin of data, including obtaining understanding of, and where applicable testing,
internal controls over the data and, where relevant, its transmission to expert.

• Reviewing the data for completeness and internal consistency

Inadequate work
If the auditor determines that work not adequate for auditor’s purposes, auditor shall:

a) Agree with that expert on nature and extent of further work to be performed by expert; or
b) Perform further audit procedures appropriate to circumstances.

Reporting: If work is not adequate for auditor’s purposes + cannot resolve matter through additional
audit procedures à express modified opinion as per SA 705 because not obtained SAAE.

Reference to Auditor’s Expert in Auditor’s Report

• The auditor shall not refer to work of auditor’s expert in auditor’s report containing unmodified
opinion unless required by law or regulation to do so. If such reference required by law or regulation,
auditor shall indicate in report that reference does not reduce auditor’s responsibility for audit
opinion.

• In some cases, law or regulation may require reference to work of an auditor’s expert, for purposes
of transparency in public sector.

• If auditor makes reference to work of auditor’s expert in auditor’s report because such reference
is relevant to understanding of modification to auditor’s opinion, indicate in auditor’s report that
such reference does not reduce auditor’s responsibility for that opinion.

CA SHUBHAM KESWANI 77
 SA 700: Forming an Opinion & Reporting on the Financial Statements

Objective:

a) To form an opinion on F.S. based on evaluation of conclusions drawn from audit evidence obtained;
and
b) To express clearly that opinion through a written report.

Specific Evaluations by the Auditor

In particular, the auditor shall evaluate whether:

(a) The F.S. adequately disclose significant accounting policies selected and applied;

(b) The a/c policies selected and applied are consistent with applicable FRF and are appropriate;

(c) The accounting estimates made by management are reasonable;

(d) The information presented in F.S. is relevant, reliable, comparable, and understandable;

(e) The F.S. provide adequate disclosures to enable intended users to understand effect of material
transactions and events on information conveyed in F.S.; and

(f) The terminology used in F.S., including the title of each financial statement, is appropriate.

Forming an opinion on the Financial Statements

The auditor shall form opinion on whether F.S. are prepared, in all material respects, in accordance
with applicable FRF.

In order to form opinion, obtain reasonable assurance about whether F.S. as whole are free from
material misstatement whether due to fraud or error.

Further, when F.S. are prepared in accordance with fair presentation framework, also evaluate
whether F.S. achieve fair presentation by considering:

1. The overall presentation, structure and content(PCS) of F.S.; and

2. Whether F.S., including related notes, represent underlying transactions and events in a manner
that achieves fair presentation.

In other words, auditor shall express an unmodified opinion when auditor concludes F.S. are
prepared, in all material respects, in accordance with applicable FRF.

Basic Elements of Audit Report

1. Title: Auditor’s report shall have title that clearly indicates that it is report of independent
auditor. “Independent Auditor’s Report,” distinguishes independent auditor’s report from reports
issued by others.

2. Addressee: The auditor’s report shall be addressed as required by circumstances of engagement.

Report could be addressed to Members of Company in case of general purpose (statutory) F.S. and to
Board of Directors in case of special purpose F.S.

3. Auditor’s Opinion: The first section of auditor’s report shall include auditor’s opinion, and shall
have heading “Opinion.” Opinion section of auditor’s report shall also:

CA SHUBHAM KESWANI 78
 a) Identify entity whose F.S. have been audited;
b) State that F.S. have been audited;
c) Identify title of each statement comprising F.S.;
d) Refer to notes, including summary of significant accounting policies; and
e) Specify date of, or period covered by, each financial statement comprising the F.S.

4.Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:

a) States that audit was conducted in accordance with Standards on Auditing;

b) Refers to the section of auditor’s report that describes auditor’s responsibilities under SAs;
c) Includes statement that auditor is independent of entity in accordance with relevant ethical
requirements relating to audit, and has fulfilled other ethical responsibilities. The statement shall
refer to Code of Ethics issued by ICAI
d) States whether auditor believes that audit evidence obtained is sufficient and appropriate to
provide basis for auditor’s opinion.

5. Going Concern: Where applicable, auditor shall report in accordance with SA 570, Auditor’s
responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of going concern
basis of accounting in preparation of F.S, and conclude whether material uncertainty exists about
entity’s ability to continue as going concern.

Implications on Auditor’s Report

Use of Going Concern Use of Going Concern Basis of Management unwilling to

Basis of Accounting is Accounting is Appropriate make or extend its
Inappropriate But Material Uncertainty Exists & assessment

Adverse Opinion Consider

Adequate disclosure of Adequate disclosure of implications on
material uncertainty is material uncertainty is Audit Report
made in F.S. NOT made in F.S.

Unmodified Opinion & Qualified/Adverse opinion

separate section “Material & mention in the basis of
Uncertainty related to opinion para
going concern”

6. Key Audit Matters: For audits of F.S. of listed entities à communicate KAM in auditor’s report in
accordance with SA 701.
When auditor is otherwise required by law or regulation or decides to communicate key audit matters
in auditor’s report, auditor shall do in accordance with SA 701.

7. Responsibilities for Financial Statements

The auditor’s report shall include a section with heading “Responsibilities of Management for
Financial Statements.” In some entities, appropriate reference may be to TCWG.

This section of the auditor’s report shall describe mgt’s responsibility for:

CA SHUBHAM KESWANI 79
a) Preparing F.S. as per applicable FRF, and for such internal control as mgt determines necessary to
enable preparation of F.S. free from material misstatement, whether due to fraud or error; &

b) Assessing entity’s ability to continue as going concern and whether use of GC basis of accounting
is appropriate as well as disclosing matters relating to GC. The expln of mgt’s responsibility for
this assessment shall include description of when use of GC basis of accounting is appropriate.

This section of auditor’s report shall also identify those responsible for oversight of financial reporting
process. In this case, heading of this section shall also refer to “Those Charged with Governance”.

When F.S. prepared in accordance with fair presentation framework, description of responsibilities
for F.S. in auditor’s report shall refer to “preparation and fair presentation of these financial
statements” or “preparation of financial statements that give a true and fair view,” as appropriate.

8. Auditor’s Responsibilities for Audit of F.S:

(I) This section of auditor’s report shall:

a) State that objectives of auditor are to:

i. Obtain reasonable assurance about whether F.S. as a whole are free from material
misstatement, whether due to fraud or error; and
ii. Issue an auditor’s report that includes auditor’s opinion.

b) State that reasonable assurance is high level of assurance, but not a guarantee that audit
conducted in accordance with SAs will always detect a material misstatement when it exists; and

c) State that misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in aggregate, they could
reasonably be expected to influence economic decisions of users taken on basis of these F.S;
or
ii. Provide a definition or description of materiality in accordance with applicable FRF.

(II) The Auditor’s Responsibilities for the Audit of F.S. section of the auditor’s report shall further:

To exercises professional judgment and maintains professional

skepticism throughout the audit as per SAs;

To identify and assess the risks of

Auditor’s Responsibilities in Audit of FS

material misstatement of the FS

To obtain an understanding of internal

control relevant for audit to design a/c policies used
audit procedures
To describe an audit by
stating that the Reasonableness
auditor’s To evaluate the appropriateness of:
of accounting
responsibilities are: estimates
To conclude on the appropriateness of
mgt use of going concern assumption Related
disclosures
made by mgt
To describe the To evaluate overall
auditor’s presentation,content & structure of
responsibilities in a F.S.
group audit
engagement as per SA
600.

CA SHUBHAM KESWANI 80
(III) The Auditor’s Responsibilities for Audit of Financial Statements section of auditor’s report
also shall:

(a) State that auditor communicates with TCWG regarding, among other matters: planned scope and
timing of audit and significant audit findings, including any significant deficiencies in internal control
that auditor identifies during audit;

(b) State that auditor provides TCWG with a statement that auditor has complied with relevant
ethical requirements regarding independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on auditor’s independence, and where applicable,
related safeguards; and

(c) For audits of F.S. of all such entities for which KAM are communicated in accordance with SA
701, state that, from matters communicated with TCWG, auditor determines those matters that
were of most significance in audit of F.S. of current period and are therefore key audit matters.

KAM to be presented in Audit Report:

As per SA 701, auditor describes these matters in auditor’s report unless law or regulation precludes
public disclosure about the matter or in extremely rare circumstances, auditor determines that a
matter should not be communicated in auditor’s report because adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.

9. Location of description of auditor’s responsibilities: The description of auditor’s responsibilities

for audit of F.S. required by this SA shall be included:

a) Within body of b) Within an appendix to c) By specific reference within

Audit Report auditor’s report in that case auditor’s report to location of such
auditor shall include reference description on website of
to location of appendix appropriate authority, where law,
regulation or auditing stds permit.

10. Other reporting responsibilities

11. Signature of auditor: Audit report shall be signed by Auditor in personal name & audit firm.
Partner signing needs to mention membership no. + Registration no. of firm + UDIN

12. Date of Audit Report: Not earlier than date when auditor has obtain SAAE

Audit reports for audit as per both SAs & International Stds on Audit
Auditor may be required to conduct audit in accordance with, in addition to Standards on Auditing
issued by ICAI, International Standards on Auditing or auditing stds of any other jurisdiction. If this
is the case, auditor’s report may refer to SA in addition to ISA or auditing standards of such other
jurisdiction, but auditor shall do so only if:

(a) There is no conflict between requirements in ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead auditor

i. to form a different opinion, or

ii. not to include an Emphasis of Matter or Other Matter para that, in particular
circumstances, is required by SAs; and

CA SHUBHAM KESWANI 81
(b) The auditor’s report includes, at a minimum, each of the elements required by SA. The auditor’s
report shall thereby identify such Standards on Auditing.

When auditor’s report refers to both the ISAs or auditing standards of a specific jurisdiction and
SA issued by ICAI, auditor’s report shall clearly identify the same including jurisdiction of origin of
other auditing stds.

Supplementary Information Presented with Financial Statements

If supplementary info that is not required by applicable FRF is presented with audited F.S., auditor
shall evaluate whether it is integral part of F.S. due to its nature or how its presented. When it is
integral part of F.S, it shall be covered by auditor’s opinion.

If supplementary info that is not required by applicable FRF is not considered an integral part of
audited F.S, evaluate whether it is presented in a way that sufficiently and clearly differentiates it
from audited F.S. If not, then auditor shall ask mgt to change its presentation. If mgt refuses ,
auditor shall identify unaudited supplementary info and explain in auditor’s report that such
supplementary info has not been audited.

Examples:

1) When notes to F.S. include expln or reconciliation to the extent to which F.S. comply with another
FRF. Auditor’s opinion will consider such this as supplementary info that can’t be differentiated from
F.S. His opinion will cover such notes or schedules cross referenced from F.S.

2) When additional p&l that discloses specific items of expenditure as separate schedule included as
appendix to F.S. à Auditor shall consider it as supplementary info that can be differentiated from
financial info.

CA SHUBHAM KESWANI 82
 SA 701: Communicating Key Audit Matters in the
Independent Auditor’s Report
• Key Audit matter are matters that in auditor’s professional judgment, were of most significance
in audit of F.S. of current period.
• KAM are selected from matters communicated with TCWG.

Objective
• To enhance communicative value of auditor’s report by providing greater transparency about
audit that was performed.
• To assist user in understanding those matters that, in auditor’s professional judgment, were
of most significance in audit of F.S. of current period.

Communicating KAM is not:

a) A substitute for disclosures in F.S as per applicable FRF

b) A substitute for auditor expressing a modified opinion as per SA 705 (Revised);
c) A substitute for reporting in accordance with SA 570 (Revised) when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an entity’s ability to
continue as a going concern; or
d) A separate opinion on individual matters.

Factors à Determining Key Audit Matters

a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315
b) Significant auditor judgments relating to areas in F.S. that involved significant mgt judgment,
including accounting estimates that have been identified as having high estimation
uncertainty.
c) The effect on audit of significant events or transactions that occurred during the period.

Examples of Key Audit Matters

Assessment of Impairment, Provision for losses and contingencies, Valuation of financial instruments,
Matters relating to Revenue recognition, Taxation matters (multiple tax jurisdictions, uncertain tax
position, deferred tax assets)

Communicating Key Audit Matters

The introductory language in this section of auditor’s report shall state that:

a) Key audit matters are those matters that, in auditor’s professional judgment, were of most
significance in audit of F.S. [of current period]; and
b) These matters were addressed in context of audit of F.S. as a whole, and in forming auditor’s
opinion thereon, and auditor does not provide separate opinion on these matters.

If no KAM Identified? :The following illustrates presentation in auditor’s report if auditor has
determined there are no KAM to communicate:

Key Audit Matters: [Except for the matter described in Basis for Qualified (Adverse) Opinion
section or Material Uncertainty Related to Going Concern section,] We have determined that there
are no [other] key audit matters to communicate in our report.]

CA SHUBHAM KESWANI 83
 SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”

Objective: The objective of auditor is to express clearly an appropriately modified opinion on F.S.
that is necessary when:

a) The auditor concludes, based on audit evidence obtained, that F.S. as a whole are not free
from material misstatement; or
b) The auditor is unable to obtain SAAE to conclude that F.S. as a whole are free from material
misstatement.

Qualified Opinion: The auditor shall express qualified opinion when:

(a) Obtained SAAE à concludes that misstatements, individually or in aggregate, are material, but not
pervasive, to F.S.; or

(b) Unable to obtain SAAE to base the opinion, but concludes that possible effects on F.S. of
undetected misstatements, if any, could be material but not pervasive.
(Material but not pervasive)

Spl. Considerations: When the auditor expresses qualified opinion due to material misstatement in F.S,
auditor shall state that, in auditor’s opinion, except for effects of matter(s) described in Basis for
Qualified Opinion section:

(1) When reporting in accordance with fair presentation framework, accompanying F.S. present fairly,
in all material respects (or give a true and fair view of) […] in accordance with [applicable FRF]; or

(2) When reporting in accordance with compliance framework, accompanying F.S. have been prepared,
in all material respects, in accordance with [applicable FRF]. When modification arises from inability
to obtain SAAE, auditor shall use corresponding phrase “except for possible effects of matter(s) ...”
for modified opinion.

Adverse Opinion: Obtained SAAE, concludes misstatements, individually or in the aggregate, both
material and pervasive to financial statements.

Spl. Considerations: When auditor expresses an adverse opinion, auditor shall state that, in auditor’s
opinion, because of significance of matter(s) described in Basis for Adverse Opinion section:

(1) When reporting in accordance with a fair presentation framework, accompanying F.S. do not present
fairly (or give a true and fair view of) […] in accordance with [applicable FRF]; or

(2) When reporting in accordance with compliance framework, accompanying F.S. have not been
prepared, in all material respects, in accordance with [applicable FRF].

Disclaimer of Opinion: Unable to obtain SAAE to base the opinion, and concludes that possible effects
on F.S. of undetected misstatements, if any, could be both material and pervasive.
Note: Unless required by law or regulation, when auditor disclaims an opinion on F.S., auditor’s report
shall not include Key Audit Matters section in accordance with SA 701.

Spl considerations: When auditor disclaims an opinion due to inability to obtain SAAE, auditor shall:

CA SHUBHAM KESWANI 84
 1. State that auditor does not express opinion on accompanying F.S;
2. State that, because of significance of matter(s) described in Basis for Disclaimer of Opinion
section, auditor has not been able to obtain SAAE to provide basis for audit opinion on F.S; and
3. Amend the statement required in SA 700 (Revised), which indicates that F.S. have been
audited, to state that auditor was engaged to audit the F.S.

Mgt imposed limitation after acceptance of Audit Engagement à Unable to obtain SAAE

Ø After accepting Audit , mgt impose limitation on scope à likely to result in Qualified or
Disclaim of opinion à auditor request mgt to remove limitation

Ø Mgt refuse to remove limitation à Auditor communicate with TCWG & determine if alternate
procedures can be performed to obtain SAAE

Ø If auditor unable to obtain SAAE, determine implications as below:

(a) If auditor concludes that possible effects on F.S.of undetected misstatements, if any, could
be material but not pervasive, auditor shall qualify the opinion; or

(b) If auditor concludes that possible effects on F.S. of undetected misstatements, if any,
could be both material and pervasive so that qualification of opinion would be inadequate to
communicate gravity of situation, the auditor shall:
(i) Withdraw from audit, where practicable and possible under applicable law or regulation;
or
(ii) If withdrawal from audit before issuing auditor’s report not practicable, disclaim an
opinion on F.S.
Ø If decides to withdraw à communicate with TCWG à matters regarding misstatement à rise
to modification of opinion

Note: If Auditor expresses Adverse or Disclaimer of Opinion then audit report shall not contain
unmodified opinion w.r.t any element of F.S.

The auditor’s inability to obtain SAAE (also referred to as limitation on scope of audit)
may arise from:
(a) Circumstances beyond the control of entity;
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized indefinitely by
governmental authorities.

(b) Circumstances relating to nature or timing of auditor’s work; or

• The entity is required to use equity method of accounting for associated entity, and auditor is
unable to obtain SAAE about latter’s financial information to evaluate whether equity method
has been appropriately applied.
• The timing of auditor’s appointment is such that auditor is unable to observe counting of
physical inventories.
• The auditor determines that performing substantive procedures alone is not sufficient, but
entity’s controls are not effective.

(c) Limitations imposed by management.

• Management prevents the auditor from observing the counting of the physical inventory.
• Management prevents the auditor from requesting external confirmation of specific account
balances.

CA SHUBHAM KESWANI 85
 SA 706: Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report

Emphasis of matter para

• Para included in Auditor’s Report
• Refers to matter appropriately presented or disclosed in F.S.
• that in, Auditor’s judgment is of
• importance to user’s fundamental understanding of F.S.

SAs that contain specific requirements for auditor to include Emphasis of Matter paragraphs in
auditor’s report in certain circumstances. These circumstances include:

• When a FRF prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation. (SA 210)

• To alert users that F.S. are prepared in accordance with a special purpose framework.

• When facts become known to auditor after date of auditor’s report and auditor provides a new or
amended auditor’s report (i.e., subsequent events). (SA 560)

Examples of circumstances where auditor may consider it necessary to include an Emphasis of

Matter paragraph are:

• An uncertainty relating to future outcome of exceptional litigation or regulatory action.

• A significant subsequent event that occurs between date of F.S and date of auditor’s report.

• Early application (where permitted) of new a/c std that has material effect on F.S.

• A major catastrophe that has had, or continues to have, significant effect on entity’s financial
position.

When the auditor includes EOM para in auditor’s report, auditor shall:

(a) Include the paragraph within separate section of auditor’s report with appropriate heading that
includes the term “Emphasis of Matter”;
(b) Include in the paragraph clear reference to matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in F.S. The para shall refer only to info
presented or disclosed in F.S; and

(c) Indicate that auditor’s opinion is not modified in respect of matter emphasized.

Note: EOM para is not substitute for KAM, if matter determined as KAM à represent as KAM

Other Matter Para

• Para included in Auditor’s report

• Refers to a matter other than those Presented/Disclosed in F.S.
• Relevant to user’s understanding of
• Audit, auditor’s responsibilities or Audit report

The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
a) Not prohibited by law or regulation; and
b) When SA 701 applies, matter has not been determined to be KAM

CA SHUBHAM KESWANI 86
 SA 710: Comparative Information—Corresponding Figures
and Comparative Financial Statements

Corresponding figures –
• Comparative info where amounts and disclosures for prior period included as integral part of
current period F.S, and intended to be read only in relation to amounts and other disclosures
relating to current period
• The level of detail presented in corresponding amounts and disclosures is dictated primarily by
its relevance to current period figures.

Comparative financial statements –

• Comparative information where amounts and disclosures for prior period included for
comparison with F.S. of current period but, if audited, are referred to in auditor’s opinion.
• The level of info included in comparative F.S. is comparable with that of F.S. of current period.

Audit Procedures for Comparative Information:

(a) Perform Specific audit Procedure: For determining that F.S. contains appropriately classified
comparative information, auditor should:
• Ensure that comparative info agrees with amount and other disclosure presented in prior period.
• The accounting policies applied are consistent with those applied in current period.
• If there have been any changes in application of accounting policies than they are properly disclosed
and presented.

(b) Evaluating the impact on F.S: If auditor becomes aware of any possible misstatement in comparative
information, then:
• He should perform the necessary audit procedures to obtain sufficient audit evidence.
• If auditor had audited prior period’s F.S. than he should follow the relevant requirements of SA
560.

(c) Written Representation: As required by SA 580, auditor should also request written
representation. He should also obtain a specific written representation regarding any prior period item
that is disclosed in current year’s F.S.

Audit Reporting
Reporting for Corresponding Figures:

Auditor’s opinion shall not refer to corresponding figures except in following circumstances:
• If auditor’s report of previous period contains other than unqualified opinion.
• If auditor has sufficient evidence that material misstatement exists in F.S. of prior period, which
was not addressed earlier.

If prior period F.S. not audited, than obtain sufficient audit evidence that opening balance don’t
contain any material misstatement.

If auditor’s report on prior period, included qualified, disclaimer of opinion, or adverse opinion and
matter which gave rise to modification is unresolved, auditor shall modify auditor’s opinion on current
period’s F.S.

In Basis for Modification paragraph in auditor’s report, auditor shall either:

CA SHUBHAM KESWANI 87
(a) Refer to both, the current period’s figures and the corresponding figures in description of matter
giving rise to modification when the effects or possible effects of matter on current period’s figures
are material; or

(b) In other cases, explain that the audit opinion has been modified because of effects or possible
effects of unresolved matter on comparability of current period’s figures and corresponding figures.

Reporting for Comparative Financial Statement:

• The auditor’s opinion shall refer to each period for which the F.S. are presented.

• When reporting on current period’s audit, if auditor’s opinion on such prior period F.S. differs from
opinion previously issued on such F.S, auditor shall disclose substantive reason for different opinion in
OM para in his report.

• If auditor concludes that material misstatement is present in previously audited figures of F.S, he
should report it to mgt and request that predecessor auditor be informed.

If then prior years statements are amended with new report by predecessor auditor, then auditor
shall report only on current period.

Reporting treatment common to both (for corresponding figures and comparative information)

(i) If F.S. of prior period were audited by predecessor auditor, auditor (is permitted by law or
regulation to refer to the predecessor audit report – on case of corresponding figures and decides to
do so) shall state in his audit report:
• That F.S. of the prior period were audited by a predecessor auditor;
• The type of opinion expressed by the predecessor auditor;
• The date of that audit report.

(ii) If prior period F.S. were not audited than he shall report the same in OM Para in his audit report
that corresponding/comparative figures are unaudited.

However, disclosure does not relieve him from his responsibility of obtaining SAAE that opening
balances do not contain misstatements that materially affect current period’s F.S.

CA SHUBHAM KESWANI 88
 SA 720: The Auditor’s Responsibility in Relation to Other Information

Scope
• SA 720 deals with Auditor’s responsibilities relating to other info, financial or non-financial
contained in Annual Report.
• Auditor’s opinion on FS doesn’t cover other information (Annual Report)
• He’s just reqd to read & consider other info for any materially inconsistent info from F.S.
that may indicate material misstatement in either F.S. or Annual Report
• Auditor’s responsibility apply whether other info is recd prior to or after auditor’s report

Obtaining the Other Information

The auditor shall:

a) Determine, through discussion with mgt, which document(s) comprises the annual report, and
entity’s planned manner and timing of issuance of such document(s);

b) Make appropriate arrangements with mgt to obtain in timely manner and, if possible, prior to
date of auditor’s report, final version of document(s) comprising annual report; and

c) When some or all of document(s) determined in (a) will not be available until after the date of
auditor’s report, request mgt to provide a WR that final version of document(s) will be provided
to auditor when available, and prior to its issuance by entity, auditor can complete the
procedures required by this SA.

Reading and Considering the Other Information

The auditor shall read the other info and, in doing so shall:

Consider whether there is material inconsistency between

• other information and F.S. and
• other information and auditor’s knowledge obtained in audit, in context of audit evidence
obtained and conclusions reached in the audit.

While reading other info, remain alert for indications that other info may be materially misstated.

When other info is materially misstated

If auditor concludes that a material misstatement of the other information exists, request mgt to
correct the other info. If mgt:

a) Agrees to make correction, auditor shall determine that correction has been made; or
b) Refuses to make correction à communicate the matter with TCWG and request that
correction be made.

If auditor concludes that material misstatement exists in other information obtained prior to date of
auditor’s report, and other information is not corrected after communicating with TCWG, auditor shall
take appropriate action, including:

(a) Considering the implications for auditor’s report and communicating with TCWG about how
auditor plans to address the material misstatement in auditor’s report or

(b) Withdrawing from engagement, where withdrawal is possible under applicable law or regulation.
When F.S. are materially misstated or Auditor’s understanding needs to be updated à respond as
per other SAs.

CA SHUBHAM KESWANI 89
 Reporting
The auditor’s report shall include separate section with a heading “Other Information”, or other
appropriate heading, when, at date of auditor’s report:

(a) For an audit of F.S. of listed entity, auditor has obtained, or expects to obtain, other info; or

(b) For an audit of F.S of an unlisted corporate entity, auditor has obtained some or all of the other
info.

When auditor’s report is required to include an Other Information section, it shall include:

(a) A statement that management is responsible for the other information;

(b) An identification of:

i. Other information obtained by auditor prior to date of the auditor’s report; and
ii. For an audit of F.S. of listed entity, other information, if any, expected to be obtained after
date of auditor’s report;

(c) A statement that auditor’s opinion does not cover other information and, accordingly, auditor
does not express (or will not express) audit opinion or any form of assurance conclusion thereon;

(d) A description of auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this SA; and

(e) When other information has been obtained prior to date of auditor’s report, either:
i. A statement that auditor has nothing to report; or
ii. If auditor has concluded that there is uncorrected material misstatement of other
information, statement that describes the uncorrected material misstatement of other
information.

CA SHUBHAM KESWANI 90
 Examples of Amounts or Other Items that May Be Included in Other Information
The following are eg of amounts and other items that may be included in other info. This list is not
intended to be exhaustive.

Amounts
• Items in a summary of key financial results, such as net income, earnings per share, dividends,
sales and other operating revenues, and purchases and operating expenses.
• Selected operating data, such as income from continuing operations by major operating area,
or sales by geographical segment or product line.
• Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganization
expenses.
• Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations.
• Capital expenditures by segment or division.
• Amounts involved in, and related financial effects of, off-balance sheet arrangements.
• Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
other contingencies.
• Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio.

Other Items
• Explanations of critical accounting estimates and related assumptions.
• Identification of related parties and descriptions of transactions with them.
• Descriptions of the nature of off-balance sheet arrangements.
• Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s qualitative
assessments of the entity’s related exposures.
• Descriptions of changes in legal or regulatory requirements, such as new tax or environmental
regulations.
• General descriptions of the business environment and outlook.
• Overview of strategy.

“Work hard in Silence, let your Success be your Noise”

CA SHUBHAM KESWANI 91
 Audit Planning, Strategy & Execution

Benefits of Planning an Audit

i) Attention to Important areas
ii) Timely resolution of Potential Problems
iii) Proper Organisation and Management of Audit Engagement
iv) Proper Selection of Engagement Team
v) Direction and Supervision of Engagement Team
vi) Easy Coordination in work done by auditors of components and experts

Nature & Extent of Planning

i. Size & complexity of the auditee
ii. Past experience & expertise
iii. Change in circumstances

Planning - A Continuous Process

Planning is not discrete phase of audit but rather continual and iterative process. It begins shortly
after completion of previous audit and continues until completion of current audit engagement. It
includes consideration of timing of certain activities and audit procedures. It also involves Audit
Programming.

Planning includes the need to consider such matters as:

• The analytical procedures to be applied as risk assessment procedures.
• Obtaining a general understanding of legal and regulatory framework applicable to entity and
how entity is complying with that framework.
• The determination of materiality.
• The involvement of experts.
• The performance of other risk assessment procedures.

Acceptance and Continuance of Client Relationships and Audit Engagements

i. Perform procedures as per SA 220 + SQC 1
Ø Integrity of principal owners, key mgt & TCWG of entity
Ø Competence of engg team to perform engagement & necessary capabilities,
expertise including time & resources
Ø Whether firm & team can comply with relevant ethical requirements
Ø Significant matters arisen during current/ previous audit engg. & implications for
continuing the relationship
ii. Evaluating compliance with ethical requirements, including independence as reqd by SA 220
iii. Establishing understanding of terms of audit engagement as reqd by SA 210

Contents of Audit Plan

i. NTE of Risk Assessment Procedures(RAP) under SA 315
ii. NTE of Further Audit Procedures(FAP) under SA 330
iii. Other planned audit procedures to comply with SAs
• The audit plan is more detailed than overall strategy includes NTE of audit procedures. Planning
for procedures takes place over audit as plan for engg develops.
• Planning of auditor's risk assessment procedures (RAP) occurs early in audit process.
• However, planning nature, timing and extent of specific further audit procedures (FAP)
depends on outcome of those risk assessment procedures (RAP).

CA SHUBHAM KESWANI 92
 • In addition, auditor may begin execution of further audit procedures (FAP) for some classes of
transactions (COTs), account balances and disclosures before planning all remaining further
audit procedures (FAPs).

Reasons for à Changes to planning decisions

i) Result of ii) Changes in ii) Audit evidence obtained from

unexpected events Conditions results of audit procedures

Overall audit strategy

a. Identify characteristics of engagement that define its scope;
b. Ascertain reporting objectives of engagement to plan timing of audit and nature of
communications required;
c. Consider factors that, in auditor’s professional judgment, are significant in directing
engagement team’s efforts;
d. Consider results of preliminary engagement activities and, whether knowledge gained on other
engagements performed by engagement partner for entity is relevant; and
e. Ascertain nature, timing and extent (NTE) of resources necessary to perform engagement.

Benefits of overall audit strategy

i. Employment of qualitative resources: Use of experienced team personnel for high risk
areas & involvement of experts on complex matters
ii. Allocation of quantity of resources: Amount of resources allocated for each area
iii. Timing of deployment of resources: When these resources are to be deployed, such as
whether at an interim audit stage or at key cut-off dates
iv. Mgt of resources: how resources are managed, directed & supervised

Considerations in Establishing Overall Audit Strategy

Examples of matters that auditor may consider:

a. Characteristics of the engagement

Ø FRF (Financial Reporting Framework)
Ø Industry specific reporting requirements
Ø Expected audit coverage (no. & locations of components)
Ø Nature of control relationships b/w parent & components
Ø Extent to which components audited by other auditors
Ø Entity’s use of service organisation
Ø Expected use of audit evidence of previous audits

b. Reporting Objectives, Timing of the Audit, and Nature of Communications

(i) The entity's timetable for reporting.
(ii) Organization of meetings with mgt regarding audit work (Nature, timing and extent).
(iii) Discussion with mgt regarding type and timing of reports to be issued.
(iv) Discussion with mgt regarding communications on status of audit work.
(v) Communication with auditors of components regarding types and timing of reports to be
issued.
(vi) Nature and timing of communications among engg team members.

CA SHUBHAM KESWANI 93
 c. Significant factors , Preliminary engagement acts & knowledge gained on other audits
Ø Determine materiality SA 320
Ø Areas with high RMM
Ø Impact of assessed RMM at FS level on D/S/R (direction, supervision & review)
Ø Evidence of mgt commitment to design, implementation & maintenance (DIM) of IC
Ø Volume of transn determine reliance on IC
Ø Imp. Attached to IC
Ø Significant business developments
Ø Significant industry developments
Ø Other significant relevant developments

Documenting the audit plan

The auditor shall document:
a. Record of key decisions (Audit strategy to plan audit & communicate significant matters to engg
team)
b. Record of NTE of Risk assess. procedures & additional audit procedures at assertion level in
response to assessed risk (Audit plan)
c. Record of reasons of change in audit plans & audit strategy, explaining reasons for change.

Relationship between the Overall Audit Strategy and the Audit Plan
• The audit strategy is prepared before audit plan.
• The audit plan is more detailed than overall audit strategy.
• Audit strategy and audit plan are inter-related because change in one would result into change
in other.
• Audit strategy provides guidelines for developing audit plan.
• It establishes scope and conduct of audit procedures and thereby, works as basis for
developing a detailed audit plan.
• Detailed audit plan would include nature, timing and extent of audit procedures so as to obtain
SAAE.

Audit Programme (Allocate work to team members)

Important matters that need to be considered are:
a. Nature of business in which org. is engaged : Draw up audit programme after considering
technical, financial and accounting set-up of the company.
b. Overall plan: The framework provided under the overall plan should be strictly adhered to.
c. System of Internal controls & accounting procedures: Study and evaluation of internal control
helps auditor to establish reliance he can place on internal controls in determining NTE of
substantive auditing procedures.
d. Size of organisation & mgt structure: An increase in the size of the organisation enhances the
complexity of the examination of its accounting records.
e. Accounting & management policies: Check F.S. of PY to see of a/c policies have been followed
consistently.

Circumstances requiring alteration of Audit Program (A/P)

Ø Audit procedures designed for certain level of turnover & volume increased substantially.
Significant changes in accounting organisation, procedures & personnel (OPP)
Ø Internal Control not as effective as assumed when A/P framed
Ø Extraordinary increase in book debts or stock compared to PY
Ø Suspicion aroused in course of audit or info recd àAssets misappropriated

CA SHUBHAM KESWANI 94
 Key Phases in Audit execution
• Execution Planning : The auditors need to plan work to carry out audit in effective, efficient
and timely manner.
• Risk & Control Evaluation: For each segment of audit, conduct a detailed risk and control
assessment i.e. list risks that must be reviewed, capture for each risk controls that exist or
and show for each control, work steps required to test effectiveness of controls.
• Testing: Test effectiveness of controls to determine whether controls are operating as
designed.
• Reporting: Report as per SA 700. The auditor should review and assess conclusions drawn
from audit evidence obtained as basis for expression of opinion on F.S.

Examples of Audit Programs

Movie Theatre Complex

(i) Peruse the MOA and AOA of the entity.
(ii) Ensure object clause permits entity to engage in this type of business.
(iii) In case of income from sale of tickets:
1. Verify control system as to how it is ensured that collections on sale of tickets of various
shows are properly accounted.
2. Verify system of online booking of various shows and the system of realization of money.
3. Check that there is overall system of reconciliation of collections with no. of seats available
for different shows on a day.
(iv) Verify internal control system and its effectiveness relating to income from café, shops, pubs,
game zone etc., located within the multiplex.
(v) Verify system of control exercised relating to income receivable from advertisements exhibited
within premises and inside the hall such as hoarding, banners, slides, short films etc.
(vi) Verify the system of collection from parking areas in respect of vehicles parked by customers.
(vii) Verify payment of salaries and other benefits to employees and compliance with statutory
requirements.
(viii) Verify payments effected in respect of maintenance of building and ensure same is in order.
(ix) Verify insurance premium paid and ensure it covers entire assets.

Identification & Verification of Plant & Machinery, tools & dies to check Obsolescence
(i) Internal Control Aspects: The following may be incorporated in audit programme to check internal
control aspects-
a. Maintaining separate register for hired assets, leased asset and jointly owned assets.
b. Maintaining register of fixed asset and reconciling to physical inspection of fixed asset and to
nominal ledger.
c. All movements of assets are accurately recorded.
d. Authorisation be obtained for –
i. a declaring a fixed asset scrapped.
ii. selling a fixed asset.
e. Check whether additions to fixed asset register are verified and checked by authorised
person.
f. Proper recording of all additions and disposal.

(ii) Assets Register: To review registers and records of plant, machinery, etc. showing clearly date of
purchase of assets, cost price, location, depreciation charged, etc.

(iii) Cost Report and Journal Register: To review the cost relating to each plant and machinery and to
verify items which have been capitalised.

CA SHUBHAM KESWANI 95
(iv) Code Register: To see that each item of plant and machinery has been given a distinct code
number to facilitate identification and verify the maintenance of Code Register.

(v) Physical Verification: To see physical verification has been conducted at frequent intervals.

(vi) Movement Register: To verify

a. whether Movement Register for movable equipments and
b. log books in case of vehicles, etc. are being maintained properly.

(vii) Assets Disposal Register: To review whether assets have been disposed off after proper
technical and financial advice and sales/disposal/retirement, etc. of these assets are governed by
authorisation, sales memos or other appropriate documents.

(viii) Spare Parts Register: To examine the maintenance of a separate register of tools, spare parts
for each plant and machinery.

(ix) Review of Maintenance: To scrutinise the programme for an actual periodical servicing and
overhauling of machines and to examine extent of utilisation of maintenance deptt services.

(x) Review of Obsolescence: To scrutinise whether expert’s opinion have been obtained from time to
time to ensure purchase of technically most useful efficient and advanced machinery after a
thorough study.
(xi) Review of R&D: To review R&D activity and its relevance to operations of organisation,
maintenance of machinery efficiency and prevention of early obsolescence.

Audit Plan to locate wastage of Raw Material

i. Procure list of raw materials, showing names and detailed characteristics of each raw material.
ii. Obtain standard consumption figures, and ascertain the basis according to which normal wastage
figures have been worked out. Examine break-up of a normal wastage into that in process,
storage and handling stages. Also obtain control reports, if any, in respect of manufacturing
costs with reference to predetermined standards.
iii. Examine various records maintained for recording separately various lots purchased and
identification of each lot with actual material consumption and for ascertaining actual wastage
figures therein.
iv. Obtain reports of Preventive Maintenance Programme of machinery to ensure that quality of
goods manufactured is not of sub-standard nature or leads to high scrappage work.
v. Assess whether personnel employed are properly trained and working efficiently.
vi. See whether quality control techniques have been consistent or have undergone any change.
vii. Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
viii. Examine whether basis adopted for calculating wastage for the month is same as was adopted
for earlier months.
ix. Obtain a statement showing break up of wastage figures in storage, handling and process for
months under reference and compare results of analysis for each of the months.

“If you can Dream it, you can Do it”

CA SHUBHAM KESWANI 96
 Risk Assessment & Internal Control

Audit risk components

1. Inherent Risk
Susceptibility of assertion to misstatement that could be material, assuming there are no related
controls.
Inherent risk is addressed at both F.S. level and assertion level.
For eg, technological developments making product obsolete, causing inventory susceptible to
overstatement.
Arise from entity’s size, operations, complexity, objectives & regulatory environment.

Risks of particular concern to auditor might include:

• Complex calculations which could be misstated;
• High value inventory;
• Accounting estimates subject to significant measurement uncertainty;
• Lack of sufficient working capital to continue operations;
• A declining or volatile industry with many business failures;

2. Control Risk (Do internal controls in place mitigate inherent risk)

• Risk that the entity’s IC system will not prevent, or detect and correct (P/D/C) on a timely basis,
a misstatement that could be material, individually or when aggregated with other
misstatements.
• Some control risk will always exist because of the inherent limitations of any IC system.
• The auditor is required to understand the entity’s IC and perform procedures to assess the
RMM at the assertion level.

3. Detection Risk
• Risk that auditor will not detect a misstatement that exists in an assertion that could be material,
either individually or when aggregated with other misstatements.
• The acceptable level of detection risk for a given level of audit risk bears inverse relationship to
ROMM at assertion level.

Audit Risk = RMM * Detection Risk

RMM = Risk that MM may exist in FS before start of audit i.e Inherent Risk * Control risk

Steps for Risk Identification

1. Assess significance of assessed risk, impact of occurrence, & revise materiality for specific
a/c bal
2. Likelihood of occurrence and impact on audit procedures
3. Document assertions affected
4. Impact of risk on each of assertions Completeness, Existence, Accuracy, Valuation, Validity,
Presentation relevant to a/c balance, COT & disclosure
5. Enquire & document mgt response
6. Consider Internal Control in place & effectiveness in mitigating risk involved.
7. Consider any unique characteristic of the risk
8. Consider any particular characteristic (inherent risk) in COT/ a/c balance/ disclosure needs
addressed in designing FAP.

CA SHUBHAM KESWANI 97
 Indicators of Possible Potential Misstatements
• Completeness
Ø Transaction not identified
Ø Source doc not prepared/captured/represented
• Existence
Ø Fictitious or unauthorised transactions entered
Ø Source document à duplicate or overstated
Ø Transactions duplicated
• Recording
Ø Inaccurate
o Capturing of source document
o Processing of transactions
o Adjustments in subsy ledger
• Cut-off Procedures
Transactions that occur in a period are recorded in another period.

Audit Procedures in case Purchases are made without POs

During the process of extracting exception reports, auditors noted numerous purchase entries
without valid purchase orders.

Analysis: In terms of percentage, about 40% of purchases were made without valid POs and also few
POs were validated after actual purchase. Also there was no reconciliation between goods received
and goods ordered.

Assertions: Validity of purchases

Pervasive/Account Balance Level: Account Balance level

Account Balance(s) affected : (i) Purchases, (ii) Account Payable

Audit Procedures:
The following procedures may address the validity of the account balance:
• Make a selection of purchases, review correspondence with vendors, purchase requisitions
(internal document) and reconciliations of their accounts.
• Review Vendor listing along with ageing details. Follow up the material amounts paid before
normal credit period and analyse reasons for exceptions.
• Meet with company's Purchase officer and obtain responses to our inquiries regarding
purchases made without POs.
• Discuss summary of such issues with client.

Steps in Conduct of Risk based Audit (3 key steps)

1. Assessing ROMM in the F.S.
2. Designing & performing FAP that respond to assessed risk & reduce it to acceptably low level
3. Issuing Audit report based on audit findings.

Explanation:
1. Risk Assessment: Assessing ROMM in F.S.
Ø Performing client acceptance or continuance procedures; [SA 210 & 220]
Ø Planning the overall engagement; [SA 300]

CA SHUBHAM KESWANI 98
 Ø Performing risk assessment procedures (RAP) to understand the business and identify
inherent and control risks; [SA 315]
Ø Identifying relevant internal control procedures and assessing their design and
implementation (those controls that would prevent material misstatements from
occurring or detect and correct misstatements after they have occurred); [SA 315]
Ø Assessing the RMM in the F/S; [SA 315]
Ø Identifying significant risks that require spl consideration
Ø Communicating material weakness in Design & Implementation of IC à TCWG + Mgt

2. Risk response: Designing and performing further audit procedures (FAP) that respond to
assessed risks and reduce the RMM in the F/S to an acceptably low level;

Some of the matters auditor should consider when planning the audit procedures include:
Ø Assertions that cannot be addressed by substantive procedures alone. Eg. highly automated
processing of transactions with little or no manual intervention. [Substantive not enough]
Ø Existence of internal control that, if tested, could reduce need/scope for other substantive
procedures. [Reduce substantive]
Ø The potential for substantive analytical procedures that would reduce the need/scope for
other types of procedures. [Analytics]
Ø The need to incorporate an element of unpredictability in procedures performed. [Surprise
checks]
Ø The need to perform further audit procedures to address potential for management
override of controls or other fraud scenarios. [FAPs]
Ø The need to perform specific procedures to address “significant risks” that have been
identified.

3. Reporting: Issuing an appropriate audit report based on the audit findings

Internal Control
The objectives of internal controls relating to accounting system are:
i) Transactions are executed through general or specific management authorization.
ii) All transactions are promptly recorded in an appropriate manner to permit the preparation of
financial information and to maintain accountability of assets.
iii) Assets and records are safeguarded from unauthorized access, use or disposition.
iv) Assets are verified at reasonable intervals and appropriate action is taken with regard to the
discrepancies.

Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are –
i) Whether all transactions are recorded;
ii) Whether recorded transactions are real;
iii) Whether all recorded transactions are properly valued;
iv) Whether all transactions are recorded timely;
v) Whether all transactions are properly posted;
vi) Whether all transactions are properly classified and disclosed;
vii) Whether all transactions are properly summarized.

CA SHUBHAM KESWANI 99
 Limitations of Internal Control
Ø Mgt expect cost not exceed benefit
Ø Most IC not directed at transn. of unusual nature. Also, there’s potential of human error.
Ø Possibility of circumvention of IC through collusion with employees or 3rd parties
Ø Person responsible for exercising IC abuse responsibility e.g. mgt override of IC
Ø Manipulation by mgt wrt transactions/estimates & judgements in preparation of F.S.

Structure of Internal Control

1. Segregation of Duties: Following functions are segregated:
a. Authorisation
b. Execution
c. Physical custody
d. Maintenance of records & documents
Periodic rotation of duties is also desirable.

2. Authorisation of transactions: Establish procedures which provide assurance that

authorizations are issued by persons acting within scope of their authority, and that the
transactions confirm to the terms of authorizations.

3. Adequacy of records & documents (same points as objective of IC)

4. Accountability & safeguarding of assets

Ø Assets like cash, inventories, investment scrips require frequent physical verification
with book records
Ø Assets which are considered sensitive & susceptible to error need to be reconciled more
frequently than others
Ø Only authorised personnel should be given access to asset
Ø Essential to have effective controls over physical custody of cash, inventories,
investments & other fixed assets

5. Independent checks by external auditor

Components of Internal control

1 Control Environment
2 Risk Assessment
3 Control Activities
4 Information Systems
5 Monitoring

1. Control Environment
Elements: (Pairing)
a. Communication & enforcement of integrity & ethical values
b. Commitment to competence
c. Participation by TCWG
d. Mgt philosophy & operating style
e. Org structure
f. Assignment of authority & responsibility

2. Entity’s Risk Assessment Procedures

CA SHUBHAM KESWANI 100

 i) Define business objectives & goals
ii) Identify events that may affect achievement of business objectives
iii) Assess likelihood & impact
iv) Respond & mitigate risk
v) Assess residual risk

Risk can arise or change due to certain circumstances:

a. Changes in operating environment: can result in changes in competitive pressures and
significantly different risks.
b. New personnel: New personnel may have a different focus on or understanding of internal
control.
c. New or revamped info. Systems: Significant and rapid changes in information systems can
change the risk relating to internal control.
d. Rapid growth: Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
e. New technology: Incorporating new technologies into production processes or information
systems may change the risk associated with internal control.
f. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes
in supervision and segregation of duties that may change the risk associated with internal
control.
g. New a/c pronouncements: Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.

Control Activities
a. Performance Reviews: Actual vs budgeted results
b. Info. Processing: Application & General IT Controls
c. Physical Controls:
Ø Physical security of assets
Ø Authorisation for access to computer prog. & data files
Ø Periodic counting and comparison with amounts shown on control records. For eg.
Comparing results of cash, inventory & security counts with a/c records)
d. Segregation of duties (discussed above)

Internal Check System

The following are objectives of internal check system:

i) To detect error and frauds with ease.
ii) To avoid and minimize possibility of commission of errors and fraud by any staff.
iii) To locate responsibility area or stages where actual fraud and error occurs.
iv) To increase efficiency of the staff working within the organization.
v) To protect integrity of business by ensuring accounts are always subject to proper scrutiny
and check.
vi) To prevent and avoid misappropriation or embezzlement of cash and falsification of accounts.

Effectiveness of Internal Check depends on following considerations:

i) Clarity of responsibility: Resp of different ppl properly defined
ii) Division of work: Segregation of work to ensure free flow & job rotation
iii) Standardisation: Process of accounting should be standardised
iv) Appraisal: Periodic review of chain of operations & work flow.

CA SHUBHAM KESWANI 101

Eg. BSF Limited is engaged in business of trading leather goods. You are internal auditor of company
for year 2019-20. In order to review internal controls of the Sales Department of company, you
visited and noticed work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.

As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check prevalent in internal control system. Do you think that there was proper division of
work in BSF Limited? If not, why?

The general condition pertaining to the internal check system may be summarized as under:
i) No complete control: no single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review of
another person.
ii) Job rotation: Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
iii) Leave once in a year: Every member of the staff should be encouraged to go on leave at
least once a year.
iv) Person with physical custody no access to books
v) A/c control for each class of asset: There should exist an accounting control in respect of
each class of assets, in addition, there should be periodical inspection so as to establish
their physical condition.
vi) Budgetary controls: Budgetary control should be exercised and wide deviations observed
should be reconciled.
vii) Mechanical devices to prevent misappropriation of cash
viii) Inventory counts, activities stopped & involve staff from different sections : For
inventory taking, at close of the year, trading activities should, if possible be suspended,
and it should be done by staff belonging to several sections of organization.

In given scenario, Co. has not done proper division of work as:
(i) receipts of cash should not be handled by official handling sales ledger and
(ii) delivery challans should be verified by authorised official other than officer handling despatch of
goods.

Manual elements in internal control may be more suitable where judgment and discretion are required
such as for following circumstances:
Ø Large, unusual or non-recurring transactions.
Ø Circumstances where errors are difficult to define, anticipate or predict.
Ø In changing circumstances that require a control response outside the scope of an existing
automated control.
Ø In monitoring the effectiveness of automated controls.

Standard Operating Procedures (SOPs)

1. Enterprise Risk Mgt: Org should have robust process to identify & mitigate risks
2. Segregation of Job Responsibilities: No 2 commercial activities be conducted by 1 person.
3. Job rotation in sensitive areas: A job carried by person for long may lead to complacency &
misuse
4. Delegation of financial powers document: Document the delegation of powers to allow controls
to operate

CA SHUBHAM KESWANI 102

 5. IT based controls: Embed controls within system instead of being dependent on humans.

Basic Assumptions about a Good Internal Control Questionnaire

In the use of standardized internal control questionnaire, certain basic assumptions about
elements of good control are taken into account. These are –
i) Certain procedures in general used by most business concerns are essential in achieving
reliable internal control. Eg daily banking of receipts or balancing of cash book or periodic
reconciliations
ii) Division of duties & responsibilities
iii) Employees with custodian function not assigned a/c function
iv) No single person thrust of completing a transaction all by himself
v) Work performed by one reviewed by another
vi) Proper documentation & recording of transactions

Flow chart depiction of flow of documents:

(i) at what point a document is raised internally or received from external sources;
(ii) the number of copies in which a document is raised or received;
(iii) the intermediate stages set sequentially through which the document and the activity pass;
(iv) distribution of the documents to various sections, department or operations;
(v) checking authorisation and matching at relevant stages;
(vi) filing of the documents; and
(vii) final disposal by sending out or destruction.

Material Weakness
Material weaknesses are defined as absence of adequate controls on flow of transactions that
increases the possibility of errors and frauds in the financial statements of the entity.

Important points with regard to such a letter are as follows:

(a) The letter lists down the areas of weaknesses in the system and offers suggestions for
improvement.
(b) It should clearly indicate that it discusses only weaknesses which have come to the attention of
the auditor as a result of his audit and that his examination has not been designed to determine the
adequacy of internal control for management.
(c) This letter serves as a valuable reference document for management for the purpose of revising
the system and insisting on its strict implementation.
(d) The letter may also serve to minimize legal liability in the event of a major defalcation or other
loss resulting from a weakness in internal control.

Case Study on Internal Control: Entertainment Centres

Y Co. Ltd. has five entertainment centres to provide recreational facilities for public especially for
children and youngsters at 5 different locations in the peripheral of 200 km. Collections are made in
cash. Specify the adequate system towards collection of money.

In order to achieve proper internal control over sale of tickets and collection by Y Co. Ltd., following
system should be adopted -
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a
way that any type of ticket used cannot be duplicated by others in order to avoid forgery.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5
centres, preferably through machines. There should be proper control over the keys of the machines.

CA SHUBHAM KESWANI 103

(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with
the number of tickets sold.
(iv) Daily banking: Each day’s collection should be deposited in the bank on next working day of the
bank.Cash should be in custody of properly authorized person preferably in joint custody.
(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters the
centre.
(vi) Advance booking: If advance booking of facility is made available, the system should ensure that
all advance booked tickets are paid for.
(vii) Discounts and free pass: The discount policy such that the concessional rates, say, for group
booking should be properly authorized and signed forms for such authorization should be preserved.
(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash
counts, daily banking, reconciliation and stock of unsold tickets etc

International Internal Control Frameworks

COSO Framework:
Components of Internal Control: Control Environment, Risk Assessment, Control
Activities,Information & Communication, Monitoring

3 categories of objectives:
Ø Operating objectives: effectiveness & efficiency of operations
Ø Reporting objectives: internal & external financial & non-financial reporting to stakeholders
Ø Compliance objectives: compliance with laws & regulations

CoCo Framework (Issued by Canadian Institute of Chartered Accountants)

The CoCo framework outlines criteria for effective control in the following 4 areas:
1.Purpose 2. Commitment 3. Capability 4.Monitoring and Learning

COBIT Framework
Ø COBIT stands for Control Objectives for Information and Related Technology.
Ø COBIT has 34 high-level processes that cover 210 control objectives
Ø Today, COBIT is used globally by all managers who are responsible for the IT business
processes.
Ø Overall, COBIT ensures quality, control and reliability (QCR) of information systems in
organization, which is also the most important aspect of every modern business.
Ø This framework guides an organization on how to use IT resources.
Ø Well-governed IT practices can assist businesses in complying with laws, regulations, and
contractual arrangements.

Sarbanes Oxley Section 404

The SEC rules and PCAOB standard require that:
• Management perform a formal assessment of its controls over financial reporting including
tests that confirm the design and operating effectiveness of the controls.
• Management include in its annual report an assessment of ICFR.
• The external auditors provide two opinions as part of a single integrated audit of the
company:
Ø An independent opinion on the effectiveness of the system of ICFR.
Ø The traditional opinion on the financial statements.

“It’s going to be hard, but Not impossible”

CA SHUBHAM KESWANI 104

 Special Aspects of Auditing in an Automated Environment

Category of Business Applications & Category

• Packaged Software (off the shelf application) used by micro & small business. Eg. Tally &
Quickbooks
• Small ERPs in small to medium business. Eg Tally ERP, SAP Business One, Focus ERP
• ERP- Med to large Cos à Eg. SAP ECC, Oracle Enterprise Business Suite

Layers of Automated Environment

• Applications (discussed above)
• Databases: Oracle 19C, MS-SQL Server
• Operating systems: Windows, Linux
• Hardware & storage devices: Server, disks
• Network devices: Switches, routers
• Network: LAN, WAN
Real Time Environment
Transactions initiated, processed & recorded immediately as they happen without delay.

Real Time Environment: IT Components

Applications Middleware Networks Hardware

For eg: ERP Applications For eg: For eg: Wide Area For eg: Servers,
SAP, Oracle E Business Webservers like Networks, Local Data centers,
suite, Core Banking Apache, Oracle, Area Networks Backup & storage
Applications Fusion, IIS devices

Understanding & Documenting Automated Environment

Understanding of Automated Environment as per SA 315. The auditor’s understanding should include:
• Applications used by Co
• Details of IT Infrastructure components for each application
• The org structure & governance
• The policies, processes & procedures followed.
• IT Risks & controls

Document the understanding as per SA 230.

Consideration of Automated Environment at each phase of audit cycle

• during risk assessment, the auditor should consider risk arising from the use of IT systems at
the company;
• when obtaining an understanding of the business process and performing walkthroughs the use
of IT systems and applications should be considered;
• while assessing entity level controls (ELCs) the aspects related to IT governance need to be
understood and reviewed;
• pervasive controls including segregation of duties (SOD), general IT controls (GIT) and
applications should be considered and reviewed;
• during testing phase, the results of general IT controls would impact the nature, timing and
extent of testing;

CA SHUBHAM KESWANI 105

 • when testing of reports and information produced by the entity (IPE) generated through IT
systems and applications;
• at completion stage, evaluation of control deficiencies may require using data analytics and
CAATs.

In a controls-based audit, audit approach can be classified into 3 broad phases comprising of planning,
execution, and completion. In this approach, considerations of automated environment will be relevant
at every phase as given below:

I. Risk Assessment Process

• Identify significant accounts and disclosures.
• Qualitative and Quantitative considerations.
• Relevant Financial Statement Assertions (FSA).
• Identify likely sources of misstatement.
• Consider risk arising from use of IT systems.
II. Understand and Evaluate
• Document understanding of business processes using Flowcharts / Narratives.
• Prepare Risk and Control Matrices (RCM).
• Understand design of controls by performing walkthrough of end-to-end process.
• Process wide considerations for Entity Level Controls, Segregation of Duties.
• IT General Controls, Application Controls.
III. Test for Operating Effectiveness
• Assess Nature, Timing and Extent (NTE) of controls testing.
• Assess reliability of source data; completeness of population.
• Testing of key reports and spreadsheets.
• Sample testing.
• Consider competence and independence of staff /team performing controls testing.
IV. Reporting
• Evaluate Control Deficiencies.
• Significant deficiencies, Material weaknesses.
• Remediation of control weaknesses.
• Internal Controls Memo (ICM) or Management Letter.
• Auditor's report.

Enterprise Risk Mgt (ERM)

Risks which business have to face & manage?
Businesses today operate in a dynamic environment. The volatility, unpredictability and pace of changes
that exist in the business environment today is far greater than in the past.
Some of the reasons for this dynamic environment include globalisation, use of technology, new
regulatory requirements, etc. Because of this dynamic environment the associated risks to business
have also increased and companies have a need to continuously manage risks.

Examples of risks include:

• Market Risks;
• Regulatory & Compliance Risks;
• Technology & Security Risks;
• Financial Reporting Risks;
• Operational Risks;
• Credit Risk;
• Business Partner Risk;
• Product or Project Risk;

CA SHUBHAM KESWANI 106

• Environmental Risks.
Risk Assessment Process (RAP)
One of critical component of ERM is RAP. It involves consideration for:
• Risk identification
• Assessment criteria including qualitative & quantitative factors
• Defn of key performance & risk indicators
• Risk appetite
• Risk scores, scales & maps
• Assess risks
• Use of data & metrics
• Prioritise risk
• Benchmarking

Typical risk assessment process would be given below:

Identify events
Define business that affect Assess Assess
Respond &
objectives & achievement of likelihood & residual
mitigate risk
goals business impact risk
objectives

Types of Controls:
• General Controls: Policies & procedures relate to many applications & support effective
functioning of application controls. They apply to mainframe, miniframe, and end user
environment. The GIT controls that maintain integrity of info & security of data commonly
include controls over following:
Ø Data center & network operations
Ø System of software acquisition, change & maintenance
Ø Program change
Ø Access security
Ø Application system acquisition, development & maintenance

• Application Controls: They include both automated or manual controls that operate at business
process level. Application controls can be preventive as well as detective in nature and designed
to ensure integrity of accounting records. Automated Application controls are embedded into
IT applications viz., ERPs and help in ensuring completeness, accuracy and integrity of data in
those systems.
Examples of automated applications include :
Ø edit checks and validation of input data,
Ø sequence number check,
Ø limit check,
Ø format check,
Ø range check,
Ø reasonableness check,
Ø mandatory data fields,
Ø existence check etc.

Entity Level Risks & Controls (ELCs)

Characteristics of ELCs
• Entity Level controls are known as pervasive controls since they operate across all organisation levels.

CA SHUBHAM KESWANI 107

• ELCs are part of company’s overall internal control framework and relate to internal control
components other than control activities.
• Entity level controls are subjective by nature and hence require application of more professional
judgement in their evaluation and testing.

Types:
1. Direct ELCs: operate at a level higher than business activity or transaction level such as a
business process or sub-process level, account balance level, at a sufficient level of precision,
to prevent, detect or correct a misstatement in a timely manner.
Eg. Business performance reviews, Internal Audit
2. Indirect ELCs: do not relate to any specific business process, transaction or account balance
and hence, cannot prevent or detect misstatements. However, they contribute indirectly to the
effective operation of direct ELC and other control activities.
Eg. Co code of conduct and ethics policies, HR Policies, Employee job roles & responsibilities

Whistle Blower Policy

How auditor obtains understanding & evaluates whistle blower policy of Co?
• Does Co. have a whistle blower policy?
• Is this policy documented & approved?
• Has whistle-blower policy been communicated to all employees?
• Are employees aware of this policy & understand its purpose & their obligations?
• Has Co. taken measures viz. training, to make employees understand contents & purpose of
policy?
• Does Co. monitor effectiveness of policy time to time?
• How does Co. deal with deviations & non-compliance?

Computer Assisted Audit Techniques (CAATs)

Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics. The data analytics methods used in an audit are known as
Computer Assisted Auditing Techniques or CAATs.

When auditing in an automated environment, auditors can apply concepts of data analytics for several
aspects of an audit including following:
• preliminary analytics;
• risk assessment;
• control testing;
• non-standard journal analysis;
• evaluation of deficiencies;
• fraud risk assessment.

Steps to be followed to achieve success with CAATs & supporting tools. A suggested approach to
benefit from use of CAATs:
Understanding Define the Identify source & Extract Data
business objectives & format of data
Environment criteria
including IT

Verify Apply criteria on

completeness & Validate & Report& Document
data obtained confirm results Results & Conclusions
accuracy of data

CA SHUBHAM KESWANI 108

 Standards, Guidelines & Procedures- Using Relevant Frameworks & Best Practices
• Standards on Auditing issued by ICAI, are required to be followed for an audit of financial
statements.

• Section 143 of Companies Act 2013 requires statutory auditors to provide an Independent
Opinion on the Design and Operating Effectiveness of Internal Financial Controls Over Financial
Reporting (IFC-FR) of the company as at Balance Sheet date. For this purpose, the Guidance
Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI, provides
the framework, guidelines and procedures for an audit of financial statements.

• Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404
of this act requires public listed companies to implement, assess and ensure effectiveness of
internal controls over financial reporting and auditors independent opinion on the design and
operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to
the requirements of IFC-FR for Indian companies.

• ISO 27001:2013 is the Information Security Management System (ISMS) standard issued by
the International Organization for Standardization (ISO). This standard provides the
framework, guidelines and procedures for implementing information security and related controls
in a company. For eg, this std covers password security, application security, physical security,
backup and recovery.

• ITIL (Information Technology Infrastructure Library) and ISO 20000 provide a set of best
practice processes and procedures for IT service management in a company. For example, change
management, incident management, problem management, IT operations, IT asset management
are some of the areas that could be relevant to audit.

• The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in
the storage, retrieval, transmission or handling of credit card/debit card are required to
implement the security controls in accordance with this standard.

• The American Institute of Certified Public Accountants has published a framework under the
Statements on Standards for Attest Engagements (SSAE) No.16 for reporting on controls at
service organisation that include
❖ SOC 1 for reporting on controls at a service organization relevant to user entities’ ICFR.
❖ SOC 2 and SOC 3 for reporting on controls at a service organization relevant to security,
availability, processing integrity, confidentiality or privacy i.e., controls other than ICFR.
❖ While SOC 1 and SOC 2 are restricted use reports, SOC 3 is general use report.

• The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular framework for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks.

“The secret of your future is hidden in your daily routine”

CA SHUBHAM KESWANI 109

 Company Audit
139. Appointment of auditors.
140. Removal, resignation of auditor and giving of special notice.
141. Eligibility, qualifications and disqualifications of auditors.
142. Remuneration of auditors.
143. Powers and duties of auditors and auditing standards.
144. Auditor not to render certain services.
145. Auditors to sign audit reports, etc.
146. Auditors to attend general meeting.
147. Punishment for contravention.
148. Central Government to specify audit of items of cost in respect of certain companies

Sec 139: Appointment of Auditors

Appointment of First Appointment of Subsequent

Auditor Auditor

Goverment Company Goverment

Other Than a Govt Co Other Than a Govt Co Company defined
defined u/s 2 (45) [Sec 139(1)]
[Sec 139(6)] u/s 2 (45) [Section
[Section 139(7)]
139(7)]

Appointment by Appointment by
Appointment by C&AG within 60 days Appointment by C&AG within 180
BOD within 30 days from from DOR Members in AGM days from
DOR (Note 1) commencement of
the year

In case of failure:
BOD within 30 days Hold office from 1st AGM Hold office till
In case of failure: till 6th AGM subject to conclusion of AGM
Members in EGM within conditions
90 days

In case of failure:
Hold office till conclusion Members in EGM within
of 1st AGM 60 days

Hold office till conclusion

of 1st AGM

Notes:
• Written consent of auditor & certificate that appointment is as per prescribed conditions to
be obtained by Co.
• Certificate should indicate that auditor satisfies criteria u/s 141
• Co. inform auditor of appointment & file notice of appointment with ROC within 15 days of
AGM

CA SHUBHAM KESWANI 110

1. MD of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing CA, as first auditor of
company. Comment on proposed action of MD.
Section 139(6) of Companies Act, 2013 à “first auditor or auditors of company shall be appointed by
BOD within 30 days from DOR of company”. In instant case, proposed appointment of Shri Ganpati,
practicing CA as first auditors by MD of PQR Ltd is violation of Section 139(6) of Companies Act,
2013, which requires BOD to appoint first auditor of Co.
Conclusion: In view of above, MD of PQR Ltd can’t appoint first auditor of Co.

2. First auditor of Healthy Wealthy Ltd., Government Co., appointed by BOD.

In case of Govt Company, appointment of first auditor is governed by provisions of Section 139(7) of
Companies Act, 2013 which states that in case of Govt co, first auditor shall be appointed by C&AG
within 60 days from DOR of co. Hence, in case of Healthy Wealthy Ltd., being a govt co, first
auditors shall be appointed by C&AG.
Conclusion: Thus, appointment of first auditors made by BOD of Healthy Wealthy Ltd. is null and
void.

Filling of Casual Vacancy [Sec 139(8)]

i) In case of non govt Co. by BOD within 30 days

If due to resignation by auditor then Board Approval + shareholder’s approval at GM within
3 months of recommendation of Board
Auditor shall hold office upto next AGM

ii) In case of Govt Co. by CG within 30 days

Otherwise BOD within next 30 days

Retiring auditor maybe reappointed at AGM if,

a) Not disqualified
b) Not given notice of unwillingness of reappointment
c) SR hasn’t been passed to appoint some other auditor or expressly provide that he shall not be
reappointed

Sec 139(10) à Where at any AGM, no auditor appointed or re-appointed, existing auditor shall
continue to be auditor of company.

Sec 141: Eligibility, Qualification & Disqualification

• Person shall be eligible to be Auditor only if he’s a CA
• Firm(including LLP) where majority partners practicing in India à appointed by Firm name
• Partners who are CA can act & sign on behalf of firm

Disqualifications of Auditor [Sec 141(3) read with Rule 10 of Cos.(Audit & Auditor) Rules 2014]
a) Body Corporate (BC) other than LLP
b) Officer or employee of Co.
(Officer includes Director, Mgr, KMP, Shadow Directors)

Examples:
• G, CAiP is director in A Ltd à CA G would be disqualified to be appointed as auditor of A Ltd.
• G, CAiP is director in Zed Ltd., holding company of RST Ltd. à CA. G would be disqualified to
be appointed as auditor of Zed Ltd. but would not be disqualified in case of RST Ltd.
Note: But as per Ethical Std Board public conscience should be preferred over legal provisions, so
G can’t also be auditor of RST Ltd (Discussed in Professional Ethics)

CA SHUBHAM KESWANI 111

 c) Person who is partner or employment of officer or employee of Company (4 cases
PO/PE/EO/EE)

Example:
Mr. Ajay, a CA appointed as auditor of Bharat Ltd. in the AGM of Co. held in September, 2019, which
assignment he accepted. Subsequently in Feb, 2020, he joined Mr. Bajaj, another CA, who is Manager
Finance of Bharat Ltd., as partner.

Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company. Section 141(4) provides that an auditor who after his appointment, disqualified u/s Section
141(3), he shall be deemed to have vacated his office as an auditor.
In present case, Mr. Ajay, auditor of Bharat Ltd., joined as partner with Mr. Bajaj, who is Manager
Finance of Bharat Ltd. The given situation has attracted Section 141(3)(c) and he shall be deemed to
have vacated office of auditor of Bharat Ltd.

d) Person/relative/partner (PRP)-
i.Is holding security or interest in CASSH (Co/Associate/Suby/Holding/Subsy of such holding i.e.
CASSH)
• Relative may hold security in the Co. of Face value 1 Lakh
• If relative (not auditor or partner) acquires interest > 1 lakh è then corrective action to
maintain limit within 60 Days of acquisition

Definition of Relative: Members of HUF + Husband wife + Father (including step- father),
Mother (including step- mother), Son (including stepson), Son’s wife, Daughter, Daughter’s
husband, Brother (including step- brother), Sister (including step- sister)

Examples:

1. “Mr. Avi”, practicing CA, holding securities of “XYZ Ltd.” face value of ` 990/-. Whether Mr. Avi is
qualified for appointment as Auditor of “XYZ Ltd.”?
Mr. Avi. is not eligible for appointment as auditor of “XYZ Ltd”.

2. “Mr. PK” a practicing CA and “Mr. Qurashi”, relative of “Mr. PK”, is holding securities of “ABC Ltd.”
having face value of ` 99,000/-.
Mr. Qurashi (relative of Mr. PK), is having securities of ` 99,000 face Value in ABC Ltd., which is as
per requirements of proviso to section 141(3)(d)(i). Mr. PK will not be disqualified to be appointed as
auditor of ABC Ltd.

3. “M/s Bhavin & Co.” is Audit Firm having partners “Mr. Bala” and “Mr. Chandu”. “Mr. A” relative of
“Mr. Chandu”, is holding securities of “AMD Ltd.” having face value of ` 1,00,100/-. Whether “M/s
Bhavin & Co.” is qualified for being appointed as an auditor of “AMD Ltd.”?
M/s Bhavin & Co, will be disqualified for appointment as auditor of AMD Ltd as relative of Mr.
Chandu (i.e. partner of M/s Bhavin & Co.), is holding securities in AMD Ltd exceeding limit mentioned.

4. M/s Rajamohan & Co. is audit firm having partners CA. Raja and CA. Mohan. Firm has been offered
appointment as auditor of Inn Ltd. for FY 2019-20. Mr. Bee, relative of CA. Raja, is holding 8,000
shares (face value of ` 10 each) in Inn Ltd. having mkt value of ` 1,60,000. Whether M/s Rajamohan
& Co. is disqualified to be appointed as auditors of Inn Ltd.?

CA SHUBHAM KESWANI 112

Mr. Bee is a relative of CA. Raja and he is holding shares of Inn Ltd. of face value of ` 80,000 only
(8,000 shares x 10 per share). M/s Rajamohan & Co. is not disqualified for appointment as auditors of
Inn Ltd. as relative of CA. Raja (i.e. partner of M/s Rajamohan & Co.) is holding the securities in Inn
Ltd. which is within the limit

ii) PRP indebted to CASSH > 5L

iii) PRP given guarantee or security for indebtedness of 3rd person to CASSH > 1L

e) Person or firm has business relation with CASSH or associate Co.

(Business relation excludes services permitted under CA Act 1949 by auditor & commercial
transactions by Company at Arm’s length price)

f) Person whose relative is Director or employed by Co. as Director or KMP

g) Full time employed OR person or partner of firm auditing > 20 companies excluding
OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with no default in filing F.S. or
Annual Return)
Notes:
Ø No. of partners on the date of acceptance of audit assignment shall be taken into account
Ø CA in full time employment elsewhere shall not be taken into account

Example:
“PQRST & Co.” is Audit Firm having partners “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T”, Chartered
Accountants. “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T” are holding appointment as an Auditor in 4,
5, 6, 10 and 15 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “PQRST & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. “Mr. P”, “Mr.
Q”, Mr. R, Mr. S and Mr. T.
(iii) Can PQRST & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than ` 100 crore which has not committed default in filing its financial statements
under section 137 or annual return under section 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of ` 115 crore each?

(i) PQRST & Co. can hold appointment as an auditor of 60 more companies:
Total Number of Audits available to Firm = 20*5 = 100
Number of Audits already taken by all the partners in their individual capacity = 4+5+6+10+15 = 40
Remaining number of Audits available to the Firm = 60 (100-40)
(ii) (1) Mr. P can hold: 20 - 4 = 16 more audits. (2) Mr. Q can hold: 20 - 5 = 15 more audits. (3) Mr. R
can hold: 20 - 6 = 14 more audits. (4) Mr. S can hold 20-10 = 10 more audits and (5) Mr. T can hold 20-
15 = 5 more audits.
(iii) PQRST & Co. can hold appointment as auditor in all 80 private companies having paid-up share
capital less than ` 100 crore , 2 small companies and 1 dormant company as these are excluded from
ceiling limit.
(iv) PQRST & Co. is already having 40 co. audits and accept only 60 more audits.They can also conduct
audit of one person companies, small companies, dormant companies and private companies having paid
up share capital less than ` 100 crores. In given case, out of 80 private companies PQRST & Co. is being
offered, 65 cos. have paid-up share capital of `115 crore each.

CA SHUBHAM KESWANI 113

Therefore, PQRST & Co. can accept appointment as auditor for 2 small companies, 1 dormant company,
15 private companies having paid-up share capital less than ` 100 crore & 60 pvt companies having paid-
up share capital of ` 115 crore each in addition to above 40 company audits already held.

h) Convicted for Fraud & period of 10 years not elapsed from date of conviction
i) Renders service under Sec 144 to Co. or its holding.

Sec 144: Services not to be rendered by Auditor

(i) accounting and book- keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.

Example:

1. CA. P is providing services of Design and implementation of financial information system to C Ltd.
Later on, he was also offered to be appointed as auditor of Co. for current FY. Advise.

Section 141(3)(i) of Companies Act, 2013 disqualifies person for appointment as auditor of a Co. who is
engaged as on date of appointment in consulting and specialized services as provided in section 144.
Section 144 of Companies Act, 2013 prescribes certain services not to be rendered by auditor which
includes Design and implementation of financial information system.

Therefore, CA. P is advised not to accept assignment of auditing as service he is rendering is

specifically notified in list of services not to be rendered as per sec 141(3)(i) read with sec 144 of
Companies Act, 2013.

Where auditor incurs any of disqualifications after appointment, he shall vacate office and such
vacation shall be deemed to be casual vacancy u/s 139(8).

Rotation of Auditors: Sec 139(2)

Applicability:
• Listed Cos.
• Exclude OPC & Small Cos
[Defn of small co. à other than public Co. (Paid up cap <= 50L & Turnover <= 2Cr)]
• Public Cos :PSC >= 10 Cr
• Pvt ltd: PSC >= 50 Cr
• Cos. with borrowings from Financial institutions, banks or public deposits >= 50 Cr
Example:
Mishra Ltd. is a pvt ltd Co, having paid up share capital of INR 48 cr but having public borrowing
from nationalized banks and financial institutions of INR 42 cr, manner of rotation of auditor will not
be applicable.

Cos. for which Rotation provision are applicable, shall not appoint or re-appoint-

(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.

CA SHUBHAM KESWANI 114

Example:
PRTK Ltd. is listed Co. engaged in business of textiles. Co. appointed Rahul & Co. as statutory auditor
in AGM dated 29th Sep, 2018. Rahul & Co. will hold office of auditor from conclusion of this meeting
upto conclusion of sixth AGM i.e. AGM to be held in year 2023. Also, Rahul & Co. shall not be re-
appointed as auditor in PRTK Ltd. for further term of five years i.e. he cannot be appointed as
auditor upto year 2028. (Cooling Period)

Cooling period (5 years)

i. individual auditor à not be eligible for re-appointment as auditor in same Co. for 5 years from
completion of his term;
ii. audit firm à shall not be eligible for re-appointment as auditor in the same Co. for 5 years
from completion of such term.

Examples:
1. Meet Ltd., listed Co. appointed M/s Preet & Co., CA firm, as statutory auditor in its AGM held at
end of Sep, 2019 for 11 years. Here, appointment of M/s Preet & Co. is not valid as appointment can
be made only for one term of 5 consecutive years and then another one more term of 5 consecutive
years. It cannot be appointed for two terms in one AGM only. Further, cooling period of five years
from completion of term is reqd i.e. firm cannot be re-appointed for further 5 years after
completion of two terms of 5 consecutive years.

2. M/s PQR & Co., an audit firm having partner Mrs. P, Mr. Q and Mr. R, whose tenure has expired in
Co. in immediately preceding FY, M/s APJ & Co., is another audit firm in which Mr. P is common
partner, will also be disqualified for same Co. along with M/S PQR & Co. for period of 5 years.

Notes:
• Right of Co. to remove auditor or right of auditor to resign from such office of Co. shall not
be prejudiced.
• Members of a company may resolve to provide that-
(a) in audit firm appointed by it, auditing partner and his team shall be rotated at such
intervals as may be resolved by members; (Internal Rotation) or
(b) audit shall be conducted by more than one auditor. (Joint Audit)

Manner of Rotation
• Audit committee(AC) shall recommend Board name of auditor
• If no AC, then Board forward own recommendations for appointment at AGM by members
• If a partner, who is in charge of audit firm and also certifies F.S. of the Co., retires from said
firm and joins another firm of CAs, such other firm shall also be ineligible to be appointed for
a period of 5 yrs.
• a break in term for a continuous period of 5 yrs shall be considered as fulfilling requirement
of rotation

Sec 177 Audit Committee(AC)

Applicability:
• Listed cos
• Public Cos
Ø Paidup Share Capital (PSC)>= 10 Cr or
Ø Turnover (T/o) >= 100 Cr or
Ø L/D/D(Loans/Debenture/Deposits) > 50 Cr

CA SHUBHAM KESWANI 115

Radheshyam Ltd., a public Co. having PSC of 7 cr but T/o of 130 cr, reqd to constitute Audit
Committee under Sec 177 because requirement for constitution of AC arises if company falls into any
of condn.

Manner & procedure for selection of Auditor

• AC or Board shall consider Qualification & Experience along with pending proceedings relating
to professional conduct
• AC shall recommend name to Board
• If board agrees à forward to AGM
• If board disagress à refer back to AC citing reasons
• If AC doesn’t reconsider, board will record reasons of disagreement & forward own
recommendation to AGM
• Auditor will hold office till conclusion of 6th AGM

Sec 142: Auditor’s Remuneration fixed in AGM where appointed. Board may fix remuneration of 1st
auditor.
Remuneration includes fees + expense reimbursed + facility extended to him

Removal of Auditors before expiry of term [Sec 140(1)]

(BR à CG Approval 30 days à SR 60 Days)

(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2
and shall be accompanied with fees as provided for this purpose under the Companies (Registration
Offices and Fees) Rules, 2014.

(2) The application shall be made to the Central Government within 30 days of the resolution.

(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.

It is important to note that before taking any action for removal before expiry of terms, auditor
shall be given reasonable opportunity of being heard.

Resignation by Auditor [Sec 140(2)]

Ø Auditor shall within 30 days from DOR(Date of Resignation) file ADT-3 (Ab main ho gaya
free) with Co. & ROC + C&AG (for Govt Co.)

Ø Indicated Reasons + other relevant facts

Ø Penalty for non-compliance

§ 50k/Remuneration↓+ 500 per day max. 2L

Removal direction by Tribunal if Auditor acted in fraudulent manner [Sec 140(5)]

Ø Tribunal either suo moto or on application by CG or any person concerned
Ø Satisfied that Auditor has acted in fraudulent manner or abetted or colluded in fraud
Ø By or in relation to Co./Directors/officers
Ø It may, by order direct Co. to change its auditors
Ø If application by CG & tribunal satisfied change in auditor reqd
Ø It shall within 15 days of receipt of application
Ø Make order that he shall not function as Auditor & CG may appoint other auditor

CA SHUBHAM KESWANI 116

 Ø Auditor against whom order passed à ineligible to be appointed as auditor of any Co. for 5
years from date of order + Liable for action u/s 447

Appointment of Auditor other than retiring Auditor who was removed (Sec 140)

• Spl notice reqd for resolution at AGM for appointing auditor

o Person other than retiring auditor or
o Providing expressly that retiring auditor will not be reappointed (except where
rotation timeline completed)
• On receipt of notice à Co. shall forward to retiring auditor
• On receipt of notice if retiring auditor makes representation to Co. in writing & request
notification to members, then Co. shall
Ø In notice of meeting to members state fact that representation has been made &
Ø Send copy of representation to every member to whom notice is sent
Ø If copy of representation couldn’t be sent à then Auditor may require it to be read out at
meeting + copy to be filed with ROC
Ø If tribunal satisfied on application by Co. or any aggrieved person à then representation need
not be sent or read out at the meeting

Right of access to books etc.

Sec 143(1) of Act provides auditor, at all times, have right of access to books of account and vouchers
of Co, whether kept at regd office or any other place and is entitled to require from officers such
info & explanation as he consider necessary for performance of duties as auditor.
Auditor of holding co. will have right to access records of all its subsys & associates related to
Consolidation.

Eg. While conducting audit of limited co. for year ended 31st Mar,2020, auditor wanted to refer to
Minute Books. BOD refused to show Minute Books to auditor.

Section 143 of Companies Act, 2013 grants powers to auditor that every auditor has right of access,
at all times, to books and account including all statutory records such as minute books, fixed assets
register, etc. of Co. for conducting audit. In order to verify actions of Co. and to vouch and verify
some of transactions of Co , it is necessary for auditor to refer to decisions of shareholders and/or
directors.
Therefore, essential for auditor to refer to Minute Books. In absence of Minute Books, auditor may
not be able to vouch/verify certain transactions of Co.
Conclusion: In case directors have refused to produce Minute Books, auditor may consider extending
audit procedure and also consider modifying/ qualifying his report in appropriate manner.

Sec 146 – Right & duty to attend AGM

Ø All notices & other communication of GMs to be forwarded to auditor
Ø Auditor shall attend (unless exempted) by himself or authorised representative (qualified to
be auditor)
Ø Shall have right to be heard at such meet on any part of business which concerns him as
auditor

Question of Lien?
Auditor may exercise right of lien in cases of cos BUT it is mostly impracticable for legal and
practicable constraints. His working papers being his own property, question of lien does not arise.

CA SHUBHAM KESWANI 117

 Sec 143(1) Duty to enquire on Certain Matters

a) Loans & advances made on security have been properly secured & whether terms prejudicial to
interest of Co. or its members
b) Transactions merely represented by book entries prejudicial to intt of Co.

c) Where Co. not being Investment/ Banking Co. whether its assets consisting of shares,
debentures & other securities sold at price < purchase price

d) Whether Loans & Advances shown as Deposits

e) Whether personal expenses charged to Revenue a/c

f) Where shares of Co. have been allotted For cash, whether cash received & if no cash recd,
position as per books & balance sheet, correct, regular & non misleading

Notes:
Ø Auditor not reqd to report on above matters unless spl. comments to make
Ø Auditor should report only when ans. to any of matters is in adverse

Sec 143(3) Duty to Report

Auditor’s report shall state:

(a) whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and
the effect of such information on the financial statements;

(b) whether, in his opinion, proper books of account as reqd by law have been kept by the Co. so far as
appears from his examination of those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) whether the report on accounts of branch office of the Co. audited u/s 143(8) by a person other
than the company’s auditors has been sent to him and the manner he has dealt with it in preparing
report;

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;

(e) whether, in his opinion, the financial statements comply with the accounting standards;

(f) the observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as a director u/s 164(2)

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements
in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.

Rule 11 of Cos. (Audit and Auditors) Rules, 2014 other matters to be included in auditor’s report
namely:-

a) whether Co. has disclosed impact, of pending litigations on its financial position in its financial
statement;

CA SHUBHAM KESWANI 118

 b) whether Co. has made provision, as required under any law or accounting standards, for material
foreseeable losses, if any, on long term contracts including derivative contracts;
c) whether there has been delay in transferring amt, to Investor Education and Protection Fund by
Co.
d) Omitted
e) i) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds advanced, loaned or invested by Co. in any person or entity including foreign entity with
understanding that Intermediary will lend or invest in another entity or provide guarantee or
security on behalf of Co. (Ultimate Beneficiary)
ii) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds received by Co. from any person or entity including foreign entity(Funding Parties) with
understanding that Co. will lend or invest in another entity or provide guarantee or security on
behalf of Funding Party (Ultimate Beneficiary)
iii) Auditor has found no material misstatement in above representations
f) Whether Dividend declared & paid as per Sec 123
g) In respect of FY commencing after 1.4.22 à Co. used a/c software to maintain books of a/c
having audit trail & same operated throughout year & audit trail hasn’t been tampered &
preserved by Co. for retention.

Note: Auditors of public cos. Required to report remuneration to directors within limits u/s 197
under the Section Report on Other Legal and Regulatory Requirements.

Sec143(3) àDuty to state reason for qualification or negative report

Sec 143(9) à Auditor’s duty to comply with SAs

Sec 145 Duty to sign Audit Report

Ø Qualifications, observations or comments on financial transactions which have adverse effect
on functioning of Co.
Ø Read before in GM & open for inspection by members of Co.

Report on Frauds [Sec 143(12)]

• If auditor has reason to believe offence of fraud involving amount of 1 Cr or above committed in
Co. by its officers or employees
• Auditor shall report to CG within such time & manner as prescribed

Manner of reporting
• Report to Board or AC within 2 days seeking their reply within 45 days (ACà Audit Committee)
• On receipt of reply forward
Ø His Report
Ø Reply or observation of board or AC
Ø With his comments
• to CG within 15 days of receipt of reply
• If no reply recd. then shall forward only his report
• Send to Secretary, MCA in sealed cover by Regd post with acknowledgment due (RPAD) or by
Speed post followed by e-mail
• Report format à ADT 4
• On letter head of auditor with post address, e-mail, mobile no., & signed by auditor with Seal +
Membership no.

CA SHUBHAM KESWANI 119

If fraud < 1 Cr à report to AC or Board within 2 days specifying following:
a) Nature of fraud
b) Amount involved
c) Parties involved

Disclosure on Board Report: Nature of fraud, amount, parties involved (if remedial action not taken)
or remedial action taken (fraud < 1 Cr)
143(13) safeguards auditor from fraud reported out of Good Faith.

The provisions of reporting on Fraud also apply to Cost & Secretarial Auditor.

Penalty for non-compliance:

Listed Co: 5L
Any other Co: 1L

The auditor is also required to report under clause (xi) of para 3 of CARO, 2020 on whether any
fraud by company or any fraud on Company has been noticed or reported during year. If yes, nature
and amount involved is to be indicated.

Example: Senior Mgr on instruction of CEO entered fake invoices of credit purchases in books of a/c
aggregating to 95 L and cleared all payments to such bogus creditor.
Here, auditor is required to report fraudulent activity to Board or Audit Committee (as the case may
be) within 2 days of knowledge of fraud. Further, Co. also required to disclose in Board’s Report.
Auditor need not report to CG as amount of fraud is less than 1 cr, however, reporting under CARO,
2020 is required.

Audit of Branch Office Accounts

• Sec 128(1) à Every Co. shall keep at Regd office books of a/c & FS that give true & fair view
& as per accrual basis + double entry system of accounting
• If kept at any other place inform ROC within 7 days
• If Co. has branch office, it can keep books of Branch at that office & proper summarised
returns sent to Regd office periodically
• Sec 143(8) à Powers & duties of Co. Auditor in relation to branch & branch auditor
• Branch a/c can be audited by Co. auditor or any other qualified person
• Branch auditor (if different) shall share his report with Co. Auditor
• SA 600 shall apply in such case
• Right of principal auditor to visit component & examine books & records, if necessary
• Obtain SAAE that other auditor’s work adequate for him
• Ordinary procedures:
Ø Advise other auditor of use of his work
Ø Coordinate at planning stage
Ø Inform about areas requiring spl considerations
Ø Procedures for identifying inter-component transactions that require disclosure
Ø Time-table for audit completion
Ø Advise about significant a/c, auditing & reporting requirements
Ø Obtain representation as to compliance with them
• Might discuss audit procedures applied or obtain written summary of other auditor’s
procedures
• In form of Questionnaire/checklist

CA SHUBHAM KESWANI 120

 • NTE of procedures will depend on circumstances of engagement & knowledge about
competence of other auditor
• Knowledge can be enhanced through review of previous audit work

Cost Audit (Sec 148)

Sec 148 of Companies Act 2013 read with Companies (Cost Records & Audit) Rules 2014

Rule 3 – Applicability of maintenance of Cost Records => t/o of products & services >= 35 cr

Rule 4 – Cost Audit applicability

i) Regulated sectors : T/o overall >= 50 Cr & individual product/service >= 25 Cr
ii) Non regulated sectors : t/o overall >= 100 Cr & individual product/service >= 35 Cr

Non-Applicability
• Revenue from exports in forex > 75% of total revenue or
• Operating from SEZ
• Engaged in generation of electricity for captive consumption through captive generating plant

Rule 5 à every Co. covered by Rule 3 maintain cost records in Form CRA-1

Who can be a Cost Auditor? Cost Accountant appointed by Board + Cos’ auditor can’t be cost auditor

CARO Clause: As per Clause (vi) to Para 3 of CARO 2020, auditor has to report whether maintenance
of cost records has been specified by the CG under section 148(1) of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.

Rule 6 à Appoint auditor within 180 days of commencement of FY

Ø File notice of appointment with CG in form CRA-2 with fees within 30 days of BM or 180 days
of commencement of FY, earlier
Ø Cost auditor shall continue till expiry of 180 days from closure of FY or till submission of
Audit report
Ø Audit report to be submitted in form CRA-3 within `180 days of closure of FY & forward to
BOD
Ø Co. within 30 days of receipt of copy of report furnish to CG in Form CRA-4 in XBRL format +
explanation to every qualification or reservation
Ø In case of any default of these rules è Penalty u/s 147 for Co., officers & Cost auditor

Sec 147: Penalty

• Default u/s 139-146 [Company & Officer]
Ø Co: 25k – 5 Lakh
Ø Officer: 10k – 1 Lakh

• Default u/s 139, 144 & 145 [Auditor]

Ø Auditor: 25k – 5L or 4 times remuneration ↓
Ø If wilful default & intention to deceive then punishable with
v Fine 50k – 25 Lakh or 8 times remuneration ↓ + imprisonment up to 1 year
v Liable to refund remuneration
v Pay for damages to Co./stat bodies/authorities/members/creditors of Co. for
their losses
Ø If auditor is firm + proved that partner(s) involved in fraud à liability of concerned
partners & firm (joint & several)

CA SHUBHAM KESWANI 121

 Ø For criminal liability in respect of liability other than fine à partners who are involved
in fraud only liable

Final Accounts Preparation & Presentation

Sec 129 à Requirements to be satisfied by F/s

• True & fair view
• Comply with a/c standards notified u/s 133 & as per Schedule III
Notes:
• CG has exempted Cos. in defence production from AS of Segment Reporting
• Provision of DTA/DTL not apply for Public Financial institution which is NBFC in business of
Infrastructure finance leasing >= 75 % of revenue from business with Govt Cos.
• Board to lay before every AGM F/S for the FY

Sec-130: Re-opening of Accounts on Court’s or Tribunal’s orders

• Co. shall not reopen or recast f/s unless application by CG/Income Tax Authorities/SEBI/
Regulatory body &
• An order by tribunal to effect that –
Ø Earlier a/c prepared in fraudlent manner or
Ø Affairs of Co. mismanaged, casting doubt on reliability of F/S
• Such order for reopening can’t be made beyond 8 years immediately preceding current FY

Section 131: Voluntary Revision of F/S or Board’s report

If it appears to directors of Co. that F/S or Board Report, don’t comply with Sec 129/134, they may
prepare revised f/s or Board Report of any 3 preceding FY after obtaining Tribunal’s approval & copy
of Tribunal’s order filed with ROC

National Financial Reporting Authority (NFRA)

NFRA shall:
a) Shall make recommendation to CG on formulation & laying down of a/c & auditing policies &
standards
b) Monitor & enforce the compliance with a/c & auditing stds
c) Oversee quality of service of professions ensuring compliance with standards & suggest
measures for improving quality of service
d) Perform such other functions as may be prescribed

Applicability to Companies:
a) Listed Companies
b) Unlisted public companies
Ø Paid up capital >= 500 Cr or
Ø T/o >= 1000 Cr or
Ø Loans/Deposits/Debentures >= 500 Cr
as on 31st March of preceding FY
c) Insurance, banking companies, cos. engaged in generating electricity,
d) Any BC or Co. or person referred to NFRA by CG in public interest
e) A BC incorporated or regd o/s India which is subsy/associate of Companies referred in (a) to
(d), if Income/NW > Consol Income/NW of such Co.
Above companies will be governed by NFRA rules for 3 years after it ceases to fulfil above conditions
*Co. not governed by NFRA rules will inform NFRA about Auditor’s appointment within 15 days form
NFRA-1

CA SHUBHAM KESWANI 122

Every auditor referred to in Rule 3 shall file return with the NFRA on or before 30th November every
year in Form NFRA-2

Punishment for Non compliance

Co./officer/auditor à Sec 450 of Cos Act 2013 (upto 10k + 1000/day)
In case of professional/other misconduct:
A. Impose penalty of:
1 L extend to 5 times fees recd (Individuals)
5 L extend to 10 times fees recd (firms)
B. Debar member or firm from:
Ø Being appointed as auditor or Internal auditor
Ø Performing valuation u/s 247
For min 6 months to max 10 years

To check True & Fair, auditor has to see:

i. that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
ii. no material asset is omitted;
iii. the charge, if any, on assets are disclosed;
iv. material liabilities should not be omitted;
v. statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III
vi. balance sheet has been prepared in accordance with Part I of Schedule III;
vii. accounting policies have been followed consistently; and
viii. all unusual, exceptional or non-recurring items have been disclosed separately.

Audit of Dividend
• Dividend out of profits after providing for depreciation under Schedule II
• Transfer to reserves optional: Co. may transfer such percentage of profits it considers
appropriate to reserves irrespective of size of declared dividend
• Out of Past profits: If current profits inadequate, it may declare out of past profits
• Dividend only from free reserves
• Dividend includes Interim dividend which can be out of profits of that FY
• If loss during FY upto last qtr à Rate of dividend <= average of preceding 3 FY
• It should be deposited within 5 days in separate a/c in scheduled bank from date of declaration
• It must be paid within 30 days from date of declaration
• If not paid within 30 days, interest @18% p.a. applicable + defaulting director (upto 2 yrs +
1000/day)
• No offence on part of Co. if:
Ø non-payment due to operation of any law
Ø shareholder given directions & those directions can’t be complied & this told to
Shareholder
Ø dispute regarding right to receive dividend
Ø dividend adjusted lawfully against sum due from shareholder
Ø any other reason, not due to fault of Co.
• If authorised by articles may pay in proportion of paid up amount of share
• Board may deduct amount receivable by Co. on account of calls while paying dividend
• If dividends are declared after the bal. sheet date but before F.S. are approved for issue,
check that dividends have not been recognised as a liability as per AS 4 and Ind AS 10- Events
after the Reporting Period, but disclosure of the same has been made in the notes.

CA SHUBHAM KESWANI 123

 • Unpaid Dividend Account (Sec 124)
Ø Dividend unpaid/unclaimed for 30 days
Ø Transfer to this A/C within 7 days of expiry of 30 days
Ø If default, interest @ 12% p.a.
Ø Statement showing names, address & amount on website of Co. within 90 days of transfer
Ø If it remains unpaid for 7 years à transfer to Investor Education & Protection Fund
(IEPF)

• Penalty for non-comp

Co: 1L + 500/Day à Max 10 L
Officer: 25k + 100/day à 2L

The Investor Education & Protection Fund shall be utilised for the following purposes in accordance
with such rules as may be prescribed-
(a) refund in respect of unclaimed dividends, matured deposits, matured debentures, the application
money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who suffered losses due to wrong actions
by any person, in accordance with orders made by Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245
by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.

Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares (Sec 126)
Payment of dividend and allotment of bonus and right shares to transferee to be held in abeyance till
title to shares is decided. Where any instrument of transfer of shares has been delivered to Co. for
registration and transfer of such shares has not been regd., it shall transfer dividend in relation to
such shares to spl. account referred to in section 124 i.e. Unpaid Dividend Account unless Co. is
authorised by regd. holder of such shares in writing to pay such dividend to transferee specified in
such instrument of transfer. Further, Co. shall also keep in abeyance in relation to such shares, any
offer of right shares and any issue of fully paid up bonus shares.

Power to close register of members or debenture-holders or other security holders (Sec 91)

Co. may close register of members or debenture-holders or other security holders for any period not
exceeding aggregate 45 days in each year, but not exceeding 30 days at any one time, subject to giving
of previous notice of at least 7 days or such lesser period as may be specified by SEBI for listed cos.
or cos. which intend to get securities listed.

Notes:
Ø residual value of asset shall not be more than 5% of original cost of asset
Ø Useful life of asset shall not ordinarily be different from useful life specified in Part ‘C’ to
Schedule II
Ø If asset is used for double shift, depreciation will increase by 50% for that period and in case
of triple shift depreciation shall be calculated on the basis of 100% for that period.

CA SHUBHAM KESWANI 124

 Non-provision of tax in the accounts

The Council of ICAI has taken note of the fact that there is a practice prevalent whereby companies
do not make provision for tax even when such a liability is anticipated. It has expressed view that on
an overall consideration of relevant provisions of law, non-provision for tax (where a liability is
anticipated) would amount to contravention of provisions of Sec 128 and 129 of the Companies Act,
2013.

Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring out
the manner in which the accounts don’t disclose a “true and fair” view of state of affairs of Co. and
the profit or loss of the company.

An example of manner in which report on balance sheet and Statement of Profit and Loss may be
qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated aggregate
amount of taxation not so provided for is ` ............ including ` ............. for the Year ended on ..............To
the extent of such non-provision for the year, profits of Company for FY under report have been
overstated and to extent of such aggregate non provision, reserves of company appearing in said
balance sheet have been over-stated and current liabilities and provisions appearing in said balance
sheet have been understated”.

Limited Liability Partnership (LLP) Audit

Ø Applicability of Audit: If T/o <= 40 L or Contribution <= 25 L à No Audit
Ø Annual return in Form 11 with ROC within 60 days of F.Y.
Ø Statement of Account & solvency in Form 8 within 30 days from end of 6 months of F.Y.

Appointment of Auditor: The auditor may be appointed by designated partners (DPs) of LLP –
1. At any time for 1st FY but before the end of first financial year,
2. At least 30 days prior to the end of each financial year (other than the first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.

Note: The partners may appoint the auditors if DPs have failed to appoint them.

LLP’s are required to maintain books of accounts which shall contain:

1. Particulars of all sums of money received and expended by the LLP and the matters in respect of
which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finished goods and COGS,
4. Any other particulars which the partners may decide.

Advantages / Purpose / Need of Audit:

1. Auditing the accounts of LLP helps in detecting errors & frauds & verification of financial
statements.
2. Disputes, if any between any partners in the matter of accounts can be settled
3. Banks & financial institutions lend money to the firms only on the basis of audited accounts.
4. Periodical visits & suggestions by the auditor will be helpful in improving the management of the LLP.
5. For settling accounts between partners at the time of admission, death, retirement, insolvency,
insanity, etc., audited accounts are accepted by those concerned who have dealings with the LLP.

CA SHUBHAM KESWANI 125

 Auditor’s Duty Regarding Audit of LLP
1. The auditor should get definite instructions in writing as to the work to be performed by him.

2. The auditor should mention:

a) Whether the records of the firm appear to be correct & reliable.
b) Whether he was able to obtain all information & explanation necessary for his work.
c) Whether any restriction was imposed upon him.

3.The auditor should read the LLP agreement & note the following provisions:
a) Nature of the business of the LLP.
b) Amount of capital contributed by each partner.
c) Interest – in respect of additional capital contributed.
d) Duration of partnership.
e) Drawings allowed to the partners.
f) Salaries, commission etc., payable to partners.
g) Borrowing powers of the LLP.
h) Rights & duties of partners.
i) Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
j) Any loans advanced by the partners.
k) Profit sharing ratio.

4. If partners maintain minute book he shall refer it for any resolution passed regarding the
accounts.

Miscellaneous Topic:

AS 1 - Disclosure of Accounting Policies -In case of a Co, members should qualify their audit reports
in case:
(a) a/c policies required to be disclosed under Schedule III or any other provisions of Companies
Act, 2013, have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) fundamental a/c assumption of going concern not followed and fact not disclosed in F.S., or
(d) proper disclosures regarding changes in accounting policies have not been made.

CA SHUBHAM KESWANI 126

 Companies Auditor’s Report Order, 2020 (CARO 2020)

Applicability:
To every Co. including foreign Co. except:
• Banking Co.
• Insurance Co.
• Sec 8 Co. (NGO)
• One Person Co. (OPC) & Small Co.
• Pvt ltd Co. (not holding/subsy of Public Co.)
Paid up Share Cap + Reserves & Surplus <= 1 Cr (B.S. Date) &
Borrowings (Bank or FI) <= 1 Cr (Any time during year) &
Revenue (including revenue from discontinued operations) <= 10 Cr as per F/S
*CARO not applicable to Consolidated financial statements

Para 3: Clauses (i) to (xxi)

(i) (Proper records of PPE/Intangibles + Physical verification + Title deeds + Revaluation + Benami)

(a) (A) whether Co. is maintaining proper records showing full particulars, including quantitative
details and situation of Property, Plant and Equipment;
(B) whether company is maintaining proper records showing full particulars of intangible assets;
(b) whether these PPE have been physically verified by management at reasonable intervals;
whether any material discrepancies were noticed on such verification and if so, whether same
have been properly dealt in books of a/c;

(c) whether title deeds of all immovable properties (other than properties where company is
lessee and lease agreements are duly executed in favour of lessee) disclosed in F.S. are held in
name of company, if not, provide details thereof in format below:-
Description Gross Held in Whether Period held- Reason for
of property carrying name of promoter,director indicate not being
value or their relative range,where held in name
or employee appropriate of Co.

(d) whether company has revalued its PPE (including Right of Use assets) or intangible assets or
both during the year and, if so, whether revaluation is based on valuation by Registered Valuer;
specify amount of change, if change is 10% or more in aggregate of net carrying value of each
class of PPE or intangible assets;

(e) whether any proceedings initiated or pending against company for holding any benami
property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so,
whether Co. has appropriately disclosed details in its F.S.;

(ii) [Inventory à Physical verification + Working capital loans]

(a) whether physical verification of inventory has been conducted at reasonable intervals by mgt and
whether, in opinion of auditor, coverage and procedure of verification by mgt is appropriate; whether
any discrepancies of 10% or more in aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in books of a/c;

CA SHUBHAM KESWANI 127

(b) whether during any point of time of year, company has been sanctioned working capital limits in
excess of 5 cr, in aggregate, from banks or financial institutions on basis of security of current
assets; whether quarterly returns or statements filed by company with such banks or financial
institutions are in agreement with books of a/c of Company, if not, give details;

Loans, Investments, Guarantee & Securities (LIGS)

(iii) whether during year Co. has made investments in, provided any guarantee or security or granted
any loans or advances in nature of loans, secured or unsecured, companies, firms, LLPs or any other
parties, if so,-

(a) whether during year Co. has provided loans or provided advances in nature of loans, or stood
guarantee, or provided security to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-

(A) aggregate amt during year, and balance o/s at BS date w.r.t. such loans or advances and
guarantees or security (LAGS) to subsidiaries, joint ventures and associates;
(B) Agg. amt during year, and balance outstanding at BS date w.r.t such LAGS to parties other
than subsidiaries, joint ventures and associates;
(b) whether investments made, guarantees provided, security given and T&Cs of grant of all loans and
advances in nature of loans and guarantees provided are not prejudicial to the company’s interest;

(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;

(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;

(e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has
been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and percentage of aggregate to total loans or advances in the nature of loans granted
during year [not applicable to companies whose principal business is to give loans];

(f) whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of section 2 of the Companies Act, 2013;

Sec 185 & 186

(iv) in respect of loans, investments, guarantees, and security (LIGS), whether provisions of sections
185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

Deposits
(v) in respect of deposits accepted by the company or amounts which are deemed to be deposits,
whether directives issued by RBI and provisions of Sec 73 to 76 or any other relevant provisions of
Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the
nature of such contraventions be stated; if an order has been passed by Company Law Board or NCLT
or RBI or any court or any other tribunal, whether the same has been complied with or not;

Cost records
(vi) whether maintenance of cost records has been specified by CG under section 148(1) of Companies
Act and whether such accounts and records have been so made and maintained;

CA SHUBHAM KESWANI 128

Statutory dues
(vii) (a) whether company is regular in depositing undisputed statutory dues including GST, PF, ESI,
income-tax, sales-tax, service tax, customs duty, excise duty, VAT, cess and any other statutory dues
to appropriate authorities and if not, extent of arrears of o/s statutory dues as on last day of the
financial year concerned for a period of more than 6 months from date they became payable, shall be
indicated;

(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any
dispute, then amounts involved and forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a dispute);

Income Disclosure
(viii) whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during year in the tax assessments under Income Tax Act, 1961, if so, whether
the previously unrecorded income has been properly recorded in the books of account during the year;

Repayment of loans
(ix) (a) whether Co. has defaulted in repayment of loans or other borrowings or in payment of interest
thereon to any lender, if yes, the period and the amount of default to be reported as per the format
below:-
Nature of Name of Amt not paid Whether No. of days Remarks,
borrowing, lender on due date principal or delay or if any
including debt interest unpaid
securities

*lender wise details in case of default to Bank, financial institutions & Govt
(b) whether company is a declared wilful defaulter by any bank or financial institution or other lender;

(c) whether term loans were applied for purpose for which loans were obtained; if not, amount of loan
so diverted and purpose for which it is used may be reported;

(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, nature
and amount to be indicated;

(e) whether Co. has taken any funds from any entity or person on account of or to meet obligations of
its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions
and the amount in each case;

(f) whether company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also report if company has
defaulted in repayment of such loans raised;

IPO/ FPO Reporting:

(x) (a) whether moneys raised by way of initial public offer or further public offer(including debt
instruments) during the year were applied for purposes for which those are raised, if not, the details
together with delays or default and subsequent rectification, if any, as may be applicable, be reported;

Preferential Allotment/Private placement

(b) whether Co. has made any preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) during year and if so, whether the requirements
of section 42 and section 62 of the Companies Act, 2013 have been complied with and funds raised
have been used for purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance;

CA SHUBHAM KESWANI 129

Fraud
(xi) (a) whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, nature and amount involved is to be indicated;

(b) whether any report under 143(12) of Companies Act has been filed by the auditors in Form ADT-4
as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;

(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by
company;

Nidhi Company
(xii) (a) whether Nidhi Company has complied with the Net Owned Funds to Deposits in ratio of 1:20
to meet out liability;

(b) whether the Nidhi Company is maintaining 10% unencumbered term deposits to meet out the
liability;

(c) whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof;

Related Parties
(xiii) whether all transactions with related parties are in compliance with sections 177 and 188 of
Companies Act where applicable and the details have been disclosed in the financial statements, etc.,
as required by the applicable accounting standards;

Internal Audit
(xiv) (a) whether the company has internal audit system commensurate with the size and nature of its
business;

(b) whether reports of Internal Auditors for the period under audit were considered by the statutory
auditor;

Non cash transactions

(xv) whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether provisions of Sec 192 of Companies Act have been complied
with;

RBI
(xvi) (a) whether company is required to be registered under section 45-IA of Reserve Bank of India
Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;

(b) whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of
India Act, 1934;

(c) whether company is a Core Investment Company (CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company
is exempted or unregistered CIC, whether it continues to fulfil such criteria;

(d) whether the Group has more than one CIC as part of the Group, if yes,indicate the number of CICs
which are part of Group;

CA SHUBHAM KESWANI 130

Cash Losses
(xvii) whether company has incurred cash losses in financial year and in immediately preceding financial
year, if so, state the amount of cash losses;

Resignation by Statutory Auditors

(xviii) whether there has been any resignation of statutory auditors during year, if so, whether auditor
has taken into consideration the issues, objections or concerns raised by the outgoing auditors;

Going Concern
(xix) on basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements, auditor’s
knowledge of Board of Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on date of the audit report that company is capable of meeting its
liabilities existing at date of balance sheet as and when they fall due within a period of 1 year from BS
Date;

CSR Reporting
(xx) (a) whether, in respect of other than ongoing projects, company has transferred unspent amount
to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry
of financial year in compliance with second proviso to section 135(5) of the said Act;

(b) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any
ongoing project, has been transferred to special account in compliance with section 135(6) of the said
Act;

Qualifications in CFS
(xxi) whether there have been any qualifications or adverse remarks by respective auditors in the
Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated
financial statements, if yes, indicate details of companies and paragraph numbers of CARO report
containing qualifications or adverse remarks.

CA SHUBHAM KESWANI 131

 Schedule III (Division II i.e. Ind AS)

Current Asset
Asset shall be classified as current when it satisfies any of following criteria:
(a) expected to be realized, or consumed in, company’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) expected to realize within 12 months after reporting period; or
(d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at
least 12 months after reporting period.
All other assets shall be classified as non-current.

Operating Cycle
An operating cycle is time b/w acquisition of assets and their realization in cash or cash equivalents.
Where normal operating cycle can’t be identified, it is assumed to have a duration of 12 months.

Current Liability
Liability shall be classified as current when it satisfies any of following criteria:
(a) expected to be settled in Co’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) it is due to be settled within 12 months after reporting period; or
(d) Co. doesn’t have an unconditional right to defer settlement of liability for at least 12 months after
reporting date. Terms of a liability that could, at option of counterparty, result in its settlement by
issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current.

Balance Sheet

Non-Current Assets

l. Property. Plant and Equipment :

(i) Classification shall be given as:
(a) Land
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of assets
(iii) A reconciliation of gross and net carrying amts of each class of assets at beginning and end of
reporting period showing additions, disposals, acquisitions through business combinations, amt of
change due to revaluation (if cha nge is 10% or more of Net Value of each class of PPE) and other
adjustments and related depreciation and impairment losses or reversals shall be disclosed separately.

Investment Property:
Reconciliation similar to PPE.

CA SHUBHAM KESWANI 132

Goodwill:
A reco. of gross and net carrying amt of goodwill at beginning and end of reporting period showing
additions, impairments, disposals and other adjustments.

Other Intangible assets

(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
(ii) Reco. similar to PPE.

Biological Assets other than bearer plants:

A reco. of carrying amts of each class of assets at beginning and. end of reporting period showing
additions, disposals, acquisitions through business combinations and other adjustments shall be
disclosed separately.

Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments made and nature and extent of investment made in each body corporate (partly-
paid investments shown separately). lnvestment in partnership firms alongwith names of firms, their
partners, total capital and shares of each partner disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amt of quoted investment and market value thereof:
(b) Aggregate amt of unquoted investment: and
(c) Aggregate amt of impairment in value of investment.

Trade Receivables:
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

CA SHUBHAM KESWANI 133

(iii) Debts due by directors or other officers of co. or any of them either severally or jointly with any
other person or by firms or pvt companies respectively in which any director is a partner or a director
or a member should be separately stated.

Trade Receivables Ageing Schedule

Outstanding for following periods from due date of

payment#
Particulars <6 6m-1 year 1-2 2-3 > 3 years Total
months years years
i) Undisputed Trade receivables –
considered good
ii) Undisputed Trade Receivables
– which have significant increase
in credit risk
iii) Undisputed Trade Receivables
– credit impaired
(iv) Disputed Trade Receivables–
considered good
(v) Disputed Trade Receivables –
which have significant increase in
credit risk
(vi) Disputed Trade Receivables
– credit impaired
# similar info. shall be given where no due date of payment is specified in that case disclosure shall
be from date of the transaction

Loans;
(i) Loans shall be classified as-
(a) omitted
(b) Loans to related parties (giving details thereof); &
(c) Other loans (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers ….(same as Trade Receivables)

Other Financial Assets

(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) others(to be specified);

CA SHUBHAM KESWANI 134

Other non-current asset: Other non-current assets shall be classified as-
(i) Capital Advances; and
(ii) Advances other than capital advances;

(1) Advances other than capital advances shall be classified as:

(a) Security Deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of Co. or any of them either severally or jointly with any
other persons or advances to firms or private companies respectively in which any director is a partner
or a director or a member should be separately stated, ln case advances are of nature of financial
asset as per relevant Ind AS, these are to be disclosed under other financial assets separately.
(iii) Others (specify nature).

Current Assets

Inventories:
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.

Investment;
Similar to non-current

Trade Receivables
Similar to non-current

Cash and cash equivalents:

Cash and cash equivalents shall be classified as:-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).

Loans:
Similar to non-current

Other current assets (specify nature): This is an all-inclusive heading, which incorporates current
assets that do not fit into any other asset categories. Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);

CA SHUBHAM KESWANI 135

 (c) Other advances (specify nature)
(2) Advances to directors or other officers of Co. or any of them either severally or jointly with
any other persons or advances to firms or pvt cos. respectively in which any director is a partner or
a director or a member should be separately stated.
(a) Earmarked balances with banks (for example for unpaid dividend) shall be separately stated.
(b) Balances with banks to the extent held as margin money or security against borrowings,
guarantees, other commitments shall be disclosed separately.
(c) Repatriation restrictions in respect of cash and bank balances shall be separately stated.

Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amt of contracts remaining to be executed on capital account and not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).

Equity

Equity Share Capital: For each class of equity share capital:

(a) no. and amt of shares authorised;
(b) no. of shares issued, subscribed and fully paid, and subscribed but not fully paid;
(c) par value per Share;
(d) reconciliation of no. of shares outstanding at beginning and end of period;
(e) rights, preferences and restrictions attaching to each class of shares including restrictions on
distribution of dividends and repayment of capital;
(f) shares in respect of each class in the company held by its holding or ultimate holding co. including
shares held by subsidiaries or associates of holding or ultimate holding co. in aggregate;
(g) shares in company held by each shareholder holding more than 5% shares specifying no. of shares
held;
(h) shares reserved for issue under options and contracts or commitments for sale of shares or
disinvestment, including terms and amounts;
(i) for period of 5 years immediately preceding the date at which Balance Sheet is prepared
• aggregate no. and class of shares allotted as fully paid up pursuant to contract without received in
cash;
• aggregate no. and class of shares allotted as fully paid up by way of bonus shares; and
• aggregate no. and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with earliest date of
conversion in descending order starting from farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up)
(m) Disclosure of Promoter Shareholding

Shares held by promoter at end of Year % change during

year
S No. Promoter Name No of shares* % of total
shares

CA SHUBHAM KESWANI 136

*details to be given for each class of share

Other Equity:
(i) Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in respect thereof);
(Additions and deductions since last balance sheet to be shown under each of the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of relevant column in Statement of Changes in
Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact that it is so
represented;
(iv) Debit balance of Statement of P&L à shown as a negative figure under the head 'retained
earnings'. Similarly, balance of 'Other Equity', after adjusting negative balance of retained earnings,
if any, shall be shown under the head 'Other Equity' even if the resulting figure is in the negative;
and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the nature and amount of each
item.

Non-Current Liabilities
Borrowings:
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) omitted
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be
specified separately in each case.
(iii) where loans have been guaranteed by directors or others, aggregate amount of such loans under
each head shall be disclosed;
(iv) bonds or debentures (along with rate of intt, and particulars of redemption or conversion) shall be
stated in descending order of maturity or conversion, starting from farthest redemption or conversion
date where bonds/debentures are redeemable by instalments, the date of maturity for this purpose
must be reckoned as date on which first instalment becomes due;
(v) particulars of any redeemed bonds or debentures which company has power to reissue shall be
disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amt of default as on balance sheet date in repayment of borrowings and intt shall be
specified.

Provisions: The amounts shall be classified as-

(a) Provision for employee benefits; and
(b) Others (specify nature).

CA SHUBHAM KESWANI 137

Other non-current liabilities;
(a) Advances; and
(b) Others (specify nature).

Current Liabilities

Borrowings:
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings further sub-classified as secured and unsecured. Nature of security shall be specified
separately in each case;
(iii) where loans have been guaranteed by directors or others, agg. amt of loans under each head shall
be disclosed;
(iv) period and amt of default as on B.S. date in repayment of borrowings and intt, specified
separately in each case.
(v) Current maturities of long term debt shall be disclosed separately

Other Financial Liabilities: OFL shall be classified as-

(a) omitted
(b) omitted
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent refundable and intt accrued
thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).

'Long term debt is a borrowing having a period of more than twelve months at time of origination

Other current liabilities:

The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);

Provisions: The amounts shall be classified as-

(i) provision for employee benefits; and
(ii) others (specify nature)

Trade Payables
The following details relating to Micro, Small and Medium Enterprises(MSME) shall be disclosed in
notes:

CA SHUBHAM KESWANI 138

(a) principal amt and interest due thereon (to be shown separately) remaining unpaid to any supplier
at end of each accounting year;
(b) amt of interest paid by buyer in terms of sec 16 of MSME Development Act, 2006, along with
payment made to supplier beyond appointed day during each accounting year;
(c) amt of interest due and payable for period of delay in making payment (which have been paid but
beyond the appointed day during year) but without adding interest specified under MSME
Development Act, 2006;
(d) amt of interest accrued and remaining unpaid at end of each accounting year; and
(e) amt of further interest remaining due and payable even in succeeding years, until such date when
interest dues above are actually paid to small enterprise, for purpose of disallowance of a deductible
expenditure under sec 23 of MSME Development Act, 2006.

Trade Payables Ageing Schedule

Particulars Outstanding for following periods from due date of Total
payment
i) MSME < 1 year 1-2 years 2-3 years > 3 years
ii) Others
iii) Disputed dues-
MSME
iv) Disputed dues-
others

The presentation of liabilities associated with group of assets classified as held for sale and non-
current assets classified as held for sale shall be in accordance with the relevant Ind AS.

Dividends
The amount of dividends proposed to be distributed to equity and preference shareholders for the
period and related amount per share shall be disclosed separately. Arrears of fixed cumulative
dividends on preference shares shall also be disclosed separately.

Utilisation of Amounts Raised

Where issue of securities made for specific purpose, whole or part of amt hasn’t been used for
specific purpose at balance sheet date, indicate by way of note how such unutilized amts have been
used or invested.

Where the company has not used borrowings from banks and financial institutions for specific
purpose for which it was taken at balance sheet date, company shall disclose details of where they
have been used.

Additional Regulatory Info

i) Title deeds of Immovable Properties not held in name of the Company

The company shall provide details of all immovable properties other than on lease whose title deeds
are not held in name of Co. in a format and where such immovable property is jointly held with
others, details are required to be given to the extent of Co‘s share.

(ii) The Co. shall disclose as to whether the fair value of investment property is based on valuation by
a regd valuer as defined under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.

CA SHUBHAM KESWANI 139

(iii) Where Co. has revalued its PPE (including Right-of-Use Assets), disclose as to whether
revaluation is based on valuation by a regd valuer.

(iv) Where Co. has revalued its intangible assets, disclose as to whether revaluation is based on
valuation by a regd valuer.

(v) The following disclosures shall be made where Loans or Advances in nature of loans are granted to
promoters, directors, KMPs and related parties (as defined under Companies Act, 2013), either
severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,

Type of borrower Amt of loan Percentage of total loans

Promoters
Directors
KMPs
Related Parties

(vi) Capital Work in Progress

Aging Schedule
CWIP <1 1-2 years 2-3 years > 3 years Total
Year
Projects in Progress
Projects temporarily suspended

For CWIP, whose completion is overdue or exceeded its cost compared to original plan, following
CWIP completion schedule shall be given:

To be completed in: Total

< 1 year 1-2 years 2-3 years > 3 years
Project 1
Project 2
(Details of projects where activity has been suspended to be given separately)

(vii) Similar schedules to be given for Intangible Assets under Development

(viii) Details of Benami Property held

Where any proceeding has been initiated or pending against the company for holding any benami
property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, disclose the
following:-
(a) Details of such property,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with reasons,
(f) Where there are proceedings against Co. under this law as an abetter of the transaction or as
the transferor then the details shall be provided,
(g) Nature of proceedings, status of same and company‘s view on same.

CA SHUBHAM KESWANI 140

(ix) where Co. has borrowings from banks or financial institutions on basis of security of current
assets, it shall disclose following:-
(a) whether quarterly returns or statements of current assets filed by Co. with banks or financial
institutions are in agreement with books of accounts;
(b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately
disclosed.

(x) Wilful Defaulter

Where a Co. is declared wilful defaulter by any bank or financial Institution or other lender,
following details shall be given:
(a) Date of declaration as willful defaulter,
(b) Details of defaults (amount and nature of defaults)

(xi) Relation with struck off Cos. to be disclosed.

xii) Registration of charges or satisfaction with Registrar of Companies (ROC)

Where any charges or satisfaction yet to be registered with ROC beyond the statutory period,
details and reasons thereof shall be disclosed.

(xiii) Compliance with number of layers of companies

Where Co. has not complied with number of layers prescribed under Sec2(87) of Cos. Act read with
the Companies (Restriction on number of Layers) Rules, 2017, name and CIN of companies beyond
specified layers and relationship or extent of holding of company in such downstream companies shall
be disclosed.

(xiv) Following Ratios to be disclosed:-

(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain items included in numerator and denominator for computing above ratios.
Further explanation shall be provided for any change in the ratio by more than 25% as compared to
the preceding year.

(xv) Compliance with approved Scheme(s) of Arrangements

Where Scheme of Arrangements has been approved by Competent Authority in terms of Sec 230 to
237 of Companies Act, 2013, disclose that the effect of such Scheme of Arrangements have been
accounted for in books of account in accordance with the Scheme‘ and in accordance with accounting
standards‘ and any deviation shall be explained.

CA SHUBHAM KESWANI 141

(xvi) Utilisation of Borrowed funds and share premium:

(A) Where company has advanced or loaned or invested funds (either borrowed funds or share
premium or any other sources or kind of funds) to any other person(s) or entity(ies), including
foreign entities (Intermediaries) with the understanding (whether recorded in writing or otherwise)
that the Intermediary shall

(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the company (Ultimate Beneficiaries) or

(ii) provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries;
the company shall disclose the following:-

(I) date and amount of fund advanced or loaned or invested in Intermediaries with complete
details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested by such Intermediaries to
other intermediaries or Ultimate Beneficiaries along with complete details of ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of Foreign Exchange Management Act, 1999 and
Companies Act has been complied with for such transactions and transactions are not violative of
Prevention of Money-Laundering act, 2002.

(B) Where a company has received any fund from any person(s) or entity(ies), including foreign
entities (Funding Party) with understanding (whether recorded in writing or otherwise) that Co.shall

(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of Ultimate Beneficiaries, disclose the
following:-
(I) date and amount of fund received from Funding parties with complete details of each Funding
party.
(II) date and amount of fund further advanced or loaned or invested other intermediaries or
Ultimate Beneficiaries alongwith complete details of the other intermediaries‘ or ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of the FEMA,1999 and Companies Act has been
complied with for such transactions and transactions are not violative of PMLA, 2002

Additional Balance Sheet

When a Co. applies a/c policy retrospectively or makes restatement of items or when it reclassifies
items in F.S., it shall attach to B.S., a "Balance Sheet" as at beginning of earliest comparative period
presented.

Share Application Money

Share application money pending allotment shall be classified into equity or liability in accordance
with relevant Ind AS. share application money to the extent not refundable shall be shown under the

CA SHUBHAM KESWANI 142

head Equity and to the extent refundable shall be separately shown under 'Other financial
liabilities'.

Preference Shares
Pref. shares including premium recd on issue, shall be classified and presented as 'Equity' or 'Liability'
in accordance with relevant Ind AS. Disclosure and presentation applicable to relevant class of equity
or liability shall be applicable mutatis mutandis to the pref. shares. For eg, plain vanilla redeemable
pref. shares shall be classified and presented under 'non-current liabilities' as 'borrowings' and
disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis
mutandis to redeemable pref. shares.

Compound Financial Instruments such as convertible debentures, where split into equity and liability
components, as per requirements of relevant Ind AS, shall be classified and presented under relevant
heads in 'Equity' and 'Liabilities'

Regulatory Deferral Account Balances shall be presented in the Balance Sheet in accordance with the
relevant Indian Accounting Standards.

Doubt regarding Valuation of Assets

If, in opinion of Board, any of assets other than PPE and non-current investments don’t have a value on
realization in ordinary course of business at least equal to amt at which they are stated, fact that
Board is of that opinion, shall be stated.

Statement of Profit & Loss

The provisions of this Part shall apply to income and expenditure account, in like manner as they apply
to a Statement of Profit and Loss,

The Statement of Profit and Loss shall include:

(1) Profit or loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"

Revenue from operations shall disclose separately in notes

(a) sale of products (including Excise Duty);
(b) sale of services;
(ba) grants or donations received in case of Sec 8 Co. only and
(c) other operating revenues.

Finance Costs: Finance costs shall be classified as-

(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).

Other income: other income shall be classified as-

(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)

CA SHUBHAM KESWANI 143

Other Comprehensive Income(OCI) shall be classified into-

(A) Items that will not be reclassified to profit or loss

(i) Changes in revaluation surplus;
(ii) Re-measurements of defined benefit plans;
(iii) Equity Instruments through OCI;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair value through
P&L;
(v) Share of OCI in Associates and JVs, to the extent not to be classified into profit or loss; and
(vi) Others (specify nature).

(B) Items that will be reclassified to profit or loss;

(i) Exchange differences in translating F.S. of a foreign operation;
(ii) Debt instruments through OCI;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of OCI in Associates and Joint Ventures, to the extent to be classified into profit or loss;
and
(v) Others (specify nature)

Additional Information:
Disclose via notes, additional info regarding aggregate expenditure and income on following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to PF and
other funds, (iii) share based payments to employees, (iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds 1 % of revenue from operations or 10L whichever
is higher, in addition to consideration of 'materiality ‘;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered as finance
cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d)
for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on CSR activities;
and
(k) details of items of exceptional nature;

(l) Undisclosed income

The Company shall give details of any transaction not recorded in books of accounts that has been
surrendered or disclosed as income during the year in tax assessments under Income Tax Act, 1961
(such as, search or survey or any other relevant provisions of Income Tax Act, 1961), unless there is
immunity for disclosure under any scheme and shall also state whether the previously unrecorded
income and related assets have been properly recorded in the books of account during the year.

CA SHUBHAM KESWANI 144

 (m) Corporate Social Responsibility (CSR)

Where the company covered under section 135 of Companies Act, following shall be disclosed with
regard to CSR activities:-

(i) amount required to be spent by the company during the year,

(ii) amount of expenditure incurred,

(iii) shortfall at the end of the year,

(iv) total of previous years shortfall,

(v) reason for shortfall,

(vi) nature of CSR activities,

(vii) details of related party transactions, e.g.,contribution to a trust controlled by the company in
relation to CSR expenditure as per relevant Accounting Standard,

(viii) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year shall be shown separately.

(n) details of Crypto Currency or Virtual Currency

Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial
year, the following shall be disclosed:-

(i) profit or loss on transactions involving Crypto currency or Virtual Currency,

(ii) amount of currency held as at the reporting date,

(iii) deposits or advances from any person for purpose of trading or investing in Crypto Currency or
virtual currency.

For Consolidated Financial Statements

• All subsidiaries, associates and JV (whether Indian or Foreign) will be covered under CFS.
• An entity shall disclose list of subsidiaries or associates or JV which have been consolidated in CFS
along with reason of not consolidating.

“Good things take time”

CA SHUBHAM KESWANI 145

 Audit Committee & Corporate Governance

Issues addressed in LODR Regulations regarding corporate governance are:

i. Responsibilities and key functions of Board, it’s composition, compensation and disclosures;
ii. Code of Conduct and vigil mechanism;
iii. Composition, meetings, powers, role and responsibilities of Audit Committee which is an
important pillar of corporate governance;
iv. Management of subsidiary companies;
v. Procedures related to risk management;
vi. Disclosures on important issues regarding related party transactions, accounting treatment,
etc.;
vii. Content of management discussion and analysis;
viii. Information to shareholders;
ix. Compliance Certificate by CEO and CFO;
x. Compliance Certificate from either auditors or practising CS regarding compliance of
conditions on corporate governance.

The provisions of these regulations which become applicable to listed entities on basis of market
capitalisation criteria shall continue to apply to such entities even if they fall below such thresholds.

Audit Committee(AC)

Qualified & Independent Audit Committee (AC) [Regulation 18(1)]

• Min 3 directors + 2/3rd ID (Independent Director) [ Listed Entity with Superior Right(SR)
Equity shares à only Independent Director(ID)]
• All financially literate + at least 1 member accounting or Financial Management expertise
• Chairperson à ID + present at AGM to answer shareholder queries
• CS à secretary to the committee
• Discretion to invite finance director/ head of finance/internal audit/ representative of stat
auditor

Meeting of Audit Committee [ Regulation 18(2)]

● At least 4 times in a year & not more than 120 days lapse b/w 2 meetings
● Quorum à2 or 1/3rd (greater) but min 2 ID present

Powers of Audit Committee

• Seek info from any employee
• Secure attendance of outsiders with relevant expertise
• Obtain legal/professional advice
• Investigate any activity within terms of reference

Notes regarding Terms of Reference:

• Audit committee shall review utilisation of loans/advances/investments by holding co. to subsy
co. > 100 Cr or 10% of asset size of Subsy ↓
• Reviewing, with mgt, annual F.S. and auditor's report before submission to Board for approval,
with particular reference to:
(a) Matters required to be included in the Director’s Responsibility Statement to be included
in the Board’s report
(b) Changes, if any, in accounting policies and practices and reasons for the same;

CA SHUBHAM KESWANI 146

 (c) Major accounting entries involving estimates based on the exercise of judgment by
management;
(d) Significant adjustments made in the financial statements arising out of audit findings;
(e) Compliance with listing and other legal requirements relating to financial statements;
(f) Disclosure of any related party transactions;
(g) Modified opinion(s) in the draft audit report
• Consider and comment on rationale, cost-benefits and impact of schemes involving merger,
demerger, amalgamation etc., on listed entity and its shareholders.

Resignation by auditor from listed entities & material subsidiaries

A. All listed entities/material subsidiaries while appointing/reappointing an

auditor shall ensure compliance with:

If auditor resigns within 45 days If auditor resigns after 45 If auditor has signed LR/AR
from end of Qtr of a FY, then days from end of Qtr of a FY, of 1st 3 Qtrs then before
auditor shall, before resignation, then auditor shall, before such resignation auditor
issue limited review/ audit resignation, issue limited shall issue LR/AR for last qtr
report for such Qtr. review/ audit report for such as well as AR for such FY
Qtr as well as next Qtr

Reporting to Stock Exchange:

Detailed reasons to be disclosed by listed entities to stock ex. in case of resignation of auditor of
listed entity as soon as possible but not later than 24 hours of receipt of such reasons from auditor.

Other Conditions:
• Concern with mgt such as non-availability of info/ non-cooperation by mgt àauditor approach
Chairman of Audit committee(AC) & AC shall receive concern directly not wait for Qtr
meeting
• If auditor propose to resign à all concerns brought to notice of AC
If due to non-receipt of info/expln à inform AC details info/expln sought & not provided by
mgt
• Deliberation by AC à Communicate views to mgt & auditor
The practicing CS shall certify compliance by listed entity on above in annual secretarial compliance
report

Obligations by listed entity & material subsidiary

Format of info. to be obtained from stat. auditor upon resignation + Cooperation by Listed Entity &
Mat. Subsy + Disclosure of Audit Comm. views to stock exchange.

Mandatory Review of info by Audit Committee

• MDA (Management Discussion & Analysis) of financial conditions & results of operation
• Statement of significant Related Party Transactions (RPTs) submitted by mgt
• Mgt letters/ letter of IC weakness issued by stat. auditor
• Internal audit reports relating to Internal Control weakness
• Appointment, removal & terms of remuneration of Chief Internal Auditor (CIA)
• Statement of Deviations (SOD)
o Qtr SOD including report of monitoring agency
o Annual statement of funds utilised for purpose other than stated in offer
doc/prospectus/notice

CA SHUBHAM KESWANI 147

Audit shall check:
• Minutes book & agenda papers
• Director’s report or MDA forms part of annual report
• Segment wise break up as per AS 17/Ind AS 108

Nomination & Remuneration Committee (NRC) (Reg. 19)

Composition:
• At least 3 directors, all NED & atleast 50% ID (SR Eq shares à 2/3rd ID)
• Chairperson = ID
• Quorum à 2 or 1/3rd (higher) at least 1 ID
• Meet at least once a year
• Chairperson maybe present at AGM to answer Shareholder queries
Role of NRC:
i. Formulation of criteria for determining qualifications, positive attributes & independence of a
director and recommend policy to BOD, relating to remuneration of directors, KMP & other
employees;
ii. Formulation of criteria for evaluation of performance of independent directors & BOD;
iii. whether to extend or continue the term of independent director, on basis of their performance
evaluation report.
iv. Devising a policy on Board diversity;
v. Identifying persons qualified to be directors and can be appointed in sr. mgt as per criteria, &
recommend their appointment & removal to Board;
vi. recommend to board, all remuneration, in whatever form, payable to sr. mgt.

Stakeholders Relationship Committee (Reg 20)

• Chairperson => Non-Executive Director & present at AGM to answer queries of security
holders
• At least 3 directors, 1 ID (SR Eq. shares à2/3rd ID)
• Meet once a year
• Role of the committee –
(1) Resolving the grievances of the security holders of the listed entity including complaints
related to transfer/transmission of shares, non-receipt of annual report, non-receipt of
declared dividends, issue of new/duplicate certificates, general meetings etc.
(2) Review of measures taken for effective exercise of voting rights by shareholders.
(3) Review of adherence to the service standards adopted by the listed entity in respect of
various services being rendered by the Registrar & Share Transfer Agent.
(4) Review of the various measures and initiatives taken by the listed entity for reducing the
quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual
reports/statutory notices by the shareholders of the company.

Risk Mgt Committee (Reg 21)

• Min. 3 Members majority being BOD
• Atleast 1 ID
• SR Eq shares à 2/3rd ID
• Chairperson è Member of BOD
• Meet at least twice a year
• Not more than 180 days shall lapse between 2 meetings
• Quorum
2 or 1/3rd (higher) with atleast 1 BOD

CA SHUBHAM KESWANI 148

 • Applicable to top 1000 listed entities & high value debt listed entity
• Role and responsibilities of Risk Mgt Committee shall mandatorily include performance of
functions specified in Part D of Schedule II.
• It shall have powers to seek info from any employee, obtain outside legal or other professional
advice and secure attendance of outsiders with relevant expertise, if it considers necessary.

Composition of Board [Regulation 17 and 17A] (All upper round off)

● At least 1 Woman Director
● >= 50% BOD à Non exec directors
● Top 1000 listed entities at least 1 Independent Woman Director
● No NED who’s 75 yrs old shall continue unless SR is passed with explanatory statement
● No. of directorships
o Only in 7 listed entities (Even for ID)
o WTD/MD in any Listed Co. è ID <= 3 listed entities
● Chairperson(CP) à Non exec director(NED) à 1/3rd ID
If, CP not NED or is promoter or related to promoter à ½ of BOD à ID
● Top 2000 entities not less than 6 directors
● W.ef. 1.4.22.Top 500 entities CP à NED + not related to MD/CEO
● SR equity shares à ½ ID
o Limited Review of all Entities whose accounts are to be consolidated with Listed Entity

Remuneration of Directors [PART C OF SCHEDULE V]

Disclosure requirements
• Pecuniary transn b/w NED & listed entity disclosed Annual Report
• Criteria for making payment to NED
• Following disclosures in add. to reqd by Cos. Act 2013
o All elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc.
o Details of fixed component and performance linked incentives, along with the
performance criteria.
o Service contracts, notice period, severance fees.
o Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.

Approval of remuneration of directors [Reg 17(6)]

• All fees/compensation à NED (incl. ID) à BR + OR (SH specify limit for ESOP p.a. for NED)
• SR every year if, remuneration to a NED > 50% of total rem. of all NEDs.
• ID not entitled to stock option
• No approval for sitting fees as per 197(5)
• SR for ED (promoters or part of promoter group) if,
o Single ED : Rem of ED > 5 cr or 2.5% of NP of entity (higher)
o >1 ED: Rem > 5% of NP of entity

Audit Procedures:
1. Ascertain from minutes of BOD’s, shareholders’ meetings, relevant agenda papers, notices,
explanatory statements etc., whether remuneration of NEDs has been decided by BOD after
receiving prior approval of shareholders in GM;

CA SHUBHAM KESWANI 149

2. The approval of shareholders by SR shall be obtained every year, in case annual remuneration
payable to a single non-executive director exceeds 50% of total annual remuneration payable to all
non-executive directors, giving details of the remuneration thereof.
3. The auditor should refer to Articles of Association of the Co., wherever applicable;
4. The auditor is required to examine Report of BOD on corporate governance to be included in
annual report of Co. and ascertain whether the same contains disclosures w.r.t remuneration of
directors and compensation to NED. The auditor should correlate this data with F.S.

Board Meetings
• Meet at least 4 times in a year max gap 120 days
• Quorum: Top 2000 listed entities à 1/3rd or 3 (higher) include 1 ID [VC & Audio visual means
counted]
• Director member 10 Committees or Chairperson of 5 committees of public ltd cos.
(Committee= Audit & stakeholder relationship comm.)
• ID hold at least 1 meeting in a FY w/o non IDs
• ID resigned replaced by next BM or 3 months (later)

Note:
1. IFSC public and private company, it shall hold first BM within 60 days of its incorporation and
thereafter hold at least one Board meeting in each half of a calendar year.
2. A ‘high value debt listed entity’ shall undertake Directors and Officers insurance (D and O
insurance) for all its independent directors for such sum assured and for such risks as may be
determined by its BOD.

Code of Conduct
(i) The Board shall lay down code of conduct for Board members and senior mgt of listed
entity.
(ii) All Board members and senior mgt personnel shall affirm compliance with code on annual
basis.
(iii) The Annual Report of co. shall contain declaration to this effect signed by CEO.
(iv) The code of conduct shall be posted on website of company.
(v) The Code of Conduct shall suitably incorporate duties of Independent Directors laid down
in Companies Act, 2013.

Auditor should check if such code is there & obtain copy of same & verify all board member + sr. mgt
have gven confirmation + its posted on website

Vigil Mechanism/Whistle Blower Policy

• For directors or employees to report genuine concerns
• Provide for adequate safeguards against victimisation of directors/employees & provide for
direct access to Chairperson of AC in exceptional cases
• Details to be disclosed on website & board report

Material Subsidiary
• Reg. 16(c) MSà Income/Net Worth >10% of consolidated Income/Net Worth
• Reg 24(1) At least 1 ID on BOD of listed entity àDirector of Unlisted material subsy.
(incorp India or not)
[Mat subsyàincome/NW >20% Consol income/NW of listed entity + all subsidiaries]
• AC review F/S in particular investments by unlisted mat. subsy (w/o reference to materiality)
• Minutes of BM of unlisted subsy laid b4 BM of listed entity

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 • Mgt of unlisted subsy bring to notice of BOD of listed entity statement of significant
transactions/arrangement entered.
(Significant means > 10% of total Revenue/expense/assets/liabilities)
• LE not dispose shares of Mat subsy. Resulting in <=50% Shareholding or loss of control w/o
passing SR except under arrangement.
No need of SR:
If transn, Approved by court/tribunal or RP u/s 31 of IBC & disclosed to stock exchange
(RSE) within 1 day of RP approval
• Sell, dispose or lease of assets >20% of total assets of Subsy àSR (Same conditions for no
need of SR)
• Policy for determining material subsy disclose in Annual Report

Secretarial Audit & Secretarial Compliance Report

• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and annex with its annual report, a secretarial audit report, given by a CS in
practice.
• To be submitted within 60 days from end of FY.

Information to Shareholders (Reg 36)

Listed Entity shall send Audit Report not less than 21 days before AGM to Shareholders.

Appointment or Re-appointment of director (Info to be sent to Shareholders)

• A brief resume of the director;
• Nature of his expertise in specific functional areas;
• Disclosure of relationships between directors inter-se;
• Names of listed entities in which the person also holds directorship and membership of
Committees of Board;
• Shareholding of non-exec. Directors in the listed entity including shareholding as beneficial
owner

Transfer or Transmission of Securities [Reg. 40]

The BOD of listed entity shall delegate power of transfer of securities to
• a committee or
• to compliance officer or
• to registrar to an issue and/or
• share transfer agents.
The auditor should also verify from records maintained to ascertain whether delegated authority has
attended to share transfer formalities at least once in a fortnight.

Management Discussion & Analysis [SCHEDULE V]

(a) Industry structure and developments.
(b) Opportunities and Threats.
(c) Segment–wise or product-wise performance.
(d) Outlook
(e) Risks and concerns.
(f) Internal control systems and their adequacy.
(g) Discussion on financial performance with respect to operational performance.
(h) Material developments in Human Resources / Industrial Relations front, including number of
people employed.

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 (i) Details of significant changes (i.e. change of 25% or more as compared to the immediately
previous financial year) in key financial ratios, along with detailed explanations therefor, including:
(i) Debtors Turnover (ii) Inventory Turnover (iii) Interest Coverage Ratio (iv) Current Ratio (v) Debt
Equity Ratio (vi) Operating Profit Margin (%) (vii) Net Profit Margin (%) or sector-specific equivalent
ratios, as applicable.
(j) details of any change in Return on Net Worth as compared to the immediately previous financial
year along with a detailed explanation thereof.

Auditor is just required to check disclosure requirements not reqd to verify facts of non-financial
info in MDA.

Disclosure of material events or information

• Every listed entity shall make disclosures of material events or information.
• BOD à authorise 1 or more KMPs to determine materiality, their contact details will be on
website.
• Such disclosures shall be hosted on website for minimum period of 5 years and thereafter as
per archival policy of listed entity, as disclosed on its website.

RPT Disclosures
• Qtr compliance report on Corporate Governance to RSE 21 days from end of Qtr
• The report shall be signed either by the Compliance Officer or Chief Executive Officer.
• Policy to be disclosed on website & weblink provided in annual report
• Disclose transn with promoter having 10% or more shareholding.
• Submit within 30 days from SFS & CFS half year results, disclosure of RPTs on consolidated
basis to RSE (format as per a/c std) & publish on website

Disclosure: Sexual Harassment of Women at Workplace

a. number of complaints filed during the financial year
b. number of complaints disposed of during the financial year
c. number of complaints pending as on end of the financial year

Disclosure of Accounting Treatment [Schedule V]

If in preparation of f/s à treatment different from a/c std followed,
Fact shall be disclosed + mgt explaination why it believes alternative treatment shall give true & fair
view of transaction.
Statement of Deviation(s) or Variation(s) [Reg. 32]

(1) The listed entity shall submit to stock ex. following statement(s) on a quarterly basis for public
issue, rights issue, preferential issue etc:
a. indicating deviation in use of proceeds
b. Indicating category-wise variation (capital exp, sales and marketing, working capital etc.) b/w
projected utilisation of funds made in its offer document or explanatory statement to the notice
for general meeting, and actual utilisation of funds.
(2) The statement(s) shall be continued to be given till proceeds have been fully utilised or purpose
has been achieved.
(3) Where entity has raised funds through preferential allotment or qualified institutions placement,
listed entity shall disclose every year, utilization of such funds during that year in its Annual Report
until such funds are fully utilized.
The audit committee shall mandatorily review:

CA SHUBHAM KESWANI 152

(a) Quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted
to stock exchange(s) in terms of Regulation 32(1).
(b) Annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/ notice in terms of Regulation 32(7).

Compliance Certificate

The CEO and CFO shall certify to Board that:

(a) They have reviewed f/s and CFS for year and that to best of their knowledge and belief:
i. These statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
ii. These statements together present true and fair view of listed entity’s affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
(b) There are, to best of their knowledge and belief, no transactions entered into by listed entity
during year which are fraudulent, illegal or violative of listed entity’s code of conduct.

(c) They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated effectiveness of internal control systems of listed entity
pertaining to financial reporting and have disclosed to auditors and Audit Committee, deficiencies in
design or operation of internal controls, if any, of which they are aware and steps taken to rectify
deficiencies.

(d) They have indicated to auditors and Audit Committee:

i. Significant changes in internal control over financial reporting during year;
ii. Significant changes in accounting policies during year and same have been disclosed in notes to
F.S; &
iii. Instances of significant fraud of which they have become aware and involvement therein, of
mgt or an employee having significant role in listed entity’s internal control system over
financial reporting.

Auditor should ensure that:

• Mgt has intituted Internal Control framework wrt Financial reporting controls
• Examine whether assessment process followed by mgt has identified significant deficiencies &
whether it has been communicated to Audit committee(AC) & auditors
• Examine process that significant changes to a/c policies & Internal control communicated to
AC & Auditors
• Examine adequacy of process followed to issue Compliance Certificate & for this refer
minutes of AC meeting
• Where negative/adverse comments in Compliance certificate, take cognizance of same in
Audit Report.

“Today is an Opportunity to build the tomorrow you Want”

CA SHUBHAM KESWANI 153

 Consolidated Financial Statements (CFS)

Mandatory under Companies Act,2013

• Sec 129(3) à where Co. has one or more subsys, including JVs & associates, its shall in
addition to own F.S. prepare CFS of Co. & all its subsys
• Sec 129(4) à Provisions relating to preparation, adoption & audit (PAA) of F.S. of Holding Co.
shall apply mutatis mutandis to CFS
• CFS shall be made as per Sched III & A/c stds
• A co. which isn’t reqd to prepare CFS, it shall be sufficient if it complies with provisions of
CFS under Sched III

Requirement to prepare CFS doesn’t apply if following conditions met:

• WOS (Wholly owned subsy) or partially owned subsy & all its other members have been
intimated in writing & for which POD is with us & they don’t object to Co. not presenting CFS
• Co. whose securities aren’t listed or not in process of listing in any stock ex (in or o/s India)
• Ultimate or intermediary holding Co. files CFS with Registrar in compliance with A/c stds

Note: An investment entity need not present CFS if it measures subsys at FVTPL (Fair value through
P&L)

Investment Entity is an entity that:

a) obtains funds from one or more investors for purpose of providing those investor(s) with investment
management services;
(b) commits to its investor(s) that business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and
(c) measures and evaluates performance of substantially all of investments on fair value basis.
Parent of Investment entity shall prepare CFS unless it’s also an Investment entity.

Example: Parent Ltd acquired 51% shares of Child Ltd during the year ended 31-3-2019. During the
financial year 2019-20, 20% shares of Child Ltd were sold by Parent Ltd. Parent Ltd while preparing
the financial statements for the year ended 31-3-2019 and 31-3-2020 did not consider the financial
statements of Child Ltd for consolidation. As a statutory auditor how would you deal with it?

AS 21 “Consolidated Financial Statements”, states that subsidiary should be excluded from

consolidation when control is intended to be temporary because shares are acquired and held
exclusively with view to its subsequent disposal in near future.

Where enterprise owns majority of voting power by virtue of ownership of shares of another
enterprise and all shares are acquired and held exclusively with view to subsequent disposal in near
future, control by first mentioned enterprise would be considered temporary and investments in such
subsidiaries should be accounted in accordance with AS 13 “Accounting for Investments”.

In case of entity which is excluded from consolidation on ground that relationship of parent with other
entity as subsidiary is temporary, auditor should verify that intention of parent, to dispose subsidiary,
in near future, existed at the time of acquisition of subsidiary. The auditor should also verify the
reasons for exclusion are given in CFS.

As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe
long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant F.S.

CA SHUBHAM KESWANI 154

However, as per sec 129(3) of Companies Act, 2013 where a Co. having subsidiary, which is not required
to prepare CFS under applicable AS, it shall be sufficient if company complies with provisions of CFS
provided in Schedule III to the Act.

Conclusion: In given case, Parent Ltd acquired 51% shares of Child Ltd during the year ended
31.03.2019 and sold 20% shares during the year ended 31.03.2020. Parent Ltd did not consolidate F.S.
of Child Ltd for year ended 31.03.2019 and 31.03.2020.

The intention of Parent Ltd is quite clear that control in Child Ltd is temporary as it disposed off
acquired shares in next year of its purchase. Therefore, Parent Ltd is not required to prepare CFS as
per AS 21, however, for compliance of provisions related to consolidation of financial statements given
under section 129(3) of Companies Act, 2013, Parent Ltd is required to make disclosures in F/S as per
provisions contained in Schedule III to Companies Act 2013.

However, if Parent Ltd is required to prepare its F/S under Ind AS, it shall have to prepare CFS in
accordance with Ind AS 110 as exemption for ‘temporary control’, or “for operation under severe long-
term funds transfer restrictions” is not available under Ind AS 110. It states that “Consolidation of
an investee shall begin from the date the investor obtains control of the investee and cease when the
investor loses control of the investee”.

Responsibility of Parent
(a) identifying components, and including financial information of components to be included in the CFS;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) harmonization of accounting policies and accounting framework; &
(g) GAAP conversion, where applicable.

Auditor's objectives in audit of consolidated financial statements are:

(a) to satisfy that CFS have been prepared in accordance with requirements of applicable FRF;
(b) to enable himself to express opinion on true and fair view presented by CFS;
(c) to enquire into matters specified in section 143(1) of Companies Act, 2013; and.
(d) to report on matters given in clauses (a) to (i) of section 143(3) of Companies Act, 2013 for other
matters under section 143(3)(j) read with rule 11 of the Companies (Audit and Auditors) Rules, 2014,
to comment on the matters specified in sub-rule (a),(b) and (c) to extent applicable;
(e) The auditor should also validate requirement of preparation of CFS for company as per applicable
FRF.

Auditor’s considerations about Materiality in Audit of CFS

• The auditor is required to compute materiality for group as a whole. This materiality should
be used to assess appropriateness of consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments) that are made by management in
preparation of CFS.
• The parent auditor can also use materiality computed on group level to determine whether
component's FS are material to group to determine whether they should scope in additional
components, and consider using work of other auditors as applicable.
• The principal auditor also computes materiality for each component and communicates to
component auditor, if he believes is required for true and fair view on CFS.

CA SHUBHAM KESWANI 155

 • The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain info required for consolidation and disclosure
requirements etc.

While considering observations of component auditor in his report on SFS, concept of materiality will
be considered.

Planning Audit of CFS

(a) Understanding of group structure and group-wide controls including assessment of IT system and
related general and applications IT related controls (manual and automated) for consolidation process;
(b) understanding of accounting policies of parent and its components as well as of consolidation
process including process of translation of F.S. of foreign components;
(c) determining and programming NTE of audit procedures to be performed based on assessment of
ROMM in consolidation process;
(d) determining extent of use of other auditor’s work in audit; and
(e) coordinating work to be performed.

How Auditor ensures completeness of Components included in CFS?

(a) review his working papers for prior years for known components;
(b) review parent’s procedures for identification of various components;
(c) make inquiries of management to identify any new components or any component which goes out of
consolidated financial statements;
(d) review investments of parent as well as its components to determine shareholding in other
entities;
(e) review joint ventures and joint arrangements as applicable; (JVs)
(f) review other arrangements entered by parent that have not been included in CFS
(g) Identify changes in shareholding that might have taken place during reporting period.

Permanent Consolidation Adjustments

• These adjustments are made on first occasion, or subsequently when there’s change
shareholding of entity which is consolidated
• These are:
o Determination of Goodwill or capital reserve as per AS
o Determining equity attributable to Minority /Non-Controlling intt
• Auditor should verify above calculations
o Particular attention to determine pre-acquisition reserves of components. Date of
investment is imp. in this regard.
o Also check pre-acquisition reserves properly allocated between parent & minority/NCI
o Also verify changes in permanent consolidation adj on account of subsequent acquisition
or disposal of shares in components

It may happen, in case of one subsy, its goodwill & in case of other Capital Reserve, parent may net
off both & show single amt in B/Sheet as per FRF. Auditor should verify if gross amt of g/w &
capital reserve shown in notes to CFS.

CA SHUBHAM KESWANI 156

 Current Period Consolidation Adjustment
These adjustments made in accounting period for which consolidation of F.S. is to be done.
These primarily relate to intra group transactions & a/c balances including:
i. Intra-group intt paid or recd
ii. Unrealized intra group profit on assets acquired/ trfd from /to other subsys
iii. Record deferred tax on unrealized inter Co. profits elimination
iv. Intra-group indebtness
v. Adj. to harmonizing different accounting policies being followed by Parent & its components
vi. Adjustments to recognize subsequent events or transactions that occur between balance
sheet date & date of auditor’s report
vii. Adj. for effects of significant transactions or events b/w date of component’s b/sheet (not
already recognized) & auditor’s report on Group’s CFS
viii. Foreign component, adjustments to convert from Component’s local GAAP to GAAP under
which CFS are prepared
Note:
In any case, difference between reporting dates of component f/s & date of CFS should not be more
than six months in case of FS under AS and three months in case of financial statements under Ind
AS.

Following information is also required to be disclosed in CFS separately for parent and each of its
components (including foreign component) which has been consolidated:
(i) amount of net assets and net assets as a percentage of consolidated net assets;
(ii) amount of share in profit or loss(P&L) and percentage share in P&L as percentage of consolidated
P&L;
(iii) amount in other comprehensive income (OCI) and percentage of OCI as a percentage of
Consolidated OCI

Examples of info. which is given in SFS of parent or subsy, need not be given in CFS
i. Source from which bonus shares are issued eg. Capitalization of profits or reserves or sec
prem a/c
ii. Disclosure of unutilized monies out of issue indicating form in which they have been invested
iii. Disclosure under MSME Development Act 2006
iv. Value of imports on CIF basis by Co. during FY in respect of:
a) Raw material
b) Components & spare parts
c) Capital Goods
v. Expenditure in forex during FY on account of Royalty, know how etc
vi. Value of imported Raw material, spare parts & components consumed & value of indigenous RM,
SP & C consumed & percentage of each to total consumption.

Management Representations regarding CFS:

(a) Completeness of components included in the CFS;
(b) Identification of reportable segments for segmental reporting;
(c) Identification of related parties and related party transactions for reporting;
(d) Appropriateness and completeness of permanent and current period consolidation
adjustments, including elimination of intra-group transactions.

CA SHUBHAM KESWANI 157

 Reporting
1. When Parent’s Auditor is also Auditor of all its Components

• Auditor should report whether principles and procedures for preparation and presentation of
CFS as laid down AS have been followed.
In case of any departure or deviation, auditor should consider requirements given in SA 705 in
audit report so that users are aware of such deviation.
• Auditor should issue an audit report expressing opinion whether CFS give true and fair view of
state of affairs of Group as on balance sheet date and whether consolidated P&L statement
gives true and fair view of results of consolidated P&L of Group for period under audit.
• Where CFS also include cash flow statement, auditor should also give his opinion on true and
fair view of cash flows presented by consolidated cash flow statements.

2. When the Parent’s Auditor is not the Auditor of all its Components

• Auditor should consider requirement of SA 600.

• As per SA 706, if auditor makes reference to work of other auditor in his audit report on
CFS, disclose clearly magnitude of portion of FS audited by other auditor.
• This may be done by stating aggregate amts, or percentage of total assets, revenues & cash
flows included in CFS not audited by parent’s auditor.
• Total assets, revenues and cash flows not audited by the parent’s auditor should be presented
before giving effect to permanent and current period consolidation adjustments.
• Reference in the report of auditor on CFS to fact that part of the audit of the group was
made by other auditor(s) is not to be construed as a qualification of the opinion but rather as
an indication of divided responsibility between auditors of parent and its subsidiaries.

3. When the Component(s) Auditor Reports on Financial Statements under an Accounting

Framework Different than that of the Parent

• Parent’s mgt performs conversion from component’s audited FS from FRF in which its
prepared to FRF for CFS.
• The conversion adjustments are audited by Principal Auditor.
• The component auditor might prepare FS as per parent’s accounting polices based on Group
Accounting Manual (GAM)
• Parent auditor shall check if GAM comply with GAAP applicable to Parent

4. Components not audited

• Generally, FS of all components included in CFS should be audited or subjected to audit

procedures in context of a multi-location group audit. Such audits and audit procedures can be
performed by the auditor reporting on the consolidated financial statements or by the
components’ auditor.
• Where FS of one or more components remain unaudited, auditor reporting on CFS should
consider unaudited components in evaluating a possible modification to his report on CFS. The
evaluation is necessary because the auditor has not been able to obtain SAAE in relation to
such consolidated amounts/balances.
• In such cases, auditor should evaluate both qualitative and quantitative factors on possible
effect of such amounts remaining unaudited when reporting on CFS using guidance provided in
SA 705, “Modifications to Opinion in Independent Auditor’s Report”.

“Push harder than Yesterday, if you want a Better Tomorrow”

CA SHUBHAM KESWANI 158

 Bank Audit

Special Audit Consideration-Bank Audit

Special audit considerations arise in audit of banks because of:

• Particular nature of risks associated with the transactions undertaken;
• scale of banking operations and resultant significant exposures which can arise within short
period of time;
• extensive dependence on IT to process transactions;
• effect of the statutory and regulatory requirements;
• continuing development of new products and services and banking practices which may not be
matched by the concurrent development of accounting principles and auditing practices.
• Evolution of technology and providing services through Net Banking and Mobiles has exposed
banks to huge operational and financial risk.

Legal Framework

Principal enactments governing functioning of bank are:

• Companies Act,2013
• Banking Regulation Act, 1955
• Prevention of Money Laundering Act, 2002
• RBI Act 1934
• SBI Act 1955
• Information Technology Act, 2000 etc..

Contents of Appointment Letter

Most banks appoint 4 or more CA firms as Statutory Central Auditors. Appointment letter contains
following:
• Period of appointment.
• Particulars of other central auditors.
• Particulars of previous auditors.
• Procedural requirements to be complied with in accepting the assignment
• A statement of division of work and review and reporting responsibilities amongst joint auditors
in case of nationalised banks
• Scope of assignment which included spl certificates or reports to be given by CSAs
• Basis of computation of audit fee and scale of travel and related allowances and conveyance
charges and other expense reimbursement entitlements, if any.

Authority appointing the auditor:

• Banking Co. à Appointed at the AGM of the shareholders
• Nationalised bank à appointed by concerned bank acting through its BOD
• In either case, approval of RBI is required before appointment is made
• SBI à appointed by C&AG in consultation with CG
• Regional rural banks are to be appointed by concerned bank with approval of CG

CA SHUBHAM KESWANI 159

 Conduct of Audit

1. Initial Considerations
• Acceptance & Continuance: Assessing engagement risk prior to acceptance.
• Declaration of Indebtness: Written confirmation that credit facilities obtained by auditors
& their family members have not become NPAs.
• Internal Assignments in Banks by Statutory Auditors: Not take stat audit assignment if
associated with internal audit assignment
• Terms of Audit Engagements: As per SA 210, agree terms of engg before beginning
fieldwork
• Communication with Previous Auditor: As per Clause 8 of Part I of First Schedule of CA Act
1949
• Planning: Documenting NTE of audit procedures & flexible to make changes
• Establish Engagement Team: Qualified & experienced professionals to manage engg risk

2. Understanding
• Understanding the Bank and Its Environment including Internal Control
• Understand Bank’s Accounting Process
• Understanding Risk Management Process
Ø Oversight by TCWG: They should approve risk mgt policies consistent with bank’s
objectives, strategies, regulatory requirement etc
Ø Identification, Measurement and Monitoring of Risks: Risks should be identified,
measured & monitored against pre-approved criteria
Ø Control Activities: Segregation of duties, verification & approval of transactions,
physical security
Ø Monitoring Activities: Conducted by independent risk mgt unit
Ø Reliable information systems: That provide adequate compliance, financial & operational
info

3. Risk Assessment
• Identifying and assessing ROMM: As per SA 315, Identifying & assessing ROMM at F.S.
level & assertion level for Class of transn, a/c balance & disclosures
• Assess the risk of fraud including Money Laundering: As per SA 240, assess risk due to
fraud
• Assess specific risk: ROMM at F level relating to banking industry & use of IT
• Risk of outsourcing activities: Used for reducing costs as well as making use of services of
an expert not available internally but risk associated with it.

4. Execution: Engagement team discussion, Response to assessed risks, Establishing Audit

strategy, Determining audit materiality, Consider Going concern
5. Reporting (discussed later in this chap)

Special considerations in IT Environment

Considering the importance of IT systems in preparation and presentation of financial statements, it

is imperative that bank should share detailed information with auditors like: -
• Overall IT policy, structure and environment of Bank’s IT system
• Data processing and data interface under various systems
• Data integrity and data security
• Business Continuity plans and disaster control plans
• Accounting manual and critical a/c entries, their processes and involvement of IT systems

CA SHUBHAM KESWANI 160

 • Controls over key aspects, use of various a/c heads,expense booking,overdue identification etc.
• Controls on recording of various e-banking and internet banking products and channels
• MIS reports being generated and their periodicity
• Major exception reports and process of generation including embedded logic
Note:
• Overall review of IT environment and computerized a/c system has to be taken at HO level.
• Branch auditors don’t have access to IT policy and processes implemented by bank.

Hence, based upon guidance and info received from SCAs, branch auditors need to ensure that data
review and analysis through CBS is carried out and TOCs and substantive checking of sample
transactions is carried out at branch level and results are shared with SCAs.

Key control aspects that an auditor needs to address while undertaking audit in a Computerised bank.

Ø Ensure authorised , accurate and complete data available for processing

Ø Ensure in case of power failure à system restarts without affecting completion of
entries/records
Ø Ensure system prevents unauthorised amendments to programme
Ø Verify segregation of duties ensured while granting system access to users
Ø Verify balance in general ledger tallies with subsidiary book
Ø Verify backup media stored in fireproof cabinet with lock & key. offsite backup for emergency.
Ø Verify latest anti-virus software installed.
Ø Verify access to computer system only to authorised persons.

Stress Testing: These are designed to understand whether bank has enough capital to survive plausible
adverse economic conditions and to maintain enough buffer to stay afloat under extreme scenarios.

BASEL III framework :Basel III norms relate to Capital Adequacy requirement compliance which the
Bank has to achieve as contained in BASEL III accord.

Basel capital adequacy norms are meant for protection of depositors and shareholders by prescriptive
rules for measuring capital adequacy, thereby evolving methods of determining regulatory capital and
ensuring efficient use of capital.

Aim:
a) improving the banking sector's ability to absorb shocks arising from financial and economic
stress
b) improving risk management and governance practices
c) strengthening banks' transparency and disclosure standards.

Risk-based Internal audit is conducted based upon risk assessment of business and control risks of
branches.

The risk assessment process includes: -

• Identification of inherent business risks in various activities undertaken by branches (Business
risk)
• Assessment of effectiveness of control systems for monitoring inherent risks of business
activities of branch (Control risk)
• Making an assessment of level and direction of various risk areas and assess level and direction of
overall business risk and control risk
• Drawing up of risk matrix taking into account factors viz. Risk of branch

CA SHUBHAM KESWANI 161

 Internal Controls

General:
• The staff of bank shifted from one position to another frequently and without prior notice.
• Work of one person should always be checked by another person (Internal check)
• The arithmetical accuracy of books should be proved independently every day.
• All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in possession of an officer, and another officer should verify
issuance and stock of such stationery.
• Mail should be opened by a responsible officer. Signatures on all letters and advices received
from other branches of bank or its correspondence should be checked by officer with the
signature book.
• Signature and telegraphic code book kept with responsible officers and access should be allowed
only to authorised officers.
• The bank should take out insurance policies against loss due to all the risks such as fire, natural
calamities, theft and employees’ infidelity.
• Surprise inspection of HO & Branches by Internal Audit Dept

Cash:
• Cash should be kept in joint custody of 2 responsible officers.
• Test-checked daily and counted in full occasionally by a responsible officer other than those
handling the cash.
• The cashier should have no access to customer’s ledger accounts and the Day Book.
• Payments should be made only after vouchers (e.g. cheques, demand drafts etc.) have been
passed for payment
• High value cash receipts and payments should be verified by a higher officer/ branch manager

Clearings
• Under Cheque Truncation System (CTS) implemented by RBI, electronic image of cheque is
transmitted to paying branch through clearing house, along with relevant info. like data on
MICR band, date of presentation, presenting bank, etc. This effectively eliminates associated
cost of movement of physical cheques, reduces time reqd for their collection.
• As per RBI guidelines, branch is required to either call customer or email him for any cheque
recd for amt of 5L & above in respect of inward clearings. Auditor may verify compliance on
test check basis.
• Auditor is to check whether sign of drawer of cheque is being verified by staff or not as else
there will be liability of paying bank under all circumstances.
• The unpaid cheques received in outward clearing should be either sent to customers at their
recorded address or customers be informed to collect the same from bank branch.

Bill for collection

• Docs recd & entered in register by responsible officer
• Accounts credited only after bill collected or advice recd from bank branch or agent to which
they were sent for collection
• Ensure à Bill sent by 1 branch to another not taken in bills for collection twice in
amalgamated B.S. of Bank. So, receiving branch needs to reverse the entries at end of year
for closing purpose.

Bills Purchased
• All documents of title should be assigned to bank
• Sufficient margin à cover decline in value of security

CA SHUBHAM KESWANI 162

 • Unable to collect on due date à immediate steps to recover amt.
• Irregular a/c report to H.O.

Loans & Advances

• Creditworthiness of borrower & sanction of authority
• Necessary documents executed before advance made
• Sufficent margin à cover against decline in security value & comply with RBI Directives
• Securities recd and return by responsible officer only + in joint custody
• Securities registered in name of bank only
• A/c kept within drawing power(DP) & sanctioned limit as per norms. Addn temporary limit max
20% of existing limit & 90 days max tenure.
• Irregular a/c report to H.O.

Demand Drafts
• Check signature with signature book
• DD sold/ issued confirmed by advice to paying branch
• Paying branch not receive confirmation or credit in account à steps to ascertain reasons

Credit Card Operations

• There should be effective screening of applications with reasonably good credit assessments.
• There should be strict control over storage and issue of cards.
• There should be a system of prompt reporting by merchants of all settlements accepted by
them through credit cards.
• Reimbursement to merchants should be made only after verification of validity of merchant’s
acceptance of cards.
• All reimbursement (gross of commission) should be immediately charged to customer’s account.
• There should be a system to ensure that statements are sent regularly and promptly to
customer.
• There should be a system to monitor and follow-up customers’ payments.

SLR/CRR Requirements

Cash Reserve Ratio: min. fraction of deposits in cash/ deposits with RBI. Check master circular of
RBI to check compliance.

Statutory Liquidity Ratio: Required to maintain gold/cash/govt approved securities/other liquid

assets. Report submitted to top mgt & RBI.

Correctness of compilation of DTL Maintenance of liquid Assets

• Verify compliance on 12 odd dates, not being Fridays

• Report to management and RBI, covering
Ø Correctness of compilation of DTL position
Ø Maintenance of liquid assets u/s 24 of Banking Regulation Act

• Audit procedure:
Ø Understand circular/direction of RBI
Ø Request branch auditor à weekly trial balance on Friday-consolidation at H.O. Also on
dates selected by auditor. Specific request examine cash balance on selected dates.
Ø Test basis examine consolidation Demand Time Liability position with reference to branch
returns

CA SHUBHAM KESWANI 163

 Ø Exclusions from liabilities:
o Paid up capital, reserve, any cr. balance in P&L a/c of bank, amt of loan taken from RBI
and amt of refinance taken from EXIM bank, NHB, SIDBI and NABARD
o Part amounts of recoveries from borrowers in respect of debts considered bad and
doubtful.
o Amounts recd in Indian currency against import bills and held in sundry deposits
pending receipts of final rates.
o Un-adjusted deposits/balances lying in link branches for agency business like dividend,
interest warrants etc. to the extent of payment by other branches but not adjusted by
link branched
o Margins held & kept in sundry deposits for funded facilities

Ø Inclusions in liabilities:
o Net credit balance in branch adjustment accounts including relating to foreign
branches.
o Borrowings from abroad by banks in India considered as ‘liability to other’ taken at
gross level can’t be netted off (Adverse balance in Nostro Mirror A/C)
o interest accrued but not accounted for in books

Verification of Assets
Balance with RBI
• Verify ledger balance w.r.t confirmation certificates and reconciliations.
• Review recos. with spl. attention to:
Ø Cash transn unresponded
Ø Revenue items requiring adjustment/write off
Ø Other cr. and debit entries originated in Statement provided by RBI remaining responded
for more than 15 days.
• WR from mgt. for reasons of old outstanding bal. in BRS unadjusted for 1 year.

Money at call/short notice

Ø Examine-proper system of authorization + compliance with HO instructions
Ø Verify call loans wrt to certificates of borrowers & call loan receipts held by bank
Ø Examine-balance in registers tally with control a/c as per GL
Ø Examine subsequent repayments-verify balance at year end. Call loans made can’t net off with
loans recd.
Ø Verify-interest accrued & accounted year end

Spl purpose certificates relating to investments

Ø Examine-bank maintain separate accounts for investments
• Own a/c
• PMS clients
• Other constituents (including brokers)
Ø RBI Guidelines-separate audit of investments under PMS-external auditor

Note: There should be half yearly reviews of Investment portfolios (30th Sept & 31st Mar)

Advances: Substantive Audit Procedures

• Verify correctness of master data of loan a/cs updated in CBS. Check parameters like
instalments, EMI, rate of intt, tenure of loans etc.

CA SHUBHAM KESWANI 164

 • Verify that each customer of bank is tagged under single customer id in respect of all it’s a/cs
including those in which cr. facilities are granted.
• Examine a/cs identified to be problem a/cs but which have not yet slipped into NPA category.
This can be done by obtaining list of SMA1 and SMA2 borrowers from bank and same can be
considered for selection of problematic accounts.
• Examine those a/cs à adversely commented upon by concurrent auditors/bank’s internal
inspection/RBI inspection team.
• Examine list of restructured a/cs to ensure that restructure is as per RBI guidelines.
Remember restructured a/c portfolio requires additional provisioning.
• Examine quick/early mortality accounts. Any advance slippage to NPA within 12 months of its
sanction is called as quick/early mortality case.
• Examine all large advances & others on sample basis
• Completeness & accuracy of interest charged
• Carry out appropriate analytical procedures

• Recoverability of advances
Ø Review periodic statements submitted by borrower
Ø Latest financial statements of borrower
Ø Reports on inspection of security
Ø Review audit report à borrower enjoying cr limit >=10 Lakh for working capital

Provisioning of NPA
Classification & Provision
• Verify whether bank has a system of ongoing identification and classification of advances
through CBS without manual intervention and its accuracy in crystallising date of NPA.
• Examine classification appropriate à particularly those advances with threat to recovery
• Examine-secured & unsecured portion segregated correctly and calculation of provision
• Review and compare date of NPA of loan a/cs mentioned in current year statements with that
of PY. Reasons for any change should be ascertained.
• A/c regularised before b/s date à payment from genuine sources à need not be classified as
NPA
• If subsequently, branch lends funds to borrower à auditor assess genuineness of source of
payment
• Inherent weakness in a/c à deemed NPA
• Classification as per position as on date and review of all std accounts on balance sheet date
• Recognition on basis of Past Due/Overdue Concept & not based on balance sheet date.

Drawing power calculation (DP)

• Ensure calculation as per extant guidelines i.e. credit policy of bank formulated by Board &
agreed by stat auditors reflected in respective sanction letters
• Spl consideration should be given to proper reporting of sundry creditors and stocks covered
under LCs/guarantees for purposes of calculating drawing power.
• Stock audit for a/c funded exposure > stipulated limits. Review report of stock auditor with
spl. focus to comments
• Calculated carefully à working capital advances to Cos. in construction business. Valuation of
WIP proper & consistent manner. Mobilisation advance reduced to calculate DP.

CA SHUBHAM KESWANI 165

Accounts with temporary deficiencies
• Banks shouldn’t classify an advance a/c as NPA merely due to existence of some deficiencies which
are temporary in nature such as non-availability of drawing power (DP) based on latest available
stock statement, balance o/s exceeding the limit temporarily and non-renewal of limits on due date.
• However, stock statements relied upon by banks for determining DP should not be older than 3
months.
• The o/s in the account based on DP calculated from stock statements older than 3 months are
considered as irregular. Ensure adherence to these guidelines.

Limits not reviewed

Where ad hoc/ regular limit not reviewed within 180 days from due date, consider as NPA. Also
ensure review not done on repetitive basis.

Asset classification à Borrower wise & not facility wise

It is to be ensured that all facilities granted by a bank to borrower will have to be treated as NPA
and not particular facility which has become irregular. Further, if debits arising out of devolvement
of LC or invoked guarantees are kept in separate a/c, outstanding balance should be treated as part
of borrower’s principal a/c for purpose of application of prudential norms on asset classification,
income recognition and provisioning.

Govt Guaranteed Advances

• If it becomes NPA, income recognition on realisation basis
• Asset classification
• CG guarantee: treat NPA if CG repudiates guarantee when invoked
• SG: no such exception, i.e. NPA if overdue > 90 days
• If CG guarantee not invoked for long à report in LFAR

Agricultural Advance
• Ensure NPA norms applied in accordance with crop season determined by State Level Bankers’
Committee in each State. Depending upon the duration of crops – short term/ long term - raised by
an agriculturist, NPA norms would also be made applicable to agricultural term loans availed of by
them.
Also ensure that these norms are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
• In respect of agricultural loans, other than those specified in circular, ensure that identification of
NPAs has been done on the same basis as non-agricultural advances.

Restructured Advance
Restructuring is an act in which a lender, for economic or legal reasons relating to borrower’s financial
difficulty, grants concessions to borrower.
It may involve modification of terms of advances including alteration of amount of
instalments/alteration of repayment period/rate of interest/sanction of additional credit facilities
etc. to help in curing of default.

• The auditor should verify compliance with requirements of circular issued in this regard.
• Banks may restructure a/cs classified under std, substandard or doubtful categories. Banks
can’t restructure a/cs with retrospective effect.
• Once bank receives an application/proposal in respect of an a/c for restructuring, it implies
that account is intrinsically weak. Accordingly, during the time account remains pending for

CA SHUBHAM KESWANI 166

 restructuring, auditors need to take a view whether provision needs to be made in respect of
such a/cs, pending approval for restructuring.
• On restructuring, account will be downgraded from Standard to substandard. NPAs will remain
in same category.

Upgradation of Account
• Examine all accounts upgraded from NPA to std. category during the year, to ensure that
upgrading of each account is strictly in terms of RBI guidelines.
• There can be a possibility of incorrect upgradation of a/c on basis of partial recoveries made in
the a/c and overdue portion might not have wiped out completely. There can also be a possibility
of recoveries being made in account after cut-off date and a/c being upgraded as on date of
balance sheet.

Sale/ Purchase of NPAs

General points to examine:

• Policy of BOD relating to procedures, delegation of power and valuation
• Only such NPA can be sold àremained in books atleast 2 years
• Sale/purchase without recourse only
• Subsequent to sale bank doesn’t assume ‘any risk’
• NPA sold at cash basis only
• Bank don’t purchase NPA already sold

Spl. Points for Sale of NPA

• Removed from books after sale
• Shortfall on sale charge to p&l i.e. Sale below Net Book Value
• Sale > Net book value, excess retained to meet loss on sale of other NPA (don’t recognize
profits)

Spl points for purchase of NPA

• Provision as per classification status in books of purchaser
• Any recovery first adjust against acquisition cost, & excess as profit
• Capital adequacy – 100% risk weight to NPAs purchased from other banks

Stationery & Stamps

• Ensure that item “Stationery and Stamps” includes only exceptional items of expenditure on
stationery like bulk purchase of security paper which is to be written off over period of time.
Such items should be valued at cost. Normal expenditure on stationery is charged to p&l a/c.
Therefore, this item may not appear at branch level as considerable part of stationery is
supplied to branches by head office.
• Check Internal Controls
• Physical verification at year end
• Check cost charged to p&l

Non-Banking assets acquired in satisfaction of claims

• Ensure that the heading includes those immovable properties/tangible assets which bank has
acquired in satisfaction of debts due or its other claims and these are being held with
intention of being disposed off.
• Verify with ref. to documentary evidence, eg. order of court, or award of arbitration

CA SHUBHAM KESWANI 167

 • Check ownership legally vested with bank. If dispute, check if recording as asset appropriate?
If dispute arise later on, check if provision reqd as per AS 29.
• Ensure compliance with Sec 9 of Banking Regulation Act
[Prohibits banking Co. from holding any immovable property, howsoever acquired, for period
exceeding 7 years from date of acquisition, except required for own use]
• Ensure that as at date of acquisition, assets should be recorded at lower of net book value of
advance or NRV of asset acquired.

Verification of capital & liabilities:

• Capital Risk Adequacy Ratio = (Eligible total capital funds/Risk weighted assets & off balance
sheet items ) * 100
• RBI requires banks to maintain minimum 9% CRAR.

Verification of Liabilities
Deposits
• Verify balance on sample basis
• Examine bal. of subsy ledger tallies with general ledger
• Check calculation of interest on test check basis.
• Examine if periodic confirmations obtained, check on sample basis
• Conversion of foreign currency deposits at rates notified by H.O.
• Resultant increase/decrease taken to P&L
• Intt on deposits on basis of 360 days in year
• Intt accrued but no due shown under ‘other liab & provisions’

Borrowings
• Obtain & verify confirmation certificates & other docs
• SA 505, “External Confirmation” –audit evidence to respond to significant risks
• Examine- clear distinction b/w rediscount and refinance, as rediscount doesn’t appear in this
head
• Examine borrowing at call & short notice-authorised

Bills payable
• Evaluate the existence, effectiveness and continuity of internal controls over bills payable.
Controls should usually include the following-
Ø Drafts, mail transfers,etc. made out in std printed forms.
Ø Unused forms relating to drafts, traveller’s cheques, etc. kept under custody of
responsible officer.
Ø The bank have a reliable private code known only to responsible officers of branches,
coding and decoding of telegrams should be done only by such officers.
Ø The signatures on demand draft, checked by officer with specimen signature book.
Ø All TTs and DDs issued by a branch should be immediately confirmed by advices to the
branches concerned. On payment, paying branch should send a debit advice to originating
branch
• Examine sample of outstanding items comprised in bills payable accounts with relevant
registers.
Reasons for old outstanding debits in respect of drafts or other similar instruments paid
without advice should be ascertained.
• Correspondence with other branches after year-end should be examined specially for large
value items outstanding on balance sheet date .

CA SHUBHAM KESWANI 168

 Contingent Liabilities
Management Representation:
The auditor should obtain representation from mgt that:-
(i) all off-balance sheet transactions have been accounted in books of a/cs as and when such
transaction has taken place;
(ii) all off balance sheet transactions have been entered into after following due procedure laid
down;
(iii) all off balance sheet transactions are supported by the underlying documents;
(iv) all year end contingent liabilities have been disclosed;
(v) disclosed contingent liabilities don’t include any crystallised liabilities which are of nature of loss/
expense and which require creation of a provision/adjustment in F.S;
(vi) estimated amounts of financial effect of contingent liabilities are based on best estimates in
terms of AS 29, including consideration of possibility of any reimbursement;

Contingent Liabilities (Presentation)

- Claims against the bank not acknowledged as debts
- Liability for partly paid investments
- Liability on account of outstanding forward exchange contracts.
- Guarantees given on behalf of constituents (within India; outside India)
- Acceptances, endorsements and other obligations
- Other items for which the bank is contingently liable

Audit procedures:
Contingent Liability (CL)
• Adequte Internal Controls ensure transn executed by persons authorised
• Verify in case of Letter of Credits for import of goods, payments made in terms of LC
• Test completeness of recorded obligations
• Review reasonableness of year end contingent liab in light of prev experience
• Review whether comfort letters issued included in CL

Claims against bank not acknowledged as debt

• Examine relevant evidence, e.g. correspondence with lawyers, workers, officers etc.
• Review minutes of meetings of BOD/committees of BOD, contracts, agreements &
arrangements, etc
• Ascertain from mgt: status of claims o/s at year end
• Review of subsequent events: completeness & valuation

Guarantees
• Check Internal Controls over issue of guarantees
• Controls over unused guarantee forms e.g. under custody of responsible officers
• Examine guarantee register- procedure of marking off expired guarantees
• Check guarantee register- ensure all included in disclosures
• If claim risen, provision as per AS 29

Auditor’s Reports

In case of nationalized bank, report is issued to Central Govt. stating following:

• Whether, in auditor’s opinion, balance sheet is full and fair balance sheet containing all
necessary particulars and is properly drawn up to exhibit true and fair view of affairs of bank.

CA SHUBHAM KESWANI 169

 • In case auditor had called for any explanation or information, whether it has been given and
whether it is satisfactory.
• Whether or not transactions of bank, which have come to auditor’s notice, have been within
powers of bank.
• Whether or not returns received from offices and branches of bank have been found
adequate for purpose of audit.
• Whether profit and loss account shows true balance of profit or loss for period covered by
such account.
• Any other matter which auditor considers should be brought to notice of Central Government.

Long Form Audit Report (LFAR)

LFAR is to be given by statutory branch auditors as well as SCAs. LFAR for branch auditors is in form
of questionnaire where observations/comments have to be provided on range of matters including cash,
balance with banks, investments, advances, deposits etc. These are submitted by statutory branch
auditors to statutory central auditors.

The consolidation is done at head office level and LFAR for bank is submitted by SCAs to mgt. LFAR,
on the bank, after due examination, should be placed before ACB of bank indicating action
taken/proposed to be taken for rectification of irregularities, if any, mentioned therein; and a copy of
LFAR and relative agenda note, together with Board's views or directions, is submitted to RBI within
60 days of submission of LFAR by statutory auditors.

Notes:
• In case of fraud report to:
Ø RBI
Ø Chairman/MD/CEO of bank
Ø CG u/s 143(12)

SCAs have to furnish following reports in addition to main report:

• Report on ICFR as per Sec 143(3)(i) of Cos Act 2013
• Long Form Audit Report (LFAR)
• Report on compliance with SLR Requirements
• Report on income recognition, asset classification & provisioning as per RBI Guidelines
• Report on fraud u/s 143(12) of Companies Act,2013
• Asset Liability Management

Concurrent Audit
Scope of Concurrent Audit in Banks
Ø Cash
Ø Deposits Advances
Ø Investments
Ø Foreign Exchange House
Ø Keeping
Ø Other Items

Coverage of Business/Branches for concurrent Audit

Banks are required to cover 50 % of total deposits and 50 % of total advances under concurrent
audit.
Ø Large and very large branches
Ø Special branches handling Foreign Exchange, Merchant Banking, large Corporate Wholesale
Banking and Forex dealing room operations

CA SHUBHAM KESWANI 170

 Ø Large problem branches rated as poor/very poor
Ø Head Office department dealing with Treasury/Funds management and handling Investment
portfolio.
Ø Any other branches or departments where in the opinion of the Bank concurrent audit is
desirable.

Areas of focus in Concurrent Audit:

Cash
• Daily cash transactions with particular reference to any abnormal/high value receipts and
payments.
• Proper accounting of inward and outward cash remittances.
• Proper accounting of currency chest transactions, its prompt reporting to the RBI.
• Expenses incurred by cash payment involving sizeable amount.

Investments
• Purchase/sale of securities should as per:
Ø HO instructions
Ø Rates beneficial to bank
• Securities in books à should be physically held by it
• Compliance with RBI/HO guidelines

Advances
• Ensure proper sanction of advances
• Securities properly recd and regd in name of bank.
• Proper post disbursement supervision & follow-up
• LC issued within delegated power
• BG issued, properly worded & recorded in register
• Classification as per RBI guidelines
• Claims to ECGC & DICGC submitted in time

Foreign Exchange
• Check foreign bills negotiated under letters of credit.
• Check FCNR and other non-resident accounts whether debits and credits are permissible
under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign
currency. Ensure that they are duly authorised and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within prescribed
limit.
• Ensure adherence to guidelines issued by RBI/HO of bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.

Appointment of concurrent auditor

• Option: own staff or external auditor
• If own official: experienced, trained & senior + independent of branch where audit is
conducted
• AC Board of bank shall decide max. tenure of external concurrent auditor. It’ll not be more
than 5 years. No auditor will continue with a branch/Business unit for more than 3 years.
• If omission/commission by auditor report to RBI & ICAI & appointment maybe cancelled

CA SHUBHAM KESWANI 171

Reporting Systems in case of concurrent audit
• There should be proper reporting of findings of concurrent auditors. For this purpose, each bank
should prepare a structured format.
• There should be zone-wise reporting of findings of concurrent audit to ACB and annual
appraisal/report of audit system should be placed before ACB.
• Before submission of report auditor should discuss important issues with branch manager and
concerned officers. This will enable auditor to consider opposite view point and clarify any
doubts.
• Minor irregularities pointed out by concurrent auditors are to be rectified in timely manner.
Serious irregularities should be reported to controlling offices/ Head Offices for immediate
action.
• Whenever fraudulent transactions are detected, they should immediately be reported to
Inspection & Audit Department (Head Office) as also Chief Vigilance Officer as well as Branch
Managers concerned (unless branch manager is involved).
• Follow-up action on concurrent audit reports should be given high priority by controlling
office/Inspection and Audit Department and rectification of features done without any loss of
time.

Audit Committee of Bank

The membership of audit committee is restricted to

• Executive Director,
• nominees of the Central Government and the RBI,
• Chartered Accountant director and
• one of the non-official directors

“Once you become Fearless, life becomes Limitless”

CA SHUBHAM KESWANI 172

 NBFC Audit

Definition
• A Financial Institution which is a Company
• A non-banking institution (NBI) which is a Co. & principal business receiving deposits & lending
• Such other institution as RBI may with approval of CG & notif. in official gazette specify
Co.= NBFC, if,
Financial Assets (FA) > 50% of total assets & Income from FA > 50% of gross income. If both
criteria fulfilled, qualify as NBFC & regd. with RBI.
Sec 45 IA of RBI Act 1997, No NBFC can do business of NBI w/o
• Certificate of Reg (CoR) issued by RBI
• Min Net owned Funds (NOW) of 2 Cr.

Categories
• Deposit taking & Non-Deposit taking (NBFC-ND)
• Non Deposit taking further classified into Systemically important & Non systemically
important (NBFC-NDSI & NBFC-ND)

Cos exempt from RBI registration (Doing financial business but regulated by other regulators)
• Housing Fin Institution (regulated by NHB)
• Merchant banking cos. (SEBI)
• Stock ex. (sebi)
• Stock broking/sub-broking(sebi)
• Venture cap fund (SEBI)
• Nidhi (MCA, GOI)
• Insurance (IRDA)
• Chit (Chit fund Act)
• Alt Inv Fund Cos.
• Mutual Benefit Cos.
• Mortgage Guarantee Cos.
• Core investment Cos with asset size <=100 Cr not accessing public funds

Diff b/w Bank & NBFC

a. NBFC can’t accept DD, but some NBFC can accept Term Deposits
b. NBFCs don’t form part of payment & settlement system & can’t issue cheques drawn on itself
c. Deposit insurance facility of DICGC not available to depositors of NBFC unlike banks
d. No min. exposure to priority sector in case of NBFC

Prudential Norms
Capital Adequacy Ratio
• Min capital ratio consisting of tier I & II capital not less than 15% of agg. Risk weighted
assets
• Tier I not less than 10% at any point of time. In case of lending against Gold jewellery, min
tier I cap 12%

Risk Weights
Nos Head Weight
1 Cash Bank 0
2 Approved securities 0
3 Loan & advances fully secured + loans to employees 0

CA SHUBHAM KESWANI 173

 4 TDS Deducted 0
5 Advance tax 0
6 Intt on Govt security 0
7 Fund based claims on CG 0
8 CG Guarantee claims 0
9 SG securities 0
10 SG guarantee claims, not in default > 90 days 20
11 Bonds of PS Banks 20
12 Post commercial operations date (PCOD) projects exist over 1 yr operation 50
13 Others 100

Provisioning (%)
Loss Assets: 100%
Doubtful Assets: Unsecured 100%
Period for which Secured Asset has been % of Provision
considered as doubtful
Up to 1 year 20
1-3 years 30
More than 3 years 50
Sub std asset: 10%
Std asset: 0.40% for systemically imp. & 0.25% for non-systemically imp.

*3/12 months in case of NBFC-Systemically Imp. (Deposit taking or Non deposit taking)

Spl point for NPA: The lease rental and hire purchase instalment, which has become overdue for
period of 12 months or more; (NBFC SI its 3 months only)

Audit Procedures
1. Ascertaining business of Co
• Check MOA & AOA (Memorandum & Articles)
• Check business policy à ascertain main business of co.
• Minutes of Board Meeting & discuss with top level mgt

2. Evaluation of Internal Control System

• Understand a/c system & related internal controls
• Review effectiveness of system of recovery
• Periodical review of advances facilitate monitoring & follow up

3. Registration with RBI

• Sec 45 IA, min Net owned fund of 2 cr
• Obtain copy of Certificate of Reg, or copy of application
• If NBFC holds Public Deposits à invest % in liquid assets as per RBI
• Qtr return filed with RBI maintenance of liquid assets

CA SHUBHAM KESWANI 174

 4. NBFC Acceptance of Public Deposit Directions (NBFC Acceptance of Public Deposits (Reserve
Bank) Directions, 2016)

i) Check NBFC appropriately classified

ii) Ceiling on quantum of deposits as per credit rating by approved credit rating agency
• Obtain copy of cr. Rating & check PD as per the rating assigned
• In event of up/downgrading à increase/decrease deposits à inform RBI
• If downgraded below min investment grade, regularise excess deposits as under:
Ø Not accept fresh deposits & not renew existing ones
Ø Existing deposits run off till maturity
Ø Report 15 days à Reg. office RBI where its regd
Ø no matured public deposit shall be renewed without express and voluntary
consent of depositor
iii) test check intt calculations, to check no excess intt paid
iv) Acceptance/renewal only after written application from depositor on form supplied by
NBFC
v) Verify deposit register & test check particulars with supporting receipts
vi) Check investments in liquid assets in safe custody with scheduled comm. Bank
vii) Check filed returns in timely manner
viii) NBFC not accepting/holding PD à BR passed

5. NBFC Prudential Norms

i) Check compliance with prudential norms (income recog, a/c stds, asset classification, PDD,
capital adequacy norms, prohibition of grant in loans against own shares)
ii) Ensure BOD granting/ intending to grant demand/call loans shall frame & implement policy
for Co.
iii) Assess compliance with prudential norms à advance properly classified as std, sub std,
doubtful & loss assets & proper provisions made
iv) In case of NPA à unrealised income not taken to p&l on accrual basis
v) A/cs classified as NPA in prev year continue shown as such in CY also. If made regular,
check with directions.

Classification of Frauds by NBFC

(a) Misappropriation & criminal breach of trust
(b) Fraudulent encashment through forged instruments, manipulation of Books of a/c or fictitious
a/cs
(c) Unauthorised cr. Facilities extended for reward or illegal gratification
(d) Negligence & cash shortages
(e) Cheating & forgery
(f) Irregularities in forex transn.
(g) Any other type of fraud
Case of (d) & ( f) to be reported as fraud if intention proved/suspected
In following cases it’ll be fraud:
Ø Cash shortage > 10,000 &
Ø Cash shortage > 5,000 if detected by mgt/auditor/inspector & not reported by cashier.

Audit Check list -- NBFC - Investment and Credit Company (NBFC-ICC)

(i) Physically verify all shares & securities held by NBFC.
(ii) Verify no loan advanced against security of its own shares.
(iii) Verify dividend income wherever declared recd by NBFC & intt wherever due (except NPA)
accounted for.

CA SHUBHAM KESWANI 175

 (iv) Dividend income on shares & units of MF recog. on cash basis.
(v) Test check bills/contract notes recd from brokers with reference to prices vis-à-vis stock mkt
quotations on respective dates.
(vi) Verify Board minutes for purchase & sale of investments. Ascertain from BR à long term/short
term.
(vii) In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
(viii) Check whether requirements of AS 13 “Accounting for Investments” have been complied with.
(ix) Check the classification of loans and advances (including bills purchased and discounted) made
by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and
the adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms.

Auditor’s duty to Report

(A) In case of all NBFCs
I. Examine whether Co. obtained CoR (Certificate of Registration)
II. In case Co. holding CoR whether its entitled as per principal business criteria as on 31st March
of year
III. Whether its meeting NOF criteria laid down in master direction
A certificate from Auditor required within 1 month of finalization of B/sheet not later than Dec 30th
of year.

(B) NBFC holding/accepting public deposits

i) Whether PD held by it with other borrowings within limits of provisions of NBFC Acceptance of
Public Deposits (RB) Directions, 2016
ii) Where PD excess of quantum à regularised in manner provided in Directions
iii) Whether its accepting PD w/o min investment grade rating from approved institution as per
Directions
iv) Whether Cap Adequacy Ratio(CAR) correctly determined & compliance with min CRAR
prescribed therein
v) Whether Co has made default in paying intt/principal after they became due
vi) Whether Co. has furnished to RBI within stipulated period return on deposits as specified in
NBS 1 to – NBFC Returns (Reserve Bank) Directions, 2016;

(C) NBFC not accepting deposits

i) BOD passed BR non-accept of deposits
ii) Whether Co accepted any deposits during year
iii) Whether Co. complied with prudential norms (I/R, a/c std, Asset classification, PDD)
iv) In respect of NBFC- NDSI
(a) Whether capital adequacy ratio disclosed in NBS-7 correctly arrived & compliant with min
CRAR
(b) Whether Co has furnished to RBI, annual statement of capital funds, risk asset ratio in
NBS 7
v) Whether NBFC correctly classified as NBFC Micro Finance Institution (MFI) as per the
Directions
Reasons for Unfavourable/ Qualified statements
Where, in auditor’s report, statement regarding any of items referred to in paragraph 3 is
unfavourable or qualified, auditor’s report shall also state reasons for such unfavourable or qualified
statement, as case may be. Where auditor is unable to express opinion on any of items referred to in
para 3, report shall indicate such fact together with reasons therefor.

CA SHUBHAM KESWANI 176

 Obligation of auditor to submit an exception report to the RBI
(I) Where, in case of a NBFC, statement regarding any of items referred to in para 3 above, is
unfavourable or qualified, or in opinion of auditor company has not complied with:

a) provisions of Chapter III B of RBI Act (Act 2 of 1934); or

b) NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
c) NBFC– Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016
and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and
Deposit taking Company (Reserve Bank) Directions, 2016.

It shall be obligation of auditor to make report containing details of unfavourable or qualified

statements and/or about non-compliance in respect of company to concerned Regional Office of
Department of Non-Banking Supervision of RBI under whose jurisdiction regd office of company is
located as per first Schedule to NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016.

(II) The duty of Auditor under sub-para (I) shall be to report only contraventions of provisions of RBI
Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report
shall not contain any statement with respect to compliance of any of provisions.

Difference b/w Division II (Ind AS- Other than NBFC) & Division III (Ind AS NBFC) of Schedule III
a) NBFC allowed present items of b/sheet in order of liquidity
b) NBFC à disclose by way of note item of ‘other income/expense’ > 1% of total income. Div II
requires disclosure of item > 1% of Revenue or 10 L (whichever is higher)
c) NBFC separately disclose under receivables debt due from LLP à Director partner/member
d) Disclose items comprising Revenue from operations & other income on face of SPL instead of only
notes
e) Separate disclosure of T/R significant increase in cr risk or cr impaired
f) Condn or restrictions for distribution attached to stat reserves separately disclosed.

Ind AS Applicability: Accounting period beginning

1.4.18: NW 500 Cr or more
1.4.19: NW 250 Cr or more

CA SHUBHAM KESWANI 177

 CARO 2020 Reporting
As per CARO 2020, auditor is required to report that –

I. Whether during year company has made investments in, provided any guarantee or security or
granted any loans or advances in nature of loans, secured or unsecured, to companies, firms, LLPs or
other parties,
If so,
(b) whether investments made, guarantees provided, security given and terms and conditions of grant
of all loans and advances in nature of loans and guarantees provided are not prejudicial to company’s
interest;
(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;
(f) whether company has granted any loans or advances in nature of loans either repayable on demand
or without specifying any terms or period of repayment, if so, specify aggregate amount, percentage
thereof to total loans granted, aggregate amount of loans granted to Promoters, related parties;
[Paragraph 3(iii)]

(II) (a) Whether company is required to be registered under section 45-IA of RBI Act, 1934 and if
so, whether registration has been obtained.
(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from RBI as per the RBI Act, 1934;
(c) Whether company is a Core Investment Company (CIC) as defined in regulations made by RBI, if
so, whether it continues to fulfil criteria of a CIC, and in case company is an exempted or unregistered
CIC, whether it continues to fulfil such criteria;
(d) Whether Group has more than one CIC as part of Group, if yes, indicate number of CICs which are
part of the Group; [Paragraph 3(xvi)]

“Be a Warrior, not a Worrier”

CA SHUBHAM KESWANI 178

 Insurance Audit
Solvency Margin (Sec 64 VA of Insurance Act,1938)
It requires every insurer and re-insurer to maintain excess of assets over liabilities at all times which
shall not be less than 50% of amount of minimum capital as stated under sec 6 of Insurance Act i.e.
150%.

Note: The minimum paid-up ESC of Indian Insurance co. should be 100 crores excluding preliminary
expenses incurred in formation and registration of company.

If, at any time, insurer or re-insurer doesn’t maintain required control level of solvency margin,its
required to submit financial plan to Authority indicating plan of action to correct deficiency. If, on
consideration of plan, Authority finds it inadequate, insurer has to modify financial plan.

Sec 64VA states that if insurer or re-insurer fails to comply with prescribed requirement of
maintaining excess of value of assets over amount of liabilities, it shall deemed to be insolvent and may
be wound up by Court on application made by authority.

The Insurance Act requires every insurer to furnish a statement of assets and liabilities as assessed
in manner laid down by sec 64V.

Every Insurer is required to prepare statement of value of assets in “Form IRDA-Assets-AA.” A

statement of amount of liabilities in case of general insurance business is to be prepared in “Form HG”
and statement of Solvency Margin in “Form KG”.

No risk to be assumed unless premium received

As per sec 64VB, no risk to be assumed unless premium is received in advance-

(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is
not ordinarily payable outside India unless and until premium payable is received by him or guaranteed
to be paid by person in such manner and such time as may be prescribed or unless and until deposit of
prescribed amt.

(2) For purposes of this sec, in case of risks for which premium can be ascertained in advance, risk
may be assumed not earlier than date on which the premium has been paid in cash or by cheque to
insurer.

Appointment of Auditors
The appointment of stat auditors in GIC, and its subsys and divisions as well as other public sector
Insurance Companies is made by C&AG, as in case of other PSUs (For eg, New India Assurance Company
Ltd., United India Insurance Company Ltd.).

However, in case of others, auditor is appointed at AGM after ensuring that auditor satisfies
compliance requirements with relevant sections of IRDAI Guidelines on Corporate Governance. These
guidelines pose certain restrictions on number of insurance companies a statutory auditor can audit.
Currently, an auditor can conduct audit only for 3 insurance companies and not more than 2 life or 2
general. The Guidelines also mandate a mandatory joint audit for all insurance companies.

Contents of Mgt Report

1. Confirmation regarding continued validity of registration granted by Authority;
2. Certification that all statutory dues have been duly paid;
3. Confirmation to effect that shareholding pattern and any transfer of shares during year are in
accordance with statutory or regulatory requirements;
4. Declaration that mgt hasn’t invested o/s India funds of the holders of policies issued in India.
5. Confirmation that the required solvency margins have been maintained.

CA SHUBHAM KESWANI 179

 Life Insurance Cos

Role of Auditor in Actuarial Process

The job of actuary involves detailed analysis of data to quantify risk. It is calculating and modelling
hub of Co. Within the department, fundamentals of Insurance business are determined from pricing
to policy valuations techniques.

Role of Auditor: Auditors required to certify, whether actuarial valuation of liabilities is duly certified
by appointed actuary, assumptions for valuation are in accordance with guidelines and norms, if any,
issued by authority and/or Actuarial Society of India in concurrence with IRDA.

Hence, Auditors generally rely on Certificate issued by Appointed Actuary, certifying Policy liabilities.
However, Auditor may discuss with Actuaries with respect to process followed and assumptions made
by him before certifying Policy liabilities.

Actuarial department broadly concentrates following key areas of Insurance business:

• Product Development/ Pricing and Experience analysis.
• Model Development.
• Statutory Valuations and reserving.
• Business Planning.
• Solvency management.
• Management reporting on various business valuations and profitability models of Life
Insurance business.
Free Look Cancellation
FLC is option provided to policyholder wherein he has period of 15 days from date of receipt of policy
document to review Terms & Conditions of policy and in case of disagreement, he/ she has option to
return policy stating reason for policy’s cancellation.

The primary objective of audit is to check and confirm that FLC requests are received within 15 days
from receipt of policy document by policy holder, verification of signatures of policy holder and
processing of FLC request within TAT( turnaround time) defined by insurer. Also checking of
appropriate a/c entries are recorded for refund.

FLC refund is calculated as follows:

FLC premium paid XXX
(Less) - proportionate risk premium (XXX)
(Less)- medical charges if any, by the insurer (XXX)

Policy Lapse & Revival

“Lapse” is discontinuance of policy owing to non-payment of premium dues.

In order to keep life insurance policy “in force” policy holder is reqd to pay premiums when due. If
payment is missed, insurer allows period of 15/30 days from premium due date for making the payment.
This period is termed as “grace period”. If the policy holder doesn’t make payment within grace period,
policy gets “lapsed”. Thus, payment within grace period is deemed to be payment on due date.

Lapsation affects all the stakeholders-policyholder, agent & insurer. Lapsed policy ceases to provide
insurance protection to insured. It forfeits benefits under the policy and cost of new policy is higher.
Agents do not get renewal premium commission if policy is lapsed.

The T&Cs of policy stipulate, where premium is not paid within grace period, policy lapses but may be
revived during life time of the life assured. Some insurers do not allow revival, if policy has remained

CA SHUBHAM KESWANI 180

in lapsed condition for more than 5 years. This is because of possibility that arrears of premiums on
such a policy would be too heavy and that it would be better to take out a fresh policy.

Role of Auditor: Check and confirm that due dates are recorded and monitored properly and polices
marked as “lapsed” on non-receipt of renewal premium within due dates/grace period. In case of revival
request, whether adequate checks in place for receipt of o/s amounts and documents are obtained
before reviving policy.

Policy Surrender
A policy becomes eligible for surrender on completion of 3 years from commencement of policy
provided that 3 years premium have been paid within due dates. The policy surrendered only when
insured person is alive.
Review of Investments
• Review Investment mgt structure to ensure adequate SODs b/w Investment front, mid and
back office
• Review SOPs prescribed by IRDA Reg
• Review insurer’s investment policy
• Review functioning, scope & minutes of Investment committee
• Compliance of all Investment regulations, various other circulars specified by IRDAI and
other regulations specified in Insurance Act, 1938;
• Review insurer’s Investment accounting & valuation policy
• Controls around personal dealings, insider trading & front running

Procedure to determine value of listed & unlisted Equity Securities & Derivative Instruments of
Insurance Co.
• Eq sec & Der instruments traded in active mkt à Fair Value on b/s date
• FV = lowest of last quoted closing prices at stock ex listed
• Unrealised gain/losses from change in FV of listed sec à Equity under ‘Fair Value Change A/C’
• On sale, p&l on sale including balance of above a/c which shall be recycled to Revenue a/c or P&L
on actual sale of security
• As per Auth. Directions, amt of Fair Value Change Account can be used for declaring bonus to
policyholders. Except for amount that is released to policyholders as per Authority’s
prescription, no other amount shall be distributed to shareholders out of Fair Value Change
Account.
• Also, any dr bal in FVC A/C shall be reduced from profit/free reserves while declaring
dividends.
• The insurer shall assess, on B/S date, whether any impairment has occurred. An impairment loss
shall be recognized as expense in Revenue/P&L to extent of difference between re-measured
fair value of security/investment and acquisition cost as reduced by any previous impairment
loss recognized as expense in Revenue/ P&L.
• Any reversal of impairment loss earlier recognized in Revenue/P&L shall be recognized in
Revenue/P&L.
• Unlisted equity securities and derivative instruments and listed equity securities and derivative
instruments that are not regularly traded in active markets shall be measured at historical cost.
Provision shall be made for diminution in value of investments. The provision shall be reversed
in subsequent periods if estimates based on external evidence show increase in value of
investment over carrying amount. The increased carrying amount of investment due to reversal
of provision shall not exceed historical cost.

CA SHUBHAM KESWANI 181

 Real estate investment property(IP)
• The value of IP à determined at historical cost, subject to revaluation at least once in every 3
years.
• The change in carrying cost of IP shall be taken to revaluation reserve.
• The insurer shall assess impairment of the property at each B.S. date.
• Gains/losses arising due to changes in carrying amt of real estate shall be taken to equity under
‘Revaluation Reserve’. The p&l on sale of investments including accumulated changes in
revaluation reserve shall be recycled to revenue account or p&l a/c on sale of property.
• The bases for revaluation à disclosed in notes to accounts. The authority may issue directions
specifying amount to be released from revaluation reserve for declaring bonus to policyholders.
• Its clarified that except for amount released to policyholders as per authority’s direction, no
other amount shall be distributed to shareholders out of revaluation reserve a/c.
• An impairment loss shall be recognized as expense in revenue/ P&l a/c immediately, unless asset
is carried at revalued amount.
• Any impairment loss of a revalued asset shall be treated as a revaluation decrease of that asset
and if impairment loss exceeds revaluation reserve, excess shall be recognized as expense in
Revenue/p&l a/c.

Debt Securities – Debt securities, including govt securities and redeemable preference shares, shall
be considered as ‘held to maturity’ securities and shall be measured at historical cost subject to
amortization.

Audit of Premium
Following are certain illustrative points, Auditors are required to follow during Audit of Accounting
of Premiums:

I. Collection of Premium:
• The premium collections are credited to separate bank a/c and no withdrawals permitted from that
account for meeting general expenditure.
• Check whether there is daily reconciliation process to reconcile amounts collected, entered into
system and deposited into bank.
• Check that there is appropriate mechanism to ensure all collections deposited into Bank on timely
basis.

II. Calculation of Premium:

• Check that A/C system, employed by Co, calculates premium amt and its respective due dates
correctly.
• Check that system employed as such is equipped to calculate all types of premium modes correctly.

III. Recognition of Income:

• Check that premium is recognised only on basis of ‘Issued Policies’ and not on underwriting dates.
• Check that premium collected are correctly allocated all various components of the Policies.
• Check that there is reconciliation on daily basis and reconciling items, if any, are rectified/
followed up.

IV. Accounting of ‘Advance Premium’:

• Check, whether system has capability to identify regular and advance premium.
• Check whether there is a process of applying advance premium to contract when premium is due.

V. Reporting of Premium figures to IRDA/ Management:

• Check methodology for generation of MIS from system and there is no manual intervention.
• Check the procedure for Maker/ Checker before finalising the MIS.

CA SHUBHAM KESWANI 182

• Check whether there is reconciliation process between premium Income as per financials and as
reported.

VI. Other Areas:

• Check whether there are appropriate SOPs developed by Companies and strictly followed by all
deptt/ branches of Company.
• Ensure duly approved Delegation of Authority parameters matrix already in place for authorisation
limits.
• Premium recognition and refund are independent processes with adequate SODs amongst personnel.

Claims (Life Insurance)

1. Auditor should review std policy document template to ensure that policy document
prescribes minimum documentary evidence needed to support claim.
2. Ensure that Insurer maintains a register or record of claims, in which every claim is entered
along with date of claim and date on which claim was discharged.
3. In case claims are rejected, reasons for rejections should be closely reviewed.
4. Check whether all claims received are registered and enter into system.
5. It should be ensured that there is a system of collecting appropriate KYC documents, and
discrepancies, if any, are intimated to policyholders within 15 days of intimation.

Commission payable to Agent

Insurance business is generally solicited by Insurance agents.

The remuneration of agent is paid by way of commission which is calculated by applying percentage to
premium collected by him. Agency commission contributes towards significant portion of expenses
incurred by Insurance Co. Commission is payable towards generation of new business and towards
settlement of renewal premium.

Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly consider
following:
• Review system established by Insurer w.r.t calculation of commission to eligible agents
accurately and processing same in timely manner.
• Review commission payment system is in sync with premium collection system.
• Check whether commission paid is within limit prescribed under Insurance Act. Check whether
commission is clawed-back on cancelled policies.
• Check completeness of commission processing system.

Operating Expenses related to Insurance Business (Expenses of Management)

(i) Any major expenses (5L or in excess of 1% of net premium, whichever is higher) are reqd to
be shown separately.
(ii) Auditor should ensure that expenses are first aggregated and then apportioned to Revenue
Account of each class of business on reasonable and equitable basis.
(iii) The accounting policy should clearly indicate basis of apportionment of expenses to
respective Revenue Accounts (i.e., Participating and Non-participating policies and in
between Linked and Non- Linked business) along with certificate that all expenses of mgt,
have been fully debited to respective Revenue a/c as expenses.
(iv) Any expenses which are not covered under 14 heads as mentioned in Schedule 3 to be
disclosed under head ‘Others’.

CA SHUBHAM KESWANI 183

 Employees’ Remuneration and Welfare Benefits
• Reimbursement of medical expenses or premium in respect of employees’ health cover is covered
under employees’ remuneration and welfare.
• Any medical fees incurred towards maintenance of health care policies (which are not for
employees) are required to be debited to claims cost under the health care and not to be
included under this head.
• Any expenses towards medical treatment of employees incurred by company should also be
included under this head.
• Non-training expenses have to be shown separately.
• Incentives paid to employees of Co. who have solicited insurance policies is also debited in this
account and not to commission account.

Audit of Accounts of General Insurance Business

Verification of Premiums

(i) Look into internal controls and compliance for collection and recording of premiums.
(ii) The auditor should ensure premium in respect of risks incepting during relevant year has been
accounted as premium income of that year on basis of premium revenue recognition. Also see
whether the premium received during the year but pertaining to risk commencing in following
year has been accounted for under the head ‘Premium Received in Advance’ and has been
disclosed separately.
(iii) The auditor should verify collections lodged by agents after balance sheet date to see whether
any collection pertains to risk commencing for year under audit. Check premium originally
recorded at gross figure i.e. without providing for unexpired risks & reinsurances.
(iv) The auditor should check whether Premium Registers have been maintained chronologically, for
each underwriting deptt. These fig. should tally with general ledger.
(v) The auditor should also check money collected by agents from policyholders have been received
by company as quickly as possible.
(vi) Where premium originally received has been refunded, the auditor should verify whether the
agency commission paid on such premium has been recovered.
(vii) The auditor should also check that in case of cancellation of policies/cover notes issued, no risk
has been assumed between the date of issue and subsequent cancellation thereof.
(viii) The auditor should also check whether the BGs against which policies are issued are valid and
there is tracking mechanism of amounts of policies issued against the guarantees.

Verification of Claims
Claims Provision
• Provision for all unsettled claims at year end on basis lodged/communicated by the parties
• Provision has been made for only such claims for which Co. is legally liable, considering
particularly, that
o risk was covered by policy,
o claims arose during currency of policy; and
o claim did not arise during period company was not supposed to cover the risk.
• Provision made should not be in excess of amount insured.
• Application of ‘average clause’ in case of under-insurance.
• In case of co-insurance arrangements, provisions should be made only in respect of its own
share of anticipated liability.
• Claims are provided for net of estimated salvage, wherever applicable.

CA SHUBHAM KESWANI 184

 • No contingent liability is carried in respect of any claim intimated in respect of policies
issued.
• Intimation of loss is received within a reasonable time and reasons for undue delay in
intimation are looked into.

Register of Claims
(i) Claims Intimation Register;
(ii) Claims Paid Register;
(iii) Claims Disbursement Bank Book;
(iv) Claims Dockets, normally containing the following records: Claim intimation, claim form,
particulars of policy, survey report, Photograph showing damage, repairer’s bills, letter of
subrogation, police report (in case of theft), fire service report, claim settlement note,
claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher,
etc.;
(v) Report of quality assurance team; and
(vi) Salvage register.

Claims Paid
• Coinsurance : claims paid have been booked only in respect of co’s share and balance debited
to other insurance cos;
• Claim not paid if prem not recd as per Sec 64 VB
• If claim as per advise of other Cos whether Co recd its share of premium
• Salvage recovered accounted for and letter of subrogation obtained as per procedure
• For final settlement of claims claimant has given unqualified discharge note not involving Co
for further liability
• Whether payment made within 30 days of receipt of final doc & intt in case of delay as per
IRDAI regulation

Commission/Brokerage
(a) Ensure that commission/brokerage is not paid in excess of limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed with the agent and filed with
IRDAI.
(c) Ensure that commission/brokerage is paid to agent/broker who has solicited business.
(d) Ensure agent/broker not blacklisted by IRDAI
(e) Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
(f) Check whether vouchers are authorised by officers-in–charge and income tax deducted at
source.
(g) Test check correctness of amounts of commission allowed.

Outstanding Premium and Agents’ Balances

The following are audit procedures to be followed for verification of outstanding premium and
agents’ balances:
• Inquire reasons for long outstanding cr balances in o/s prem a/c and examine reasons for
policies not being issued or outstanding premium not adjusted against amounts due.
• Scrutinise and review control a/c debit balances and their nature should be enquired into.
• Examine inoperative balances and treatment given for old balances with reference to company
rules.
• Enquire into reasons for retaining old balances.

CA SHUBHAM KESWANI 185

 • Verify old debit balances which may require provision or adjustment. Notes of explanation
may be obtained from management in this regard.
• Check age-wise, sector-wise analysis of outstanding premium.
• Verify whether o/s premiums have since been collected.
• Check availability of adequate BG or premium deposit for o/s premium.

Unexpired Risk Reserve

All policies are renewed annually except in specific cases where short period policies are issued. Since
insurers close their accounts on particular date, not all risks under policies expire on that date. Many
policies normally extend beyond this date into following year during which risks continue. In other
words, at closing date, there is unexpired liability under various policies which may occur during
remaining term of policy beyond year end.

There are two methods of creating this reserve.

One is based on proportionate number of days of risk remaining to risk expired, which is called 1/365
method. The other method is by taking URR directly on 50% of premium amount.

As per Income Tax provisions, insurance companies are allowed deduction of 50 % of net premium
income in respect of Fire and Miscellaneous Business and 100 per cent of the net premium income
relating to Marine Insurance business.

Reinsurance Contracts
1) Facultative Reinsurance
It is that type of reinsurance whereby contract relates to one particular risk and is expressed in
reinsurance policy. Each transaction has to be negotiated individually. Each party has free choice i.e.,
ceding company to offer and re-insurer to accept.

The Insurance is used when:

(i) Automatic cover has exhausted.
(ii) Risk is excluded from treaties
(iii) Reinsurance treaties have not to be overburdened for abnormal risks.
(iv) When insurer has no automatic cover.
(v) Where technical guidance is required at each stage of acceptance of risk.

2) Treaty Insurance: Agreement for reinsurances within the limits of treaty

Proportional Treaties- Such treaties are based on pro-rata apportionment of the sum insured,
premium and losses, according to pre-determined percentage/ratio.

Non-Proportional Treaties- Such treaties are characterised by distribution of liability b/w ceding
company and reinsurer on basis of losses rather than the sum insured, as is case in proportional
reinsurance.
The following are the other characteristics of non - proportional treaties:
• Premium is not calculated on each cession, but on whole portfolio of ceding company.
• The premium rate is predetermined.
• Cost of reinsurance can vary substantially each year, depending on premium income, loss ratio
and reinsurance marked situations.
• Normally no commission is paid.

CA SHUBHAM KESWANI 186

Reinsurance Outward:

• The auditor should check whether pattern of re-insurance underwriting for outward cessions
fits within parameters and guidelines applicable to relevant year.
• The auditor should check whether cessions been made as per stipulation applicable to various
categories of risk.
• The auditor should verify whether cessions been made as per agreements entered with
various companies.
• It should also be seen whether outward remittances to foreign re-insurers have been done as
per the foreign exchange regulations.
• Check whether commission on cession has been calculated as per terms of agreement with re-
insurers.

Re-insurance Inward:

• Re-insurance Inward underwriting should be as per norms and guidelines prescribed by

Insurance Act, 1938 and IRDA Regulations. It is necessary to ensure that inward reinsurance
arrangements and acceptances, both Indian and foreign are done as per prescribed parameters
applicable for particular year.
• The auditor should check that domestic inward acceptances are in accordance with approved
programme.
• The auditor should verify whether re-insurance inward acceptance, both Indian and foreign, are
as per arrangements / agreements entered into with Indian and foreign insurance companies.
• The auditor should evaluate the system and practice adopted in recognising the foreign
currency transaction and also whether it is in accordance with AS-11 “The Effects of Changes
in Foreign Exchange Rates”.
• The auditor must ensure that foreign inward accounts balances have been re -stated at
prevailing value at year end and that difference arising out of re-statement has been taken to
Profit and Loss Account.

Trade Credit Insurance

• Policyholder's loss is non-receipt of trade receivable arising out of trade of goods or services.
• Policyholder is supplier of goods or services in consideration for fair market value.
• Policyholder's trade receivable does not arise out of factoring or reverse factoring
arrangement or any other similar arrangement.
• Policyholder has a customer (i.e. Buyer) liable to pay trade receivable to policyholder in return
for goods and services,in accordance with a policy document filed with insurer.
• Policyholder undertakes to pay premium for entire Policy Period.
• Any other requirement that may be specified by Authority from time to time.

Investment Risk Management Systems and Process Audit

IRDA advised that the CA firm, which is not the Statutory or Internal or Concurrent Auditor of
concerned Insurer shall certify that the Investment Risk Management Systems and Processes are in
place.

“The Harder you work, the Better you get”

CA SHUBHAM KESWANI 187

 Audit of PSU

Government Company [Sec 2(45)]

• >= 51% of paid-up share capital held by
Ø Central Govt
Ø Any state govt(s)
Ø Partly by both
• Includes subsidiary Co. of a govt Co.

Articles of Constitution
Article • Appointment of C&AG by President
148 • Special procedure for removal of C&AG, only on the ground of proven misbehaviors or
incapacity.
• Salary and other conditions of service to be determined by the Parliament.
Article • The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines these
149 functions and powers of C&G.
Article • On the advice of the C&AG, President to prescribe such form in which accounts of
150 the Union and States shall be kept.
Article • Audit reports of C&AG on A/Cs of Central/ State Government should be submitted
151 to President/Governor of State who shall cause them to be laid before
Parliament/State Legislative Assemblies.

C&AG shall hold office for term of six years or upto age of 65 years, whichever is earlier

Organizations subject to C&AG Audit

Ø All Union and State Government departments and offices including Indian Railways and Posts
and Telecommunications.
Ø Public commercial enterprises controlled by Union and State govts, i.e. govt cos and
corporations.
Ø Non-commercial autonomous bodies and authorities owned or controlled by Union or States.
Ø Authorities and bodies substantially financed from Union or State revenues.

Three Committees:

1. Public Accounts Committee: Duty to satisfy itself that:

(i) that moneys were disbursed legally on service or purpose to which they were applied;
(ii) that expenditure incurred was authorised;
(iii) that re-appropriation has been made in accordance with provisions made (i.e.
distribution of funds).
(iv) to examine statement of accounts of autonomous and semi - autonomous bodies, audit
of which is conducted by C&AG

2. Estimates Committee: The Committee examines estimates with a view to:

(i) report what economies, improvements in organization, efficiency or administrative
reform,consistent with policy underlying estimates may be effected;
(ii) suggest alternative policies;
(iii) examine whether money is well laid out within limit; and suggest form in which
estimates shall be presented to Parliament.

CA SHUBHAM KESWANI 188

 3. Committee on Public Undertakings (COPU)
(i) to examine reports and accounts of PSUs
(ii) to examine reports of C&AG on public undertakings
(iii) to examine autonomy and efficiency of psu and to see whether they are being
managed in accordance with sound business principles and prudent commercial
practices
(iv) to exercise such other functions vested in PAC and Estimates Committee not covered
above and as may be allotted by Speaker from time to time

C&AGs Role as Friend, Philosopher & Guide to committees

• Report generally forms basis of committee’s working
• Scrutinises notes submitted by ministries to committees to check correctness of submissions
• Financial Committees present their Report to Parliament/ State Legislature with their
observations and recommendations.

The various Ministries / Deptt of Govt are required to inform Committees of the action taken
by them on recommendations of Committees (which are generally accepted) and Committees
present Action Taken Reports to Parliament / Legislature;
[Financial committees à Report à Parliament/ State legislature
(observations/recommendations) Ministries/Dept à Inform action à Committees à Action
taken report à Parliament/State legislature]

• If A/R couldn’t be discussed in detail, written ans. obtained from dept/ministries to ensure
A/R not taken lightly by Govt even if entire report not deliberated by committee

Objective & Scope of PSU Audit

1. Audit of PSU not constrained to Financial & Compliance audit
2. Propriety audit
3. Comprehensive audit
4. Org decision by competent authority
5. Helping govt
6. Highlight issues of efficient & economic operations
7. Fiscal & managerial accountability
Fiscal Accountability: Audit of provision of funds, sanctions, compliances, propriety etc
Managerial Accountability: Efficiency, Economy & effectiveness

Basic Elements of
PSU Audit

Three Parties Subject Matter, Types of

criteria & subject Engagement
matter info

Responsible Party Intended users Attestation Engg. Direct Reporting

Engg

Auditor

CA SHUBHAM KESWANI 189

Auditor: Its SAI (Supreme Audit Institution), India & person delegated by it for audit
[SAI= C&AG + Indian Audit & Accounts Department(IAAD) ]

Subject matter: This refers to information, condition or activity measured or evaluated against
certain criteria.

Criteria: These are benchmarks used to evaluate subject matter.

Subject matter information: This refers to outcome of evaluating or measuring subject matter
against criteria.

Attestation Engagements: In attestation engagements, responsible party measures subject matter

against criteria and presents subject matter info, on which auditor then gathers SAAE to provide
reasonable basis for expressing conclusion.

Direct Reporting Engagement: In direct reporting engagements, it is auditor who measures or

evaluates subject matter against criteria.

Financial audits are always attestation engagements, as they are based on financial information
presented by responsible party. Performance audits and compliance audits are generally direct
reporting engagements.

Principles of PSU Audit

General Principles Principles relating to Audit process
• Ethics & Independence • Planning the audit (Agreeing terms of
• Professional Judgement, due care and engg, understanding entity, developing
skepticism audit plan)
• Quality Control • Conducting Audit (Performing audit
• Audit Team Management & Skill procedures, evaluating evidence &
• Audit Risk drawing conclusions)
• Materiality • Reporting & follow up (Reporting based
• Documentation on conclusions & following up on reported
matters)
• Communication

Role of C&AG in Audit of Govt Cos.

1. 143(5) C&G direct manner a/c audited + auditor includes in report (*3)
Directions issued+ action taken thereon + impact on a/cs & financials
2. 143(6)(a) Supplementary Audit
Within 60 days from date of receipt of audit report
3. 143(6)(b) C&AG Comment upon/ supplement audit report à Sent by Co. to every person entitled
to secure copies of audited f/s + place before members in AGM
4. Test Audit u/s 143(7)
Provisions of sec 19A of C&AG (Duties, Powers & Conditions of Services Act,1971) shall apply to
such test audit
Compliance Audit
Compliance audit is independent assessment of whether given subject matter is in compliance with
applicable criteria.

Compliance audit is concerned with:

(a) Regularity- adherence of subject matter to formal criteria emanating from relevant laws,
regulations and agreements applicable to entity.

CA SHUBHAM KESWANI 190

 (b) Propriety- observance of general principles governing sound financial management and ethical
conduct of public officials.

Perspective of Compliance Audit:

Compliance auditing is generally conducted either-
(i) in relation with audit of F.S, or
(ii) separately as individual compliance audits, or
(iii) in combination with performance auditing.

Performance Audit
A performance audit is objective and systematic examination of evidence for purpose of providing an
independent assessment of performance of govt organization, program, activity, or function in order
to provide info to improve public accountability and facilitate decision-making by parties with
responsibility to oversee or initiate corrective action.

(i) Economy: Minimize cost of resources used for an activity, having regard to qty, quality
andbest price.

(ii) Efficiency: Input-output ratio. Max output with min input. Or min input for given quality
& qtyof output
Following to be checked:
• Sound procurement policies
• Resources are protected & maintained
• Efficient utilization of physical, financial & HR
• Public sector prog/entities/ activities efficiently managed
• Objectives met cost effectively

(iii) Effectiveness: Extent to which objectives achieved & relation b/w intended & actual
impact of activity
Check:
• Objectives & means provided (legal, financial etc) for public sector prog. consistent
with policy
• Extent to which results achieved
• Assess & establish with evidence that social & economic impact due to policy or
other causes
• Identify factors inhibiting satisfactory performance
• Assess compliance with laws & regulations
• Assess effectiveness of prog or individual components

Case study by ICAI

Q. Performance audit of enforcement mechanism administering provisions of Minimum Wages Act (
social welfare legislation)

Ø Auditor possess knowledge of industries or labour contracts where provisions applicable

Ø Evaluate std of living before and after implementation of the Act
Ø Also evaluate EEE in welfare system to be audited
Ø Study shortcomings in coordination b/w different agencies like labor dept,
ESI , EPF organisations
Ø Shall also point out lacuna in existing legal framework to strengthen objective of
legislation.

CA SHUBHAM KESWANI 191

 Planning for performance Audit
• Understanding entity/programme

Sources of understanding the entity

Documents Legislative Policy Academic Past Audits Media

of the documents documents or spl Coverage
entity research

(i) Documents of the entity: Documents on administration and functions of entity, policy files,
annual reports, budget docs, accounts, minutes of meetings, information on website, internal audit
reports, electronic databases and MIS reports, RTI material etc.

(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of Public
Accounts Committee, Committee on Public Undertakings, Estimates Committee and letters from MP.

(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.

(iv) Academic or special research: Independent evaluations on entity, academic research and similar
work done by other govts and other SAIs.

(v) Past audits: Past financial and performance audits of entity provide major source of info and
understanding.

(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in
a transparent manner.

• Defining objectives and scope of audit

• Determining audit criteria: Stds to determine if program meets expectations
Audit criteria can be obtained from following sources:
Ø Procedure manuals of entity
Ø Policies, std, directives, guidelines
Ø Independent expert opinion or know how
Ø Scientific knowledge or other reliable info
Ø General mgt & subject matter literature

• Deciding audit approach: Selection of approach also determines methods & means to conduct
performance audit.

Methods & means for conducting Performance audit:

i. Analysis of procedures: It involves review of the systems in place for planning, conducting,
checking and monitoring the activity.
ii. Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It
involves analysis of a particular issue within the context of the whole area under review.
iii. Use of existing data: The audit staff should investigate the data held by entity mgt and by
other relevant sources.
iv. Surveys: Survey is a method of collecting information from members of a population to
assess the interrelation of events and conditions.
v. Analysis of results: It requires the auditor to carry out actual output-input analysis to
determine the efficiency of the programme.
vi. Quantitative analysis: It involves examination of available data relating to financials like
earnings, revenue, or data relating to programme implementation like details of
beneficiaries etc.

CA SHUBHAM KESWANI 192

 • Developing audit questions
• Assessing audit team skills and whether outside expertise required
• Preparing Audit Design Matrix
• Establishing time table and resources
• Intimation of Audit programme to audit entities

Comprehensive Audit
Efficiency cum performance audit. Locate area of weakness and extravagance for mgt info.

Some of issues examined in comprehensive audit are:

• Overall cost of capital compared with approved planned cost? Is there a substantial
increase? If yes any extravagance or unnecessary expenditure?
• Accepted prodn or output achieved? Underutilisation of installed capacity or shortfall in
performance?
• Planned rate of return achieved?
• System of project formulation and implementation sound?
• Are cost control measures adequate?
• Does enterprise have R&D program?
• Does enterprise have adequate system of Repair & Maintenance (R&M)

Propriety Audit
Verification of transaction under test of public propriety, commonly accepted customs, & stds of
conduct.

Principles of Propriety

• Expenditure not prima facie more than what occasion demands + sufficient vigilance by
officers
• Authority utilising power to sanction expenditure not accruing to its own benefit
• Funds not to be utilised to benefit particular person(s)
• Apart from agreed remuneration & reward no other avenue benefit indirectly mgt person,
employee or others

Provisions of Cos Act relating to Propriety

1. Sec 143(1) requiring enquiry into certain specified matters (Covered in Co. Audit)
2. 143(6) & (7) à Supplementary & test audit
3. Sec 148 àCost records & Audit à Cost consciousness in mgt
4. Additional info. Part II of Schedule III

Proprietory Elements under CARO 2020

Clause iii, iv, viii, ix, x, xi, xiii, xv, xviii of Para 3 (Refer CARO 2020 for details)

Parts of Audit Report of C&AG

• Introduction containing general review of working results of Govt Co/ deemed govt co.
• Results of comprehensive appraisals of selected undertakings conducted by Audit board
• Resume of Co. Auditor’s report submitted under directions of C&AG & that of comments
on A/Cs of govt cos.
• Significant results of audit of undertakings not taken up for appraisal by audit board.

“Discipline is the Bridge between Goals & Accomplishment”

CA SHUBHAM KESWANI 193

 Liabilities of Auditor

Civil Liabilities under Companies Act,2013

Mis-statement in prospectus u/s 35 of Companies Act, 2013, are:

(1) Where person subscribed for securities of Co. acting on any statement included, or inclusion or
omission of any matter, in prospectus which is misleading and has sustained any loss or damage,
company and every person who—
(a) is a director of Co. at time of issue of prospectus;
(b) has authorized himself to be named in prospectus as director of company or has agreed to become
such director either immediately or after an interval of time;
(c) is promoter of company;
(d) has authorised issue of prospectus; and
(e) is expert referred to in sub-section (5) of sec 26, shall, without prejudice to any punishment to
which any person may be liable under sec 36, be liable to pay compensation to every person who has
sustained such loss or damage.

Where it is proved that prospectus has been issued with intent to defraud applicants for securities of
company or any other person, every person referred to in subsection (1) shall be personally responsible,
without any limitation of liability, for all or any of losses or damages that may have been incurred by
any person who subscribed to securities on the basis of such prospectus.

No person shall be liable, if he proves—

(a) that, having consented to become a director of Co., he withdrew his consent before issue of
prospectus, and that it was issued without his authority or consent; or

(b) that prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

(c) that, as regards every misleading statement purported to be made by an expert or contained in
what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct
and fair representation of the statement, or a correct copy of, or a correct and fair extract from,
report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the
prospectus believe, that person making statement was competent to make it and that said person had
given the consent required by subsection (5) of section 26 to issue of the prospectus and had not
withdrawn that consent before delivery of a copy of prospectus for registration or, to the defendant's
knowledge, before allotment thereunder

Criminal Liability
Criminal liability for Misstatement in Prospectus –
As per Sec 34 of Companies Act, 2013, where prospectus issued, circulated or distributed includes any
statement which is untrue or misleading, every person who authorises issue of prospectus shall be
liable under section 447.

This section shall not apply to person if he proves that such statement or omission was immaterial or
that he had reasonable grounds to believe, that statement was true or inclusion or omission was
necessary.

CA SHUBHAM KESWANI 194

Punishment for false statement - According to Sec 448 of Companies Act, 2013 if in any return, report,
certificate, financial statement, prospectus, statement or other document required by, or for,
purposes of any of provisions of this Act or rules made thereunder, any person makes a statement —
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under section 447.

Punishment of Fraud u/s 447

Amount of Fraud >= 10L or 1% of turnover of Co. (lower)
Punishment of Imprisonment 6 months – 10 Years & Fine of amt of fraud..max 3 times
If it involves public intt à Imprisonment min 3 years

Amt of fraud < 10 L or 1% of turnover of Co.(Lower)

Punishment of imprisonment extend to 5 yrs or fine upto 50 L or both

Liabilities under Income Tax Act 1961

Sec 288:
• Person who has been convicted of any offence connected with any Income Tax proceeding or on
whom a penalty has been imposed under said Act is disqualified from representing an assessee.
• CA found guilty of professional misconduct by Council of ICAI, cannot act as a representative
for such time that order of Council disqualifies him from practising.

Sec 278:
Any person who acts or induces another person to make & deliver to IT Authorities false a/c,
statement, or declaration, relating to taxable income which he knows to be false or does not believe
to be true is punishable:
• with imprisonment from 6 months to 7 years & fine if tax evaded exceeds ₹ 25 Lacs
• with imprisonment from 3 months to 2 years & fine if tax evaded is up to ₹ 25 Lacs

Rule 12A
• A CA who as authorised representative prepared return filed by assessee, has to furnish to
A.O., particulars of a/cs, statements and other docs supplied to him by assessee for preparation
of return.
• Where CA has conducted an examination of such records, he has also to submit a report on
scope and results of such examination.
• If this report contains any information which is false and which CA either knows or believes to
be false à liable to rigorous imprisonment which may extend to 7 years and fine.

Sec. 271J
For incorrect info in any report or certificate furnished under this Act or Rules, A.O. or CIT (Appeals)
may impose a penalty of ₹ 10,000 for each such report or certificate.

CA SHUBHAM KESWANI 195

 Internal Audit (IA)
Ø Independent assurance
Ø on effectiveness of internal controls and risk management processes
Ø to enhance governance and achieve organisational objectives

The objectives and scope of IA Function as per SA 610 may include:

• Monitoring of internal controls : Monitoring through Exception Reports of Continuous Control
Management Tool in ERP system
• Examination of financial and operating information: Internal Audit for identifying reasons of
Year to Year deviation in Profit & Loss Account Items
• Review of operating activities: Reviewing Store Management Practices vis-a-vis Indutry's Best
Practices
• Review of compliance with laws and regulations: Review of compliance with newly applicable Tax
Regime.
• Risk management: Evaluation and management of Risk Exposure for complex financial instruments
transactions
• Governance: Assessment of Governance Process in the accomplishment of objectives on ethics
and values.

Applicability of Internal Audit

Sec 138 of Companies Act, 2013 read with Rule 13 of Companies Accounts Rules 2014
• Listed Cos
• Unlisted public Companies (25/50/100/200)
Ø Deposits >= 25 Cr (anytime) or
Ø PSC >= 50 Cr or
Ø Borrowings (Bank/FI) > 100 Cr (anytime) or
Ø T/o >= 200 Cr
• Pvt Co. (100/200)
Ø Borrowings > 100 Cr (anytime) or
Ø T/o >= 200 Cr
JKT Pvt. Ltd. having ` 40 lacs paid-up capital, `9.50 crores reserves and turnover of last 3 consecutive
FY, immediately preceding FY being ` 49 cr, ` 145 cr and ` 260 cr, but does not have any internal audit
system. In view of management, internal audit system is not mandatory. Comment.
As per sec 138 of Companies Act, 2013, read with rule 13 of Companies (Audit and Auditors) Rules,
2014, every pvt company shall be required to appoint internal auditor or a firm of internal auditors,
having-
(i) turnover of 200 crore rupees or more during preceding FY; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore
rupees or more at any point of time during preceding FY.
Conclusion: In the instant case, JKT Pvt. Ltd. is having a turnover of ` 260 crores during preceding FY
which is more than 200 cr. Hence, co. has statutory requirement to appoint Internal Auditor and
conduct internal audit.

Who can be Internal Auditor?

Ø Individual/firm/body corporate
Ø CA/Cost a/c /any other professional whether in practice or not
Ø May or may not be employee of Co.

CA SHUBHAM KESWANI 196

AB Pvt. Ltd. company, having outstanding loans and borrowings from banks exceeding one hundred crore
rupees, wants to appoint Mr. X, a practicing cost accountant, as an internal auditor. Is the appointment
of Mr. X valid?
As per Sec 138 of companies Act, 2013, internal auditor shall either be a CA or cost accountant
(whether engaged in the practice or not), or such other professional as may be decided by Board to
conduct an internal audit of companies. Thus, Appointment of Mr. X as an internal auditor of AB Pvt.
Ltd is valid.

Main Responsibilities of Internal Auditor

• Maintain adequate system of Internal Control (IC)
• To operate independently of a/c staff
• Not involve himself in executive functions to maintain objective outlook
• To observe facts & situations & bring them to notice of authorities
• Associate closely with mgt & keep knowledge upto date about business
• At all times, enjoy independent status

Scope of Internal Auditor’s work includes review of:

1. Internal control systems & procedures
• Assess design & operating efficiency & effectiveness of IC
• To minimize overall internal audit risk, inherent risk, control risk & detection risk
• Controls should be inbuilt in operating functions à cost effective
• Review should consider limitations of Internal Control à cost benefit, human errors,
collusion & abuse by process owner

2. Custodianship & Safeguarding of Assets

• Verify existence of assets
• Review Segregation of Duties is in place
• Ensure all assets accounted fully
• Review control systems for intangible assets e.g. procedures related to credit control

3. Compliance with Policies, Procedures & Regulations

• Point out specific weakness & suggest remedial action

4. Relevance & Reliability of Information

• Review information systems
• Examine whether reporting by exception i.e reports highlight significant & distinctive
features

5. Review of Organisation structure

• Manner in which activities of organisation are grouped for managerial control
• Examine org chart à check structure is simple & economical & no function enjoys undue
dominance over the others
• Responsibilities of staff at headquarter shouldn’t overlap with CEO of operating units
• Reasonableness of Span of control of each executive (no. of subordinates that executive
controls)
• Where dual responsibilities can’t be avoided, primary one should be specified
• Evaluate process of mgt development in enterprise

6. Review of utilisation of Resources

• Check proper operating std & norms established

CA SHUBHAM KESWANI 197

 • Whether – detailed enough to be identified with specific operating responsibility
• Review method of establishing stds & norms
• Wide divergence – b/w actual performance & std – reasons maybe considered

7. Accomplishment of Goals & Objectives

• Objectives clearly stated & attainable
• Expressed in quantifiable terms
• Sufficient flexibility in plan to permit improvements

Integrity, Objectivity & Independence of Internal Auditor

1) IA shall be free from undue influences which force him to deviate from truth.
The independence shall not only be of mind but also in appearance.
2) IA shall be honest, truthful & be person of high integrity
3) IA shall complete work in highly objective manner. Shall not allow bias & prejudice to override
objectivity esp. while arriving at conclusions or reporting opinion.

Qualities of Internal Auditor

1) Special expertise for evaluating mgt controls esp. financial & accounting controls
2) Accounting & financial expertise
3) Expected to evaluate operational performance & non-monetary controls. Requires basic
knowledge of technology & commercial practices of entity
4) Basic knowledge of commerce, laws, taxation, cost accounting, tax, economics, EDP systems,
5) Understanding of mgt principles & techniques (MTP)
6) By conduct à assurance to mgt confidentiality will be maintained

Internal Audit Report

SIA 370 Reporting by IA in 2 stages:
1) At end of assignment IA Report covering specific area, fn or part of entity is prepared
highlighting key observations. Issued with details of manner of conducting assignment & key
findings from audit. Issued to Auditee with copies to local mgt agreed in planning phase.
2) On periodic basis, at close of plan period, report on IA activities covering Entity & plan period
is prepared by Chief Internal Auditor (or EP in case of external service provider). Normally
done on Quarterly basis & submitted to Audit Committee. A part of IA report may form part
of the Periodic Report shared with AC.
This SIA pertains to responsibility to issue only IA report pertaining to specific assignments.

Key Elements of Internal Audit Report

a) Overview of scope, objective & approach (SOA) of audit assignments
b) Fact that Internal audit completed as per Standard on Internal Audit (SIA)
c) Executive summary of key observations covering important aspects & specific to scope of
assignment
d) Summary of corrective actions required(or agreed by mgt) for each observation
e) Nature of assurance, if any, which can be derived from observations.
Notes:
• Content & form depends on Prof judgment of IA in consultation with auditee
• Draft report to be issued before Final Report
Follow Up

CA SHUBHAM KESWANI 198

• As per SIA 390 Monitoring & Reporting of Prior Audit Issues(PAI), CIA is responsible for
continuous monitoring closure of PAI through timely implementation of action plans.
• The responsibility to implement action plans stays with the mgt.
• IA should review follow up action taken by mgt based on his observations. If no action taken in
reasonable time à draw mgt attention to it. Where mgt not acted on his suggestions or
implemented recommendations à IA ascertain reasons
• Where mgt has accepted recommendations & initiated necessary action, IA periodically review the
manner & extent of implementation of recommendations & report which recomm. not implemented
fully/partly.

Relationship b/w Internal Auditor(IA) & External Auditors(EA)

• Scope & objective of Internal audit dependent on size & structure of entity & requirements of
management. IA reviews a/c systems & internal control, examines financial & operating info for
mgt, there’s a lot of overlap b/w work of IA & EA.
• Work done by IA has important bearing on work of EA. Function of IA is integral part of system
of Internal Control.
• It’s a statutory requirement as per sec 138, Audit committee in consultation with IA formulate
scope, functioning, methodology, & periodicity (SFMPE) for conducting Internal audit.
• Its obligatory for stat auditor (EA) to examine scope & effectiveness of work carried out by IA.
He should examine internal audit dept of org, strength of staff & qualification & powers.
• Extent of independence exhibited by IA & status in organisation, determine effectiveness of
audit.
• EA should evaluate internal audit function to determine NTE of compliance & substantive
procedures.
Difference between Internal & External Audit
Basis Internal Audit External Audit
Meaning Ongoing audit function performed within Audit function performed by
an organisation by separate internal audit independent body not part of
dept organisation
Examination Examines operational efficiency of Examines accuracy & validity of
organisation F.S.
Appointment By mgt By members
Users of Report Management Stakeholders
Period Continuous process throughout year Done once in a year
Opinion On the effectiveness of operational acts On truthness & fairness of F.S.
of organisation
Status of Auditor Could be employee Can’t be employee

Factors responsible for high employee attrition rate are as under:

i. Job Stress & work life imbalance;
ii. Wrong policies of the Management;
iii. Unbearable behaviour of Senior Staff;
iv. Safety factors;
v. Limited opportunities for promotion;
vi. Low monetary benefits;
vii. Lack of labour welfare schemes;

CA SHUBHAM KESWANI 199

 SA 610: Using the work of Internal Auditor

• Sole responsibility of audit opinion à External Auditor

• External auditor has to obtain SAAE that work of IA Function or Internal auditor providing
direct assistance is adequate for purpose of audit
• Scope of SA:
a) Using work of IA Function in obtaining audit evidence &
b) Using internal auditors to provide direct assistance (DA) under Direction, Supervision
& Review of External auditor (DSR)
• This SA doesn’t apply if entity doesn’t have IA function

Objectives of Auditor where entity has internal audit function:

• To determine if work of IA function or direct assistance of Internal auditor can be used
• If using work of IA Function, determine whether work is adequate for Audit purpose
• If using IA to provide DA, to DSR their work

Internal Audit Function: A function of entity that performs assurance and consulting activities
designed to evaluate and improve effectiveness of entity’s governance, risk management and internal
control processes (GRC).
Direct Assistance: The use of internal auditors to perform audit procedures under direction,
supervision and review of external auditor.

Evaluating whether work of Internal Audit Function can be used for Audit Purpose
(a) The extent to which internal audit function’s organizational status and relevant policies and
procedures support objectivity of internal auditors;
(b) The level of competence of internal audit function; and
(c) Whether internal audit function applies a systematic and disciplined approach, including quality
control. (DISCO)

Determining Nature & Extent of work of Internal Audit Function that can be used

Types of Work of internal audit function that can be used by external auditor include following:
• Testing of operating effectiveness of controls.
• Substantive procedures involving limited judgment.
• Observations of inventory counts.
• Tracing transactions through the information system relevant to financial reporting.
• Testing of compliance with regulatory requirements.
• In some circumstances, audits or reviews of financial information of subsidiaries that are not
significant components to group (where this does not conflict with the requirements of SA
600).

To determine adequacy of specific work performed by internal auditors for external auditor’s
purposes, external auditor shall evaluate whether:
i. The work was performed by internal auditors having adequate technical training and
proficiency;
ii. The work was properly supervised, reviewed and documented;
iii. Adequate audit evidence has been obtained to enable internal auditors to draw reasonable
conclusions;

CA SHUBHAM KESWANI 200

 iv. Conclusions reached are appropriate in circumstances and any reports prepared by internal
auditors are consistent with results of work performed; and
v. Any exceptions or unusual matters disclosed by internal auditors are properly resolved.

Written Agreements: Prior to using internal auditors to provide direct assistance for purposes of audit
(a) Obtain written agreement from authorized representative of entity that IA will be allowed to
follow external auditor’s instructions, and entity will not intervene in work the internal auditor
performs for external auditor; and
(b) Obtain written agreement from internal auditors that they will keep confidential specific matters
as instructed by external auditor and inform external auditor of any threat to their objectivity.

Areas where Internal auditor can’t provide Direct Assistance:

(a) Involve making significant judgments in audit;

(b) Relate to higher assessed RMM where judgment required in performing relevant audit procedures
or evaluating audit evidence gathered is more than limited;

(c) Relate to work with which internal auditors have been involved and which has already been, or will
be, reported to Mgt or TCWG by internal audit function; or
(d) Relate to decisions external auditor makes in accordance with this SA regarding internal audit
function and use of its work or direct assistance.

Significant judgments include following:

• Assessing risks of material misstatement (RoMM) ;
• Evaluating sufficiency of tests performed;
• Evaluating appropriateness of management’s use of going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report.

Documentation: External auditor uses IA to provide direct assistance

(a) Evaluation of existence and significance of threats to objectivity, and level of competence of
internal auditors used to provide direct assistance;
(b) Basis for decision regarding nature and extent of work performed by internal auditors;
(c) Who reviewed work performed and date and extent of that review
in accordance with SA 230;
(d) Written agreements obtained from authorized representative of entity and the internal auditors
(e) Working papers prepared by internal auditors who provided direct assistance on the audit
engagement.

Factors to be considered while evaluating existence & significance of

threats to objectivity of Internal Auditor
• The extent to which internal audit function’s organizational status and relevant policies and
procedures support objectivity of internal auditors
• Family and personal relationships with individual working in, or responsible for, aspect of entity to
which work relates.
• Association with division or deptt in entity to which work relates.
• Significant financial interests in entity other than remuneration on terms consistent with those
applicable to other employees.

“If you want to fly, give up everything that Weighs you down”

CA SHUBHAM KESWANI 201

 Management Audit

Management Audit vs Operational Audit

The scope and content of mgt audit should cover everything that we know as operational audit and, in
addition, it should also include review of adequacy and competence of objectives, plans, policies and
decisions of top mgt.

• Mgt audit is concerned with “Quality of managing”, whereas operational audit focuses on “Quality of
operations”.

• Management audit is “Audit of management” while operational audit is “Audit for the management”.
The focus of mgt audit is on “Quality of Decision Making” rather than effectiveness or efficiency of
operations.

• The basic difference b/w two audits, then, is not in method, but in level of appraisal. In a mgt audit,
the auditor is to make his tests to the level of top management, its formulation of objectives, plans
and policies and its decision making.

Mgt audit is wider in scope compared to operational audit.

Example:
• If Co. facing issues due to long decision making cycles à Mgt Audit
• If issues due to policy implementation à Operational Audit

What knowledge necessary to be a mgt. auditor?

i. Purpose for which org. has been created (eg, steel mill to produce to reduce imports, create
employment opportunities, develop backward areas, etc)
ii. Mgt structure including delegation of authority, planning & budgeting
iii. Reports required & reports actually received for mgt
iv. Internal Controls
v. Production Planning
vi. Factory layout, design & installed capacity
vii. Sales mgt & sales planning
viii. Personnel policy & personnel mgt including requirements, training, welfare, incentives &
disincentives

Desirability or Importance of Management Audit

• Detecting & overcoming current managerial deficiencies in ongoing operations. It represents a
positive, forward looking approach that evaluates
Ø how well mgt accomplish its objectives
Ø how effective management is planning, organising, directing, controlling, & coordinating
org acts.
This evaluation is aided with Mgt Audit Questionnaire.
• Managerial problems & operational difficulties can be spotted before the fact. They can help
pinpoint problems developing from small scale.
• Its another mgt tool to achieve org objectives. Capability of mgt audit questionnaire to pinpoint
problem areas is a plus factor.
• Clearly helpful in case of ailing industries, to isolate problems & account for their ailments.
• Often, mgt audits conducted prior to investments in entity, M&A, or b4 any other strategic
decision.

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 Organising the management Audit
1. Devising statement of Policy
• Mgt support reflected clearly & policy statement to be specific
• Spell out clearly scope & status of mgt auditing in enterprise, authority to carry out
audits, issue reports, make recommendations, & evaluate corrective action
• Lay in clear terms scope of activities to be performed by mgt auditor
• Statement must categorically say that mgt auditor is capable of reviewing admin & mgt
controls over any activity within Co.

2. Location of audit function within organisation

The function should be independent.

3. Allocation of Personnel
• Persons selected & assigned should have good understanding of audit theory, fundamentals
of organisation & mgt
• Basic knowledge of:
Ø Technology & commercial practices
Ø Commerce, law, tax, cost a/c, Economics, EDP systems

4. Staff training program

• Will help to achieve quality in assignments.
• Incentive to draw capable people in dept & retain them.

5. Time & other aspects

Depends on nature & scope of work.

6. Frequency
Vary as per nature, size & structure of organisation. Interval shouldn’t exceed 3 years.

Ways to Conduct Mgt Audit

1. Getting facts through interviews
• Adequate prep necessary to avoid waste of time & effort.
• Begin by stating purpose of audit.
• Emphasis on getting facts essential to review & appraise the area of study
• Exchange of info should be friendly & conducted in open atmosphere

2. Management Audit Questionnaire

• Aims at comprehensive & continuous examination of org mgt
• Its concerned with appraisal of mgt actions in accomplishing org objectives
• Primary objective it to Highlight weakness & deficiencies of mgt for possible
improvements
• It enables mgt auditor to synthesise elements causing mgt difficulties & deficiencies
(d&d)

There are three possible answers to the management audit questions:

Yes: It indicates that the specific area, or function under study is functioning in an acceptable
manner. No written application is needed in that case.
No: It indicates unacceptable performance & should be explained in writing.
Not applicable :It indicates that question does not apply.

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 Types of Reports
1. Oral Reports: For emergency reporting i.e. followed up with written report
2. Interim written report: Inform about significant developments during audit for early
consideration
3. Regular written reports: Issued after audit
4. Summary written reports:
Ø Also referred as Flash Reports
Ø They summarise individual reports
Ø These are primarily for audit committees or higher level mgt
Ø Especially useful for top level managers who don’t actively review individual reports
Ø Also useful for general auditor to see overall reporting effort with more perspective &
on integrated basis

Steps to prepare Mgt Audit Report

1. Planning the audit report: Deciding what to be communicated to the reader
2. Supporting Information: Supplement report with audit evidence that sufficiently &
convincingly supports conclusions
3. Preparing Draft Report: Before issue of final report
4. Writing & issuing final report: When completely satisfied with draft report, before that
discuss conclusions & recommendations with mgt
5. Follow up audit report: Review whether follow up action taken by mgt
6. Action/response of mgt on Audit report: Where mgt has not acted upon suggestions of
auditor or not implemented his recommendations, auditor should ascertain reasons for same

Behavioural Aspects encountered in Mgt Audit

Nature & Cause of behavioural problems:

1. Relationship conflict between mgt auditor & other personnel

Mgt auditors maybe employee of Co. & other persons will regard them as employee only. On
other hand, mgt auditor being specialist of field, may think their approach & solutions, only way
to resolve mgt problems.

2. Control: Mgt auditor evaluates effectiveness of controls, auditees may feel that auditor’s
report might create incompetent impression on mgt, this creates feeling of antagonism

Causes of Antagonism are as follows:

Ø Fear of criticism stemming from adverse audit findings.
Ø Fear of changes in day-today working habits because of changes resulting from audit
recommendations.
Ø Punitive action by superiors prompted by reported deficiencies.
Ø Insensitive audit practices - reports which are overly critical, reports which focus on
deficiencies only, and the perception that auditors gain personally from reporting
deficiencies.
Ø Hostile audit style - a cold and distant aspect is a lack of understanding of the auditee’s
problems, an absence of empathy, an excessive concentration on insignificant errors, &
prosecutional tone when asking questions.

3. Resistance to change: Auditor’s study of systems & procedures give room for
recommendations for changes in systems.

CA SHUBHAM KESWANI 204

 Solutions to behavioural problems:

There is a need to demonstrate to extent possible that:

1. The audit is part of an overall programme mandated by higher-level authority to meet higher-level
organisational needs for both protection and maximum constructive benefit.

2. The objective of review is to provide maximum service in all feasible managerial dimensions.

3. The review will be conducted with minimum interference with regular operations of the operating
personnel.

4. the responsible officers will be kept fully informed and have opportunity to review findings and
recommendations before any audit report is formally released.

It is essential to create an atmosphere of trust and friendliness so that audit reports will be
understood in their proper perspective.

1. Constructive criticism - He should also make obvious in his report the value of his comments in
tangible terms. Only then would suggestions carry weight with the auditees and they will feel convinced
that the auditor has been objective in his remarks in the report.

2. Reporting methods - Adopting friendly but firm tone in report. It is always possible to disagree
without being disagreeable and to criticise without being critical. The reports should concentrate on
areas that need improvement rather than listing inefficiencies and deficiencies in performance of
auditee.

3. Participative approach - Auditor’s reports have better acceptability if improvements suggested are
discussed with those who have to implement them and made to feel that they have participated in the
recommendations made for improvements.

CA SHUBHAM KESWANI 205

 Operational Audit

It involves evaluating the effectiveness & efficiency of operations. Not a one-time activity should be
conducted at least once in 3 years.

XYZ, a manufacturing unit does not accept recommendations for improvements made by Operational
Auditor. Suggest an alternative way to tackle hostile management.

While conducting operational audit auditor has to come across many irregularities and areas where
improvement can be made and therefore gives his suggestions and recommendations.
These suggestions and recommendations may not be accepted by hostile managers and there may be
cold war between operational auditor and managers. This would defeat purpose of operational audit.

The Participative Approach comes to help of auditor. In this approach auditor discusses ideas for
improvements with those managers that have to implement them and make them feel that they have
participated in recommendations made for improvements. By soliciting views of operating personnel,
operational audit becomes a co-operative enterprise.

This participative approach encourages auditee to develop friendly attitude towards auditors and look
forward to their guidance in more receptive fashion. When participative method is adopted then
resistance to change becomes minimal, feelings of hostility disappear and gives room for feelings of
mutual trust. Team spirit is developed. Auditors and auditee together try to achieve common goal. The
proposed recommendations are discussed with auditee and modifications as may be agreed upon are
incorporated in operational audit report.

With this attitude of auditor, it becomes absolutely easy to implement proposed suggestions as auditee
themselves take initiative for implementing and auditor does not have to force any change on auditee.

Hence, the Operational Auditor of XYZ manufacturing unit should adopt the above mentioned
participative approach to tackle hostile management of XYZ.

Why Operational Audit?

The need for operational auditing has arisen due to inadequacy of traditional sources of information
for effective management of company where management is at a distance from actual operations due
to layers of delegation of responsibility, separating it from actualities in organisation.

Operational audit is considered as a specialised management information tool to fill the void that
conventional information sources fail to fill. Conventional sources of management information are
departmental managers, routine performance report, internal audit reports, and periodic special
investigation and survey. These conventional sources fail to provide information for best direction of
departments. The shortcomings of these sources can be stated as under:

(i) Executives and managers are too preoccupied with implementation of plans and achieving of
targets.
(ii) Managers or their aides are generally relied upon for transmitting information than for booking
for information or for analysing situations.
(iii) The information that is transmitted by managers is not necessarily objective - often it may be
biased for various reasons.
(iv) Conventional internal audit reports are often routine and mechanical in character and have definite
leaning towards accounting and financial information. They are also historical in nature.
(v) Other performance reports contained in annual audited accounts and routine reports prepared by
operating departments have own limitations.

CA SHUBHAM KESWANI 206

(vi) Surveys and special investigations, are very useful but these are at best occasional in character.
Also, they are costly, time consuming and keep departmental key personnel busy during the period
they are on.
Operational vs Internal Audit
The difference in approach of both of these audits is illustrated below:

1. Perception - Traditionally, internal auditors have been engaged in a sort of protective function. They
view and examine internal controls in financial and accounting areas to ensure that possibilities of loss,
wastage and fraud are not there; they check accounting books and records to see, whether internal
checks are properly working and resulting accounting data are reliable.

2. Issues - The basic difference that exists in technique of operational auditing is in auditor’s role in
recommending corrections or in installing systems and controls.
A further distinction lies in attitude and approach to whole auditing proposition. Every aspect of
operational auditing programme should be geared to management policies, objectives and goals.

3. Objectives - Main objective of operational auditing is to verify fulfilment of plans and sound business
requirements as also to focus on objectives and their achievement objectives; operational auditor
should not only have a proper business sense, he should also be equipped with thorough knowledge of
policies, procedures, systems and controls, he should be intimately familiar with business.

Today, however, concept of modern internal auditing suggests that there is no difference in internal
and operational auditing. The modern internal auditing performs both protective as well as constructive
functions.

Qualities of Operational Auditor

1. His knowledge beyond accounting and finance would be scanty and this is reason which should make
him even more inquisitive.

2. He should ask the who, why, how of everything. He should try to visualise whether simpler alternative
means are available to do a particular work.

3. He should try to see everything as to whether that properly fits in business frame and organisational
policy. He should be persistent and should possess attitude of skepticism.

4. He should imbibe collaborative and constructive approach rather than fault-finding approach and
should give feeling that his efforts are to help to attain an improved operation and not merely fault
finding.

5. If auditor succeeds in giving feeling of help and assistance through constructive criticism, he will
be able to obtain co-operation of persons who are involved in operations. Try to develop a team
comprised of people of different backgrounds. The involvement of technical people in operational
auditing is generally helpful.

CA SHUBHAM KESWANI 207

 Objectives of Operational Audit
Ø Appraisal of Controls
Ø Evaluation of Performance
Ø Appraisal of Objectives and Plans
Ø Appraisal of Organisational Structure: Organisational structure provides line of relationships
and delegation of authority and tasks.
In evaluating organisational structure, aspects that may be considered by operational auditor
may be as follows:
(i) Is organisational structure in conformity with management objectives?
(ii) Whether organisational structure is drawn up on basis of matching of responsibility and
authority?
(iii) Whether line of responsibility from top to bottom is clearly discernible from structure?
(iv) Whether delegation of responsibility and authority at each stage is clear and overlapping
are avoided?

Differences between Financial and Operational Auditing

(i) Purpose - The financial auditing is concerned with opinion whether historical information recorded
is correct or not, whereas operational auditing emphasizes on effectiveness and efficiency of
operations for future performance.

(ii) Area - Financial audits are restricted to matters directly affecting appropriateness of presented
financial statements but operational auditing covers all activities that are related to efficiency and
effectiveness of operations directed towards accomplishment of objectives of organization.

(iii) Reporting -The financial audit report is sent to all stockholders, bankers and other persons having
a stake in the Organisation. However, operational audit report is primarily for management.

(iv) End Task - The financial audit has to report findings to persons getting the report as its end
objective, however, the operational auditing is not limited to reporting only but includes suggestions
for improvement also.

To determine whether the system or procedure is meeting current requirements, the following among
other things should be considered:
1. Is the system or procedure designed to promote achievement of company’s objectives, and is it
accomplished effectively?
2. Does the system or procedure operate within framework of organisational structure?
3. Does system or procedure adequately provide methods of control in order to obtain maximum
performance with least expenditure of time and effort?
4. Does system or procedure provide means for effective coordination between one deptt and another?
5. Have all required functions been established?

Q. “In reviewing any System or Procedure, the management auditor must concern himself with its
purpose as well as its design.” Elucidate how you as a management auditor will study system and
procedural functions?
In the study of the systems and procedural functions, the auditor should ask himself:
1. Is the function properly located in organisation?
2. Do the staff personnel have necessary training and experience to perform the work?
3. Has a definite programme been established and has been taken for its attentive accomplishment?
4. Is productivity satisfactory?
“Believe you can & you are halfway there”

CA SHUBHAM KESWANI 208

 Due Diligence

It is process of investigation, performed by investors, into details of a potential investment such as

examination of operations and management and verification of material facts.

Importance
• To confirm that the business is what it appears to be;
• To identify potential ‘deal killer’ defects in target company and avoid bad business
transaction;
• To gain information that will be useful for valuing assets, defining representations and
warranties, and/on negotiating price concessions; and
• To verify that transaction complies with investment or acquisition criteria.

Classification
• Commercial/Operational: Evaluation from commercial, strategic and operational perspectives.
For example, whether proposed merger would create operational synergies.
• Financial: Analysis of books of accounts and other info pertaining to financial matters of
entity.
• Tax: The accountant has to look at tax effect of merger or acquisition.
• Information system: It pertains to all computer systems and related matter of entity.
• Legal: Legal aspects of functioning of Entity are reviewed.
• Environmental Due Diligence: It is carried out in order to study entity’s environment, its
flexibility and adaptiveness to acquirer entity.
• Personnel: to ascertain that entity’s personnel policies are in line or can be changed to suit the
requirements of restructuring.

Scope of Financial Due Diligence

a) Brief history of target Co. & background of promoter
b) Accounting policies : Check if appropriate & see if changed in recent past
c) Review of F.S.
d) Taxation: Tax implications of merger
e) Cash flow
It is important to know if company is able to meet its cash requirements. It is necessary to
check that:
(a) Is the company able to honor its commitments to its trade payables, to the banks, to
government and other stakeholders?
(b) How well is the company able to turn its trade receivables and inventories?
(c) How well does it deploy its funds?
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e) What is investment pattern of company and are they easily realisable?
f) Financial projection: For next 5 years with assumptions & workings
g) Management & employees
h) Statutory compliance: If not legally compliant may have to pay penalty

CA SHUBHAM KESWANI 209

 Hidden Liabilities
• Show cause notice not matured into demand. Maybe material & imp.
• Letters of comfort to Banks & Financial Institutions.
• Tax liab. Under direct & indirect tax
• Long pending sales tax assess.
• Pending final assess. of custom duty
• Agreement to buyback shares at stated price
• Future lease liability
• Unresolved labour litigations

Over-Valued Assets
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV
• Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
• Intangible assets of no value
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.

Work approach to DD
• Reviewing & reporting on financials submitted by target Co.
• Assessing the business first hand by a site visit
• Working through the due diligence process with acquisitioning Co. or investor by defining key
areas
• Helping prepare an offer based on completing of due diligence

How to conduct DD?

• Start with open mind. Identify trouble spots & ask for expln.
• Get best team of people. You may hire DD experts.
• Get help in all areas to get 360-degree view of Co.
• Talk to customers, suppliers, business partners, and employees are great resources.
• Take a risk mgt. approach.
• Prepare comprehensive report detailing compliances & substantive risks/issues

Contents of DD Report
• Executive summary
• Intro.
• Background of Co.
• Objective of DD
• Terms of reference & scope of verification
• Brief history of Co.
• Assessment of Financial Liabilities
• Assessment of valuation of assets
• Assessment of Net Worth

CA SHUBHAM KESWANI 210

 Investigation

Basis Investigation Audit

Nature Voluntary Mandatory

Observance of a/c Analytical, involves application of mind Compliance of GAAP,

principles Audit procedures & disclosures

Objective Establish a fact Verify f/s give t&f view of SOF

of entity

Periodicity Not limited by rigid time frame Qtrly, half yearly or annually

Reporting To person on whose behalf investigation To owners of business entity

carried out

Scope Governed by statute/non statutory Scope is wide, for statutory

audit governed by law

Steps in Investigation
1. Determination of objectives and establishment of scope of investigation.
2. Formulation of the Investigation programme.

The investigation programme should be drawn up having regard to:

(a) Nature of business
(b) Structure of business organization
(c) Instructions from client embodying objectives and scope of work
(d) Consequent scope and depth of investigation
(e) Necessity to extend investigation into books and records belonging to others.
(f) Investigator concentrate on areas considered relevant rather than undertaking wide-range
verification.

3. Examination and study of various records by reference to appropriate evidence.

4. Analysis, processing and interpretation of findings.
5. Preparation of report and drawing up of conclusions.

Important issues in mind while preparing his report

Ø Report to not contain anything irrelevant
Ø Every word/expression to be used properly to minimize possibility of diff. interpretation
Ø Facts & conclusions should be linked with evidence
Ø Basis & assumptions to be explicitly stated. Should be reasonable & not in conflict with the
objectives of entity
Ø Report should clearly spell out nature & objective of assignment, its scope & limitations
Ø Opinion in final para of report

Spl issues in investigation

Ø Whether to adopt cent percent verification approach or adopt selective verification
• Depends on circumstances
• Cash defalcation à examine all cash vouchers
• Profitability of concern à adopt selective approach

CA SHUBHAM KESWANI 211

 Ø Whether rely on already audited statement of a/c
• Doubt on audited statement of a/c à no Q of reliance
• Value of business/share/Goodwill à rely on audited materials
Ø Assistance of expert?
• Get written consent of client

Ø Investigation out of disputes & conflicting claims

• Remain above disputes
• Alert of possibilities of info available to be prejudiced
• Requires maturity & experience
Ø Basis of opinion
• Refrain from issuing speculative opinion
• Confine opinion to established facts, nothing more
Ø Retain working papers or not?
• Take representation letter from appointing authority
• Help in correlating facts & events while drafting report

Factors to consider for studying economic & financial position of business:

• Adequacy of fixed & working capital
• Trend of sales & profits in future?
• Whether profit maintained in future would yield adequate return on capital employed?
• Whether business operating at 100% capacity or improvements can be made?

Factors- future maintainability of turnover

• Trend: Past sales increase consistent or fluctuating.
• Marketability: Is it possible to extend sales to new market?
• Political & economic considerations: Are policies of govt likely to extend market of goods to
other countries?
• Competition: Is demand for competitor’s products increasing?

Types of Investigation

Statutory Non-Statutory

Investigation into the Investigation of Investigation on behalf of

affairs of a Company ownership of a Company incoming partner
(Sec 216)
Investigation for valuation of
By inspector through shares of pvt Co.
order of CG (Sec 210)
Investigation of frauds
By SFIO (Sec 212)
Investigation on behalf of bank or
Other Cases financial institution proposing to
advance loan to a co.

Investigation on behalf of
individual or firm proposing to buy
a business

Investigation in connection with

review of profit forecast

CA SHUBHAM KESWANI 212

 Statutory Investigations
Investigation into the affairs of a company (Sec 210)
Where CG is of opinion, that its necessary to investigate into affairs of a company-
a) on receipt of a report of Registrar or inspector;
b) on intimation of a SR passed by a Co. that affairs of the company ought to be investigated or
c) in public interest,
it may order (discretionary) an investigation into the affairs of the company.

Order passed by court or Tribunal requiring investigation à CG shall order investigation into affairs
of Co.

Investigation by SFIO (Serious Fraud Investigation Office) (Sec 212)

Where report states that fraud taken place in Co. à as a result any director, KMP, other officer of
Co. or any other person or entity, has taken undue advantage or benefit (in form of asset, property or
cash or any other manner) à CG may file application before Tribunal for appropriate orders of
disgorgement of such asset, property or cash and holding such director, KMP, other officer or other
person personally liable without any limitation of liability.

Power of Inspector to conduct investigation into affairs of related companies etc (Sec 219)
It provides that an inspector may also investigate, subject to approval of CG, into affairs of—
a) any other body corporate which is, or has at any relevant time been company’s subsidiary or
holding Co, or a subsidiary of its holding Co;
b) any other body corporate which is, or has at any relevant time been managed by any person as
MD or as manager, who is, or was, at relevant time, MD or manager of company;
c) any other body corporate whose BOD comprises nominees of company or is accustomed to act
in accordance with directions or instructions of company or any of its directors; or
d) any person who is or has at any relevant time been Co’s MD or manager or employee.

Evidence from place o/s India: If in course of investigation, application made to competent court in
India by inspector stating that evidence may be available in a country or place o/s India, such court
may issue a letter of request to court or authority in such country or place for seeking such evidence.

Authentication of Report: The report shall be authenticated either by

• seal of the Co. whose affairs have been investigated, or
• by a certificate of a public officer having custody of report, and
such report shall be admissible in any legal proceeding as evidence in relation to any matter contained
in report.

Who can act as inspector: A Body Corporate, FIRM or Other association can’t be appointed as
inspector. Only Individual can be appointed.

MCQ: Inspector not to keep books & papers in custody for more than 180 days.

General approach for investigation under Cos. Act,2013

1. Clarity of Terms of reference: Obtain clarity on TOR in writing.
2. Scope of investigation: Determined on basis of TOR
3. Period of investigation: Based on TOR & Scope
4. Framing of programme: For investigating in systematic manner.
5. Using the work of experts: Engineers, lawyers etc
6. Legal requirements & investigation report: Report should be fair & unbiased

CA SHUBHAM KESWANI 213

 Investigation of ownership of Co
Section 216 of Companies Act, 2013, CG may appoint one or more inspectors to investigate and report
on matters relating to company, and its membership for purpose of determining true persons,
(a) financially interested in success or failure, whether real or apparent, of the company; or
(b) able to control or to materially influence policy of company; or
(c) beneficial interest in shares of a company or who are or have been beneficial owners or significant
beneficial owner of a company.

Investigation on behalf of Incoming Partner

a. History of inception & growth of firm
b. Record of profitability of firm’s business
c. Examination of asset & liability position
d. Orders in hand and quality of clientele
e. Composition & quality of key personnel
f. Reasons for offer of admission
g. Record of capital employed & rate of return
h. Computation of goodwill on admission & retirement

Investigation in Valuation of Shares of Pvt Co.

For equity shares, there are 2 main methods of valuation.

1st method: Value is determined on the basis of net worth of Co.

Net worth is divided by no. of shares comprising equity capital to arrive at value for one share.
When this method is followed, goodwill of business, and non-trading assets (like investments) based on
estimated future maintainable profit, included among the assets to arrive at amount of net worth.

2nd method: Capitalisation of Avg Profits

• Avg profit earned by business during preceding 5 to 7 years is computed.
• On the assumption that same would continue to be earned in future, value of business is
calculated by capitalising it at reasonable rate of interest.
• If rate assumed is high, value of the business would be smaller.
• Correspondingly, it would be high if rate of interest applied is low. A provision of risk factor
and restriction on transfers in value of shares is made by varying the rate of interest applied.
• The rate of return that an investor expects to earn in a business of the type in which the Co.
is engaged, is ascertained from prices of the shares of cos. engaged in a similar business quoted
on stock exchange.
Variety of Frauds

Payroll Frauds – Data Frauds –

•Extra number of employees • Change in computer data
•Extra hours • Destroy, suppress or insert records
•Calculation of net pay by transferring rounding off amount • Using open fields in computerized accounting
to personal account. system
•Not deactivating the retired employees’ IDs
•Fictitious employees/ workers paid salary.

CA SHUBHAM KESWANI 214

 Others –
• Teaming and Lading
• Process houses mixing
Technology related Frauds – Banking related Frauds – inferior quality material to
• Employing hostile Software • Forged Signatures sale good quality material
Prog. or malware attacks • Cheque Frauds - Alteration in amts, • Pilferage and theft in super
• Phishing mails Alteration in a/c titles, Kite flying markets
• Vishing – Voice Mail • Cash lending during working hours • Selling classified
• Smishing - Text messages • Missing notes in bundles information,
• Whaling – Targeted phishing on • Use of same notes bundles by two • Withholding information
high network individuals branches from customer about free
• Card duplications • Wrong posting in other accounts product schemes, discount and
• Stealing confidential data • Misuse of sensitive stationery concession.
• ATM transaction misuse • Enhancement of
• Using PINs of debit card/credit performance
card holder • Taking advantage of disaster
• Advances - inflated stock or natural calamity.
statements, inflated projections, • Trust FDs
forged/duplicate land documents, • Fictitious journal entries to
L/Cs inflate expenses or income.

Investigation on behalf of a Bank/ FI Proposing to Advance Loan to a Company

ü Purpose for which loan is required
ü Schedule of repayment submitted by borrower including assumptions of cash profits & cash
available for repayment
ü Financial standing & reputation of business enjoyed by directors & officers
ü Co. authorised by MOA to borrow money
ü History of growth & development & performance in past 5 years
ü Whether any loan application made to other bank & if so reasons for rejection

To investigate profitability of business to judge accuracy of schedule of repayment furnished by

borrower & value of security in form of assets of business and those which will be created out of
loan, investigating accountant should take under-mentioned steps:

(a) Prepare condensed income statement from Statement of P&L for previous 5 years, showing items
of income and expenses, amounts of gross and net profits earned and taxes paid annually during each
of 5 years. Amount of maintainable profits determined on basis of foregoing statement should be
increased by amount by which these would increase on investment of borrowed funds.

(b) Compute under-mentioned ratios separately to show trend as well as changes that have taken
place in financial position of Co:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.

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(c) Enter in separate part of statement break-up of annual sales product-wise to show their trend.

Steps involved in the verification of assets and liabilities included in Balance Sheet of borrower
company which has been furnished to Bank
a. Fixed Assets: Gross value, Depreciation, Charge on asset, Revaluation
b. Inventory : Nature & types, if pledged for loan then disclose amt of loan
c. Trade Receivables:
• Debts where credit period not expired
• Debts due within 6 months
• Debts due but not recovered for over 6 months
d. Investments: Date of purchase, cost, nominal & market value
e. Secured & unsecured loans: Details of assets pledged should be disclosed
f. Provision for tax: PY upto which tax assessed
g. Insurance: Schedule of insurance policies
h. Contingent liabilities: Ensure completeness of disclosure

Fraud at operational level employees

(i) Tampering of Cheques/Drafts/On-line payments/receipts: On-line payments generally are
considered a transparent mechanism to prevent the above frauds.
(ii) Off Book Frauds: Fraud perpetrator misappropriates cash before these are recorded in
books or before sale is recorded in books.
(iii) Cash Misappropriation: Cash is misappropriated after accounting entries are already passed
in the books.
(iv) Teeming and Lading: Cash deposits or cheques collected from customers being overlapped
with collections from subsequent customers and amount collected is diverted to personal
A/c. Reconciliation of customer accounts at single point of time and confirmation from
customers for amounts outstanding in their accounts helps in identifying any leakage in
collections.
(v) Fraudulent Disbursements: Issuing or submission of false bills, or personal expense bills
being
converted into official expenses bills.
(vi) Expense Reimbursement Schemes: Multiple expense claims based on duplicate bills or
photostat copies.
(vii) Payroll Fraud: Payment to non-existent employees or in a contractual arrangement inflating
of manpower resources than those actually deployed while billing the client.
(viii) Commission Schemes: The salesman exaggerates sales through fictitious billings to earn
higher commission or alter sales prices of products sold from those stipulated by Co. or
share sales volumes achieved with other employees to share higher commission.

Situations in which frauds can occur:

A. Cash Receipts
(i) Issuing a receipt to payee for full amount collected and entering only part of amount on
counterfoil.
(ii) Showing larger cash discount than actually allowed.
(iii) Adjusting cash sale as credit sale, and raising debit in account of customer.
(iv) Writing off good debt as bad and irrecoverable to cover up amount collected which has
been misappropriated.
(v) Short-debiting customer’s account in ledger with intention to withdraw difference when
full amount payable by him is collected.

CA SHUBHAM KESWANI 216

 Audit procedures:
ü Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm that they
are in fact copies of receipts issued earlier.
ü The record of sales of scrap of waste paper, that of collection of rents from labourers
temporarily accommodated in the company’s quarters, that of refunds of amounts
deposited with the electric supply co., or any other Government authorities should be
examined for finding out if any of these amounts have been misappropriated.
ü Cash sales should be vouched in detail.
ü Recoveries from customers and sundry parties should be checked with the copies of
receipts issued to them; deductions made on account of cash discounts should be
reviewed.
ü All withdrawals from the bank should be checked by reference to corresponding entries
in the bank pass book.

B. Inflating cash payment – Cash payment frauds may be in the form of:
(i) Making double payment of invoice or paying false invoice.
(ii) Paying personal expenses out of business by falsifying details. e.g., showing betting losses
as advertisement charges.
(iii) Withdrawing unclaimed credit balances of customers or amounts falsely credited in accounts
of parties.
(iv) Falsely adjusting refund in account of customer and withdrawing credit balance.
(v) Wrong totalling of wage sheets and misappropriating the excess amount withdrawn from the
bank for payment of wages.

Audit procedures:
ü All evidence as regards cash payments made, including acknowledgement by parties, should be
carefully scrutinised.
ü In case where a figure appears to have been erased or altered on receipts issued by party, on
reference to party concerned, actual amount paid to him should be confirmed.
ü All payments by bearer cheques should be examined.
ü The system of recording of wages should be reviewed, for possible over-totalling of wage
sheets, and entries in them of dummy workmen.
ü The system of ordering and receiving goods reviewed to confirm that no payment made in
respect of supplies not received.
ü Confirmations should be obtained from partners or Directors in respect of amounts shown to
have been paid to them.

C. Frauds through suppliers’ ledger –

(i) Adjusting fictitious or duplicate invoices as purchases in accounts of suppliers and
subsequently misappropriating amounts when payments are made to suppliers in respect of
these invoices.
(ii) Suppressing Credit Notes issued by suppliers and withdrawing corresponding amounts not
claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that
same have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than market prices and
collecting excess amount, paid in cash, from suppliers.

CA SHUBHAM KESWANI 217

Audit procedures
ü The Purchase Journal should be vouched by reference to entries in Goods Inward Book and
suppliers’ invoices to confirm that amounts credited to the accounts of suppliers were in
respect of goods, which were duly received and the suppliers’ accounts had been credited
correctly.
ü All suppliers should be requested to furnish statements of their accounts to see whether or
not any balance is outstanding or due so as to confirm that allowances and rebates given by
them have been correctly adjusted and were duly authorized by the authorized person/
officer.
ü Examine system of internal control w.r.t purchase orders and possibilities of collusion with
suppliers.

D. Customers Ledger
(i) Teeming & lading
(ii) Misappropriating amount collected from customer and subsequently adjusting his account
by crediting amount on account of allowance or a rebate for excess price charged.
(iii) Crediting amount received from a customer to account of another customer and
subsequently withdrawing amount wrongly credited.

Audit procedures:
ü Spl attention should be paid to allowances adjusted on account of goods returned or difference
in price
ü To confirm that accounts of customers have been debited in respect of goods supplied to them,
entries in Order Book should be cross-checked with those in Sales Day Book where the same is
kept.
ü The accountant should obtain confirmation of customers in respect of amounts standing in
accounts.
ü Those of them who have no balance in accounts should be requested to confirm statement of
their account (which should be sent to them) for ascertaining that the entries shown therein
were genuine.

E. Inventory Fraud
• Employees remove goods from premises
• Theft of goods concealed by writing them off
• Inventory records manipulated by employees
• Inflating quantities issued for production for defalcating raw material

Verification Procedure for Defalcation of inventory - Such thefts usually are possible through collusion
among no. of persons. Therefore, for their detection, entire system of receipts, storage and despatch
of all goods, etc. should be reviewed to localise the weakness in system.

The determination of factors which have been responsible for theft and establishment of guilt would
be difficult in the absence of:
(a) a system of inventory control, and existence of detailed record of the movement of inventory, or
(b) availability of sufficient data from which such a record can be constructed.

The step in such an investigation is to establish the different items of inventory defalcated and their
quantities by checking physically the quantities in inventory held and those shown by Inventory Book.

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Defalcations of inventory, sometimes, also are committed by mgt, by diverting a part of production
and the consequent shortages in production being adjusted by inflating the wastage in production;
similar defalcations of inventories and stores are covered up by inflating quantities issued for
production.

For detecting such shortages, investigating accountant should take assistance of an engineer. For that
he will be more conversant with factors which are responsible for shortage in production and thus will
be able to correctly determine the extent to which the shortage in production has been inflated.

In this regard, guidance can also be taken from past records showing the extent of wastage in
production in the past. Similarly, he would be able to better judge whether the material issued for
production was excessive and, if so to what extent.

The per hour capacity of the machine and the time that it took to complete one cycle of production,
also would show whether the issues have been larger than those required.

Investigation on behalf of an Individual or Firm Proposing to Buy a Business:

A. Proprietary concerns or partnerships

ü Reasons for sale & effect on turnover & profits
ü Length of lease
ü Unexpired period of patents
ü Age & prospects of employees continuing
ü Valuation of Goodwill

B. Ltd Co.
ü Auth & issued share capital
ü Uncalled liability on shares
ü Capital divided in classes à rights of each class
ü Mortgage or charge on assets à registrar of charges
ü Price at which shares offered
• Public co -> quoted price
• Pvt co -> valuation

Investigation in connection with review of Profit/Financial Forecasts

Investigations which involve examination of future profits like,

(1) Profit reports can be required as part of general investigation into purchase of a business or,

(2) By banks and financial institutions with regard to project cash flow and profitability statements
for appraisal of loan applications submitted by the intending borrowers.
• All forecasts depend on nature of business with its numerous and substantial uncertainties.
• Therefore, such forecasts are not capable of verification in same way as F.S. which present results
of a completed accounting period.
• Normally, such situations involve special review as these depart from auditor’s traditional role of
expressing an opinion in relation to past events.

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 Forensic Audit

Particulars Other Audits Forensic Audit

Objectives Express an opinion as to Whether fraud has actually taken
‘True & fair’ presentation place in books
Techniques Substantive & compliance Investigative, substantive & in-depth
checking
Period Accounting period No such limitation
Verification of stock, Relies on mgt certificate Verification of suspected/selected
estimation realizable value of items where misappropriation
assets, provisions, liability etc expected
Off balance sheet items (like Vouch arithmetic accuracy Regulatory & propriety of these
contracts etc) transactions & contracts examined
Adverse findings, if any Negative or qualified Legal determination of fraud impact
opinion & identification of perpetrators

Need for forensic Audit

1. Fraud Detection: Investigating and analyzing financial evidence, detecting financial frauds and
tracing misappropriated funds

2. Computer Forensics: Developing computerized applications to assist in recovery, analysis and

presentation of financial evidence.
3. Fraud Prevention: Either reviewing internal controls to verify their adequacy or providing
consultation in development and implementation of internal control framework aligned to
organization's risk profile.

4. Providing Expert Testimony: Assisting in legal proceedings, including testifying in court as

expert witness and preparing visual aids to support trial evidence.

Services rendered by Forensic Auditors

Ø Crafting questions to be posed
Ø Responding to questions posed
Ø Identifying individuals to be most knowledgeable of facts
Ø Identifying documents to be requested and/or subpoenaed
Ø Evaluating produced documentation and information for completeness
Ø Analysing produced records and other information for facts
Ø Identifying and preserving key evidence
Ø Identifying alternative means to obtain key facts and information

Areas where services of Forensic Audit are in great demand in following areas
• Criminal Investigation: Matters relating to financial implications services of forensic
accountants are availed of. Report of accountants is considered in preparing and presentation
as evidence.
• Professional Negligence Cases: Professional negligence cases are taken up by forensic
accountants. Non confirmation to Generally Accepted Accounting Standards (GAAS) or
noncompliance to auditing practices or ethical codes of any profession, Forensic Auditors are
needed to measure loss due to such professional negligence or shortage in services.

CA SHUBHAM KESWANI 220

 • Arbitration service: Forensic accountants render arbitration and mediation services for
business community. Their expertise in data collection and evidence presentation makes them
sought after in this specialized practice area.

• Fraud Investigation & Risk/Control Reviews: Forensic accountants render such services both
when called upon to investigate specific cases as well for review of or implementation of
Internal Controls. Another area of significance is Risk Assessment and Risk Mitigation.

• Settlement of Insurance claims: Insurance cos engage forensic accountants to have accurate
assessment of claims to be settled. In case policyholders seek help of forensic accountant when
they need to challenge claim settlement as worked out by insurance companies. A forensic
accountant handles claims relating to consequential loss policy, property loss due to various
risks, fidelity insurance and other types of insurance claims.

• Dispute settlement: Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trademarks cases,
liability arising from breach of contracts and so on.

Process of forensic Accounting

1. Initialization:
Ø Clarify and remove all doubts as to the real motive, purpose and utility of assignment.
Ø It is helpful to meet client to obtain understanding of important facts, players and
issues at hand.
Ø A conflict check should be carried out as soon as relevant parties are established.
Ø Carry out a preliminary investigation prior to development of detailed plan of action.
This will allow subsequent planning to be based upon a more complete understanding of
issues.

2. Develop Plan: Consider the knowledge gained by meeting with client and carrying out initial
investigation and set out objectives to be achieved and methodology to be utilized to
accomplish them.

3. Obtain relevant evidence: The evidence should be sufficient to ultimately prove identity of
fraudster(s), mechanics of fraud scheme, and amount of financial loss suffered.

4. Perform the analysis:

The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
• calculating economic damages;
• summarizing a large number of transactions;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model
• utilizing charts and graphics to explain the analysis.

5. Reporting
• Issuing report is final step of fraud audit. Auditors will include info detailing fraudulent
activity, if any has been found.
• The client will expect report containing findings of investigation, including summary of
evidence, a conclusion as to amount of loss suffered as result of fraud and to identify those
involved in fraud.

CA SHUBHAM KESWANI 221

 • The report may include sections on nature of the assignment, scope of investigation, approach
utilized, limitations of scope and findings and/or opinions.
• The report will include schedules and graphics necessary to properly support and explain
findings.
• The report will also discuss how fraudster set up the fraud scheme, and which controls, if any,
were circumvented.
• It is also likely that investigative team will recommend improvements to controls within the
organization to prevent any similar frauds occurring in future.
• The forensic auditor should have active listening skills which will enable him to summarize
facts in report. It should be kept in mind that report should be based on facts assimilated
during the process and not on the opinion of person writing the report.

6. Court Proceedings: Evidence gathered will be presented in court proceedings & team members
may be called.

Characteristics of Forensic Auditor

Out of the Box Thinking ,Creativity, Curiosity, Confidence, Discretion, Detail oriented, Objectivity &
Credibility
Skills of Forensic Auditor
Audit stds, Accounting & business reporting systems, Criminology, Data Analytics, Evidence
Gathering, IT
Forensic Audit Techniques
(I) General Audit Techniques:
• Testing defenses: A good initial forensic audit technique is to attempt to circumvent these
defenses yourself. The weaknesses you find within organizations control will guide you down sea path
taken by suspected perpetrators. This technique requires you to attempt to put yourself in shoes and
think like your suspect.

(II) Statistical & Mathematical Techniques:

• Trend Analysis:
Ø Businesses have cycles and seasons much akin to nature itself.
Ø An expense or event within business that would be analogous to snowy day in middle of
summer is worth investigating.
• Ratio Analysis:
Ø Another useful fraud detection technique is calculation of data analysis ratios for key numeric
fields.
Ø Like financial ratios indicate financial health of company, data analysis ratios report on fraud
health by identifying possible symptoms of fraud.

(III) Technology based /Digital Forensics Techniques:

Ø Every transaction leaves digital footprint in today's computer-driven society.
Ø Close scrutiny of relevant emails, accounting records, phone logs and target company hard
drives is requisite facet of any modern forensic audit.
Ø Before taking steps such as obtaining data from email etc. take appropriate legal advice so
that it doesn’t amount to invasion of privacy.
Ø Digital investigations can become quite complex and require support from trained digital
investigators.
Ø However, many open-source digital forensics tools are available to assist in phase of
investigation.

CA SHUBHAM KESWANI 222

(IV) Computer Assisted Auditing Techniques (CAATs):
Ø These are computer programs that auditors uses to process data of audit significance
contained in client’s information systems, without depending on him.

(V) Generalised Audit Software (GAS):

Ø It is class of CAATs that allows auditors to undertake data extraction, querying, manipulation,
summarization and analytical tasks.
Ø It focuses on fully exploiting the data available in entity’s application systems.
Ø It support auditors by allowing them to examine entity’s data easily, flexibly, independently
and interactively in data-based auditing.
Ø Using GAS, auditor can formulate range of alternative hypotheses for particular potential
misstatement in subject matter and then test those hypotheses immediately.
Ø “What if” scenarios can be developed with results and auditors can examine generated report
rapidly. Currently, latest versions of GAS include Audit Command Language (ACL), Interactive
Data Extraction and Analysis (IDEA) and Panaudit.

(VI) Common Software Tool (CST):

Ø Due to shortcomings of GASs, CSTs have become popular over period. Spreadsheets (like MS
Excel, Lotus, etc.), RDBMS (like MS Access, etc.) and Report writers (like Crystal reports,
etc.) are few examples of CSTs.
Ø Their widespread acceptability is due to its instant availability and lower costs.
Ø While spreadsheets may be extremely easy to use due to its simplicity and versatility, other
CSTs may need some practice.

(VII) Data Mining Techniques:

Ø It is a set of assisted techniques designed to automatically mine large volumes of data for
new, hidden or unexpected information or patterns.
Ø They are categorized in three ways: Discovery, Predictive modeling and Deviation and Link
analysis.
Ø It discovers usual knowledge or patterns in data, without predefined idea or hypothesis about
what pattern may be, i.e. without any prior knowledge of fraud.
Ø It explains various affinities, association, trends and variations in the form of conditional
logic.

(VIII) Laboratory Analysis of Physical and Electronic Evidences: Use of Computer Forensics &
protection of evidence.

CA SHUBHAM KESWANI 223

 Sample Table of Contents of a Forensic Audit Report may include following:
1. EXECUTIVE SUMMARY
(Background, Origin of Audit, Audit Objective, Proposed Audit Outputs, Audit Implementation
Approach)

2. RISK ANALYSIS
Internal Environment Risk & External Environment Forces

3. AUDIT PROCESS
3.1. Preliminary understanding of scope and incident coverage
(i) Identification of all related data elements
(ii) Preparation of a List of "persons of interest" for interview
(iii) Obtain management approval for scope
3.2. Collect Evidence
3.3. Conduct Interviews
3.4. Analyse findings
3.5. Validate Inferences and conclusions

4. EVIDENCE OF RISK EVENTS

(Conflicts of interest, Bribery, Extortion, Theft, Fraudulent transactions, Inventory frauds, Misuse
of assets, Financial Statement frauds)

5. AUDIT RECOMMENDATIONS
5.1 Logical Framework Approach
5.2 Preconditions and Risks

6. GOVERNANCE ON RECOMMENDATION IMPLEMENTATION

6.1 Stakeholders
6.2 Budget Consideration

“The secret of getting things is to ACT”

CA SHUBHAM KESWANI 224

 Peer Review
Definition:
“Peer Review” means
Ø an examination and review of systems and procedures
Ø to determine whether same have been put in place by Practice Unit (PU)
Ø for ensuring quality of assurance services as envisaged by
Ø Technical, Professional and Ethical (TPE) Stds applicable including other regulatory
requirements and
Ø whether same were consistently applied during period under review.”

Objectives of Peer Review

The main objective to ensure that in carrying out assurance service assignments, members:
• comply with TPE Stds including other regulatory requirements &
• have in place proper systems including documentation, to amply demonstrate quality of
assurance services.
Thus, primary objective is not to find out deficiencies but to improve quality of services rendered by
members.

Scope of Peer Review

(i) Compliance with Technical, Professional and Ethical Standards.

(ii) Quality of reporting.

(iii) Systems and procedures for carrying out assurance services.

(iv) Training programmes for staff (including articled and audit assistants) concerned with
assurance functions, including availability of appropriate infrastructure.

(v) Compliance with directions and / or guidelines issued by Council to Members, including Fees
to be charged, Number of audits undertaken, register for Assurance Engagements
conducted during year.

(vi) Compliance with directions and / or guidelines issued by Council relating to article assistants
and / or audit assistants, including attendance register, work diaries, stipend payments.

Statement of Peer Review aims to confine scope of review to preceding 3 years since this would
establish the consistency or deviations, if any, in respect of procedures followed by PU.

As per the Statement, Technical, Professional and Ethical Standards – means

(i) Accounting Standards issued by ICAI applicable for entities other than companies under
Companies Act, 2013;
(ii) Accounting Standards prescribed under section 133 of Companies Act; 2013 by CG based
on recommendation of ICAI in consultation with NFRA
(iii) Ind AS prescribed under section 133 of Companies Act 2013 by CG based on
recommendation of ICAI in consultation with NFRA
(iv) Standards
(v) Framework for preparation and presentation of F.S., Preface to Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services and Framework for
Assurance engagements;
(vi) Provisions of relevant statutes and / or rules or regulations which are applicable in context
of specific engagements being reviewed including instructions, guidelines, notifications,
directions issued by regulatory bodies as covered in scope of assurance engagements.

CA SHUBHAM KESWANI 225

 Assurance Engagement does not include:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;
(v) Engagements solely to assist client in preparing, compiling or collating information other
than financial statements;
(vi) Testifying as an expert witness
(vii) Providing expert opinion on points of principle, such as Accounting Standards or
applicability of certain laws, on basis of facts provided by client; and
(viii) Engagement for Due diligence.

Types of Entities
Level 1 : (Once in 3 years*)
PU which has undertaken audit of any of the below entities:
• SCA of any Banks or Insurance Cos.
• CSA of PSU & Central Coop societies with turnover > 250 Cr. Or NW > 5 Cr.
• SA of AMCs/ MFs
• Listed Enterprises (India or o/s India) whether equity/debt
• Body Corp. including trust covered under public interest entities
• NBFC with deposits >= 100 Cr
• Stat. Audit of Entities preparing the F.S. as per Ind AS
• Entities raised funds from public, banks or financial institutions of over 50 Cr
• Entities raised donations/contributions over 50 Cr
• N.W. > 100 Cr or turnover of 250 cr or above
• Funding by CG/SG of over 50 Cr

Level II: Other than level 1 (Once in 4 years*)

*If board decides à conducted at shorter intervals

Any Practice Unit not selected for Peer Review, may suo moto apply to Board for conduct of Peer
Review. Board shall act upon same within 30 days from date of receipt of such request.
An auditee (Client) may request Board for conduct of Peer Review of its auditor (Practice Unit). Board
shall act upon same within 30 days from date of receipt of such request.

Peer Review Board

• Max 12 members, >=50% from Council of ICAI
• Chairman & VC from council (maybe rotated every year)
• Term 2/3rd members à 3 years or Council term (earlier)
• Casual Vacancy filled by council
• Member of Disciplinary board/committee not be member of Board
• Quorum:
ü 1/3rd members but not less than 3
ü Include Chairman (VC in absence)
ü Atleast once in every calendar quarter

Eligibility of becoming Peer Reviewer

• Member in practice at least 7 yrs of experience.
• Moved from Industry à Practice then 10 yrs Industry + 3 yrs exp. in practice
• Requisite training & test
• Furnish declaration as prescribed by Board + sign Declaration of Confidentiality

CA SHUBHAM KESWANI 226

 • Not eligible if:
ü Disciplin. Action pending against him
ü Guilty of misconduct by Council/BOD/DC
ü Convicted by Comp. court within or o/s India offence involving Moral Turpitude &
imprisonment
ü Partner or personnel has obligation or conflict of intt with PU
ü He has undergone training/articleship under any of the partner of Practice Unit
• Reviewer shall not accept prof assignment from PU 2 yrs from/before date of appointment

Qualified Assistant
• CA + No disqualification u/s 8 or 21 of CA Act 1949
• Name intimated to Board & PU b4 P/R
• Sign Declaration of Confidentiality
• No direct interface with PU or Board
• Should be from firm of reviewer as partner or Paid Asst as per records of ICAI

Approach of Peer Reviewer

a) Gain understanding of Engg letter that defines scope & nature of assurance engg.
b) No of assurance engagements to be selected requires prof judgment based on replies of
questionnaire & size of PU
c) The PU may have policies and procedures for accepting particular engg. Check compliance with
such P&P.
d) Reviewer may follow combination of compliance & substantive procedures throughout the
process.
e) Evaluating records consider following:
ü Any significant issues, matters, problems, arose during engg have been appropriately
considered, resolved & documented
ü Evidence & reasonableness of conclusion
ü Significant decisions, prof judgment, resolution of significant matters documented

Obligations of Practicing Unit (PU)

i) Produce or allow access to record, doc or register maintained by PU
ii) Provide expln or further particulars/info.
iii) All assistance
iv) If info not in legible form à PU will translate to English/hindi à PU shall be responsible
and accountable for accuracy and truthfulness of translation so provided.

Obligation of Reviewer
• The reviewer shall not take PU’s client’s file or records examined by him
• Complete review in prescribed time & submit report to Board
• The Reviewer shall document all his working papers and submit a copy of his working papers to
the Board, if called for by the Board within 18 months of submission of Review Report.

Peer Review Process

Selection of Practice Unit(PU) & appointment of Reviewer (7 Days)

(i) Notification to PU : PU which has been selected for Peer Review shall be notified by Board.

(ii) A detailed declaration cum questionnaire in the form approved by Board shall be submitted by PU
within 7 days from date PU has been notified by Board so that Reviewer to be allotted from Panel of
3 reviewers can be identified by Board as per declaration cum questionnaire submitted by PU.

CA SHUBHAM KESWANI 227

(iii) Name of three Reviewers shall be recommended by Board to Practice Unit so selected.

(iv) PU shall select one out of three Reviewers & intimate to Board within 7 days of receipt of names.

(v)The Board shall intimate Reviewer so selected and seek consent within 7 days.

Planning:

i)Questionnaire: On intimation given by Board of Reviewer’s consent, PU shall within 2 days furnish
following info to reviewer:
Proceedings against PU or partners or qualified assistants during 3 yrs preceding period of review i.e.
till date of submission of questionnaire

ii) Information to be furnished by Peer Review Board: Board shall call for relevant infor. from the
UDIN Directorate and may share concerned details with Peer Reviewer which shall form part of Peer
Review.

Selection of sample by Reviewer:

(a) The Reviewer shall within 7 days of receiving info. from Practice Unit select sample of assurance
services that he would like to Review and intimate the same to PU & PRB.
(b) The Reviewer may also seek further / additional clarification from PU on info furnished / not
furnished.
(c) The Reviewer shall plan for on–site Review visit or initial meeting in consultation with Practice Unit.
Reviewer shall give PU at least 5 days’ time to keep ready necessary records of selected assurance
services.
(d) Reviewer and PU shall mutually co-operate and ensure that entire Review process is completed
within 60 days from date of notifying PU about selection for Review.

Execution
Onsite Review: This on-site Review should not extend beyond 7 working days based on size of PU.

Compliance Review- General Controls

• Independence
• Maintainence of professional skills & stds
• Outside consultation
• Staff recruitments, Supervision & Developments
• Office admin

Selection of Assurance Service Engagements for Review:

(a) The no. of assurance service engagements to be reviewed shall depend upon:
¨ The SQCs generally prevailing;
¨ The size and nature of assurance engagements undertaken by PU.
¨ The methodology generally adopted by PU in providing assurance services.
¨ The no. of partners / members involved in assurance service engagements in PU;
¨ The no. of locations / branch offices of PU;
The Fees charged / received / GST paid by PU.

(b) From initial sample selected at planning stage, Reviewer, in consultation with Peer Review
Board, may reduce or enlarge initial sample size of assurance service engagements for Review.

CA SHUBHAM KESWANI 228

 Review of Records
Compliance Approach: To check controls that audit is performed as per TPE Stds
Following areas to be considered:-
• Assurance services records for administration
• Review & evaluation of system of Internal Controls
• Substantive tests
• Financial Statements Presentation & disclosure
• Assurance services conclusion
• Assurance services Reporting

Substantive Approach: Review of workpapers to check work done as per TPE Stds

Reporting
ü Before making report to Board communicate findings to PU if systems/procedures are deficient
or he needs clarification
ü PU shall reply back within 5 days
ü If reviewer satisfied à submit P/R Report to Board + initial findings + response of PU (A Copy
to PU)
ü Not satisfied à Modified report to Board + Initial findings + response of PU (Copy to PU)
ü Follow on Review after 1 year (maybe reduced to 6 months) from date of issue of MR

Peer Review Certificate

On Receipt of Peer Review Report Board shall within 3 months
• Issue a Peer Review Certificate to PU mentioning validity period.
• Inform PU Certificate can’t be issued with reasons + inform due date of follow on review

PU can’t continue with expired certificate and all docs will be invalid if signed in intervening period à
so PU should submit docs & get PR completed 1 month before expiry

Inherent Limitations of Peer Review

ü The reviewer conducts review in accordance with Statement on Peer Review.
ü The review would not necessarily disclose all weaknesses in compliance of technical standards
and maintenance of quality of assurance services since it would be based on selective tests.
ü As there are inherent limitations in effectiveness of any system of quality control which
happens to be subject-matter of review, departure from system may occur and may not be
detected.

Difference between Peer Review & Quality Review

Peer review is review of systems and procedures of audit firm. Although sample audit files are
inspected by peer reviewer, it is done for purpose of testing effectiveness of systems and procedures.
Intention is not to find faults but help the firm develop effective systems. It is kind of mentoring
process. Peer review is part of activities of ICAI aimed at improving quality of service.

In contrast, quality review is supposed to act as deterrent. Quality Review Board (QRB) is constituted
by CG and is independent of ICAI. As per Sec 28A of CA’s Act, CG has authority to constitute QRB
which carries out supervisory and disciplinary functions. Quality review normally pertains to one
particular audit conducted by audit firm. Main objective is to find errors or inadequacies committed
by auditor. Serious errors lead to disciplinary action against member.

“If you get Tired, learn to Rest not to Quit”

CA SHUBHAM KESWANI 229

 Quality Review

‘Quality means doing it right when no one is looking.’ Henry Ford

Examples of Imp areas as per Quality Review Report 2018-19 in accordance with SQC-1 are:
• Whether audit firm establishes and implements policies and procedure on all element of
system of quality control
• Whether EQCR review at appropriate time for planning audit, significant audit judgement, and
expressions of audit opinion.
• Whether audit firm assigns person responsible for monitoring system of quality control with
appropriate experience & sufficient and appropriate authority.
• Whether audit firm obtain, at least annually, confirmation letter concerning compliance with
policies and procedure for maintenance of independence from all person required to maintain
independence.
• Whether audit firm perform independence confirmation procedure before acceptance and
continuance of audit engagement, and when issuing auditor’s report appropriately confirms
there was no change in status of independence.
• Whether audit firm develop and provides education/ training program that fully take into
account knowledge, experience, competence and capabilities of professional staff.

The scope & objective of quality review includes:

• Examining whether Stat auditor has ensured compliance with applicable technical stds and
other professional and ethical stds and relevant guidance.
• Examining whether Statutory Auditor has ensured compliance with relevant laws and
regulations as required under applicable audit std.
• Examining whether Audit firm under review (AFUR) has implemented system of quality control
with reference to applicable quality control stds.
• Examining whether there is no MM of assets and liabilities at reporting date in selected
entity.

Meaning of Technical Std as per Quality Review Board (QRB)

• Preface to Statements of A/C Std;
• Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related
Services;
• The a/c std notified under sec 133 of Cos Act, 2013;
• The A/C Std issued by ICAI;
• The FFPPFS issued by ICAI; (FFPPFSà Framework for Preparation & Presentation of FS)
• The applicable Quality Control and Standards on Auditing issued by ICAI and notified under
statute;
• The Statements on Auditing issued by ICAI;
• The Notifications/Directions/Guidelines issued by ICAI
• Other relevant L&R (Legal & Regulatory) requirements which include Code of Ethics &
Guidance Notes issued by ICAI

QRB Composition
• CP & 10 other members (CG nominates CP & 5 members, other 5 by Council ICAI)

CA SHUBHAM KESWANI 230

Functions of QRB
• Make recommendations to Council w.r.t quality of services of members
• Review quality of services provided by members
• To guide members of ICAI to improve quality of services and adherence to various statutory
and other regulatory requirements

QRB to review audit of Cos. under NFRA applicability only if referred by NFRA. For others it can do
suo moto.

Powers of QRB
• On its own or through spl arrangement with ICAI, evaluate quality of work of members
• Lay down evaluation criteria for evaluating the services of members
• Call for info from members, ICAI, Council, Clients etc.
• Invite experts for expert/technical advice or opinion
• Make recommendations to council to guide members to improve quality of service

Quality review excludes Internal/Tax/GST & other spl purpose audits. Also excludes employment
services.
Selection of Audit Firms (Criteria)
• Other than those covered by NFRA Rules
Ø risk based selection including regulatory concerns pointing towards stakeholder risk
Ø on account of being part of a sector identified as being susceptible to risk on basis of
market intelligence reports.
Ø reported fraud or likelihood of fraud.
Ø serious a/c irregularities in the f/s highlighted by the media and other reports
Ø major non-compliances under relevant statutes highlighted in past reviews
• Joint Audits à All joint auditors maybe reviewed
• Also review firms if recommendation by RBI, SEBI, IRDA, MCA, NFRA
• Not consider complaints by others à dealt by CA Act 1949

Quality Review Cycle

The following quality review cycle of Audit firms may be followed generally or as maybe decided by
Board:
• Once in 3 years for Audit firms having 20 or more Partners
• Once in 4 years for Audit firms having 10 or more but less than 20 Partners
• Once in 5 years for Audit firms having less than 10 Partners.
Upto 3 engagements may be selected by QRB in a cycle. If no adverse findings in past review then
only 1.
If adverse finding in previous review à then >3 also possible.

Criteria for Technical Reviewers

• Min 15 yrs of post qualification exp & practicing
• Atleast signed 3 stat audits as CSA of Bank/public ltd cos/Govt cos/Pvt ltd cos with t/o >= 50
cr (last 10 yrs)
Out of 3 one must be other than pvt
• No disciplinary proceedings under CA Act 1949
• Not member of QRB/ICAI Council/ Regional council/ Branch comm.

Submit 6 annual declarations along with relevant evidences, to QRB regarding participation in training
workshops/programmes.

CA SHUBHAM KESWANI 231

 Stages of QR Assignments
• QRB selects Audit Firm and audit file for review and identifies TR to conduct Quality Review.
• QRB sends Offer Letter of Engagement to TR.
• TR conveys his acceptance of Letter of Engagement to QRB by sending necessary declarations
for meeting eligibility conditions and furnishing statement of confidentiality by himself and his
assistant/s.
• QRB intimates AFUR about proposed Quality Review. QRB also sends copy of intimation letter
to TR and provides them contact details of each other for further communication.
• TR sends specified QR Questionnaire to AFUR for filling-up. He also calls for additional info
from AFUR, if reqd.
• TR & his team carry out Quality Review by starting off-site review by making proper planning
for review and then on-site visiting office of AFUR by fixing date as per mutual consent
ensuring that review exercise gets completed within specified time.
• On completion of on-site review, TR to send preliminary report to AFUR. TR shall send a copy
of preliminary report to QRB as well.
• AFUR to submit representation on preliminary report to TR and TR to immediately send reply
of AFUR to QRB.
• TR to submit final report along with copy of Annual report of entity for year under review, to
QRB in specified format, on his letterhead, duly signed and dated. In addition, also send copy
of final report to AFUR, requesting them to send final reply thereon to QRB within 7 days of
receipt of final report. AFUR shall also send a copy of their final reply to TR.
• AFUR to submit to QRB their reply on final report and feedback regarding experience of quality
review.
• Upon receipt of final reply from AFUR, TR shall submit to QRB within next 7 days a summary
of his findings, containing findings, technical requirements, final reply of AFUR and final
comments thereon.
• QRG to consider report of TR and responses of AFUR and make recommendations to QRB. QRG
may also call for additional details/information, if reqd, from TR/AFUR or issue such directions
as it may deem appropriate, enabling to assess quality of audit and reporting by AFUR.
• QRB to consider report and recommendations of QRG and decide further course of action.

Composition Of Review Team

QR Team headed by TR + upto 5 assistants, No firm of CA be a member.

Independence & Qualification of Technical Reviewers

• No discipl. Proceedings under CA Act 1949
• He/ firm/network firm not stat auditor of Co. or rendered other service in last 3 FY or
thereafter
• He/ firm/network firm no association with AFUR last 3 FY or thereafter
• Comply with condn of Sec 141(3) of Cos Act 2013 w.r.t review of stat audit (not disqualified)
• Not belong to city/region of HO of AFUR

Independence of Assistant (Qualified Assistance)

• He shall be CA;
• Not disqualified under CA Act 1949;
• Sign statement of confidentiality;
• No direct interface either with audit firm under review (AFUR) or Board;
• Should be working with them for at least one year as member/ partner in CA firm;
• Not associated with AFUR and concerned entity, whose audit is being reviewed, last 3 FY/After.

CA SHUBHAM KESWANI 232

 • No disciplinary proceeding under CA Act, 1949 pending against him or any disciplinary action
under CA Act, 1949 / penal action under any other law taken/pending against him during last 3
FY/after;
• Not member of current QRB/ICAI’s Central Council/Regional Council/Branch level Mgt
Committee; and
• He should not himself be empanelled as TR with Quality Review Board.

Situations where Technical Reviewer can Qualify Quality Review Report

A reviewer may qualify report due to one or more of the following:
• non-compliance with technical standards;
• non-compliance with relevant laws and regulations;
• quality control system design deficiency;
• non-compliance with quality control policies and procedures;

Basic Elements of Quality Review Report

(a) Elements relating to audit quality of companies:
i. A ref. to scope and period of review of audit firm conducted along with limitations on scope.
ii. A statement indicating instances of lack of compliance with T/P/E stds.
iii. A statement indicating the instances of lack of compliance with relevant laws and regulations.

(b) Elements relating to quality control framework adopted by audit firm in conducting audit:
i. An indication whether AFUR has implemented system of quality control with ref. to quality control
Stds.
ii. A statement indicating that system of quality control is responsibility of AFUR.
iii. An opinion on whether AFUR's system of quality control is designed to meet requirements of quality
control stds for attestation services and whether it was complied with during period reviewed to
provide reasonable assurance w.r.t complying with T/P/E stds, other guidance and laws and regulations
in all material respects.
iv. Where reviewer concludes modification in report is necessary, description of reasons with
suggestions.
v. A reference to preliminary report.
vi. An attachment which describes quality review including info on planning and performing the review.

Actions that maybe recommended by QRB

(a) Make recommendations to Council of ICAI u/s 28B(a) of CA Act, 1949 for referring case to
Director (Discipline) of ICAI for consideration and necessary action under CA Act, 1949.
(b) Issue advisory and guidance to the AFUR u/s 28B(c) of CA Act, 1949 for improvement in quality of
services and adherence to various statutory and other regulatory requirements. A copy of such
advisory may also be sent to ICAI for information.

(c) Inform details of non-compliance to regulatory bod(y)/ies relevant to entity as may be decided by
Board.

(d) Intimate AFUR as to findings of Report as well as action initiated as above.

(e) In case of review arising out of reference received from regulatory body, inform results of review
and details of action taken to the concerned regulatory body.

(f) Consider matter complete and inform AFUR accordingly.

CA SHUBHAM KESWANI 233

 Type of Report to be issued
In deciding on type of report to be issued, reviewer should consider evidence obtained and should
document overall conclusions w.r.t year being reviewed in respect of following matters:
(a) whether AFURs system of quality control has been designed to provide firm with reasonable
assurance of complying with technical standards , other relevant guidance and other relevant laws and
regulations.
(b) whether personnel of AFUR complied with such policies and procedures
(c) whether independence of AFUR is maintained in conducting audit.
(d) whether AFUR has instituted adequate mechanism for training of staff.
(e) whether AFUR ensures availability of expertise and/or experienced individuals for consultation.
(f) whether skill and competence of assistants are considered before assignment of attestation
engagement.
(g) whether progress of attestation service is monitored and work performed by each assistant is
reviewed by service in-charge and necessary guidance is provided to assistants.
(h) whether AFUR has established procedure to record the audit plan, NTE of auditing procedures
performed and conclusions drawn from evidences obtained.
(i) whether AFUR maintains audit documentation as per relevant standards.
(j) whether AFUR verifies compliance with laws and regulations to the extent it has material effect
on financial statement.
(k) whether internal controls within AFUR contribute towards maintenance of quality of reporting.

“Don’t stop until you’re Proud”

CA SHUBHAM KESWANI 234

 Direct Tax Audit

Audit Report
Form 3CA: Person carrying Business/profession + reqd audit under any other law (Eg Company)
Form 3CB: Person carrying business/profession but no audit reqd by other law
Form 3CD: Particulars to be furnished with Audit Report

Audit of Public Trust

An auditor should conduct routine checking during course of audit of public trust, in following
manner:
(i) Check books of account and other records having regard to system of accounting and internal
control;
(ii) Vouch the transactions of trust to ensure that:
• transaction falls within ambit of trust;
• the transaction is properly authorized by trustees or other authority permissible in law;
• all incomes due to trust have been properly accounted for on basis of system of accounting
followed;
• all expenses and outgoings appertaining to trust have been recorded on basis of system of
accounting;
• amounts shown as applied towards object of trust are covered by objects of trust as
specified in the document governing the trust.
(iii) Obtain trial balance on closing date duly certified by trustee;
(iv) Obtain Balance Sheet and Profit & Loss Account of trust authenticated by trustees and check
with trial balance with which they should agree.
Notes:
Ø Charitable or religious trust or institution to make an application for registration within 1 year
from date of creation of trust or establishment of institution.
Ø The report of audit of accounts of a trust or institution which is required to be furnished
under Clause (b) of Section 12A should be in Form No. 10B.

Who should get accounts audited?

• Business à T/o > 1 Cr*
w.e.f AY 20-21 its 5Cr if 95% transn through banking channels
• Profession à Gross receipts > 50 L
• Business u/s 44AE, 44BB, 44BBB à claims profits lower than deemed
• Professionà profits deemed u/s 44ADA à claims profits lower than deemed
• Business à provision of Sec 44AD(4) applicable i.e. declares profits as per 44AD for AY &
fails to do that in any 5 succeeding AY à ineligible to claim benefit of 44AD

Notes:
• 44AD isn’t applicable to commission income
• Computation of Turnover to determine eligibility of Tax Audit
(i) Discount allowed in sales invoice deducted from turnover.
(ii) Cash discount not allowed in a cash memo/sales invoice is in nature of a financing charge
and is not related to turnover. Therefore, should not be deducted from the turnover.
(iii) Turnover discount is normally allowed to a customer if sales made to him exceed a
particular quantity. As per trade practice, it is in nature of trade discount and should be
deducted from the figure.
(iv) Special rebate allowed to customer can be deducted from sales if it is in nature of trade
discount. If it is in nature of commission on sales, then it cannot be deducted.

CA SHUBHAM KESWANI 235

 (v) Price of goods returned should be deducted from turnover even if returns are from sales
made in earlier year/s.
(vi) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form
part of turnover. However, if shares, securities, debentures etc., are held as stock-in-trade,
sale proceeds thereof will form part of turnover.

Considerations while furnishing particulars in Form 3CD

i. If item of income/expenditure is covered in more than one of specified clauses in statement of
particulars, suitable cross reference to such items be given at appropriate places.
ii. If there is difference in opinion of tax auditor and assessee in respect of any info furnished in
Form, auditor should state both viewpoints and relevant info to enable tax authority to decide
in the matter.
iii. If any clause is not applicable, he should state that same is not applicable.
iv. In computing allowance or disallowance, he should keep in view law applicable in relevant year,
even though form of audit report may not have been amended to bring it in conformity with
amended law.
v. The info in Form should be based on books of accounts, records, documents, information and
explanations made available to tax auditor for examination.
vi. In case auditor relies on judicial pronouncement, he may mention the fact.

Revision of Tax Audit Report

(a) Normally, report of tax auditor cannot be revised later.
(b) However, when accounts are revised in following circumstances, tax Auditor may have to revise
his Tax audit report also.
i. Revision of accounts of company after its adoption in AGM.
ii. Change in law with retrospective effect.
iii. Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments, etc.
The Tax Auditor should state it is a revised Report, clearly specifying the reasons for such revision
with a reference to the earlier report.

Disclosure of GST Registration (Clause 4)

• Clause 4 requires auditor to ensure whether assessee is liable to pay indirect tax like excise
duty, service tax, sales tax, goods and service tax, custom duty, etc.
• If yes, furnish registration no. or GST no. allotted for same.
• Thus, auditor is primarily required to furnish details of registration nos. as provided to him by
assessee. The reporting is required to be done in manner or format specified by e-filing.

NR Co. engaged in extraction of mineral oils claiming lower than deemed income u/s 44BB
Clause 8: Auditor reqd to mention clause of sec 44AB under which tax audit is conducted.
Clause 12: If p&l includes profits & gains assessable to tax on presumptive basis, indicate the amt &
relevant sections. Tax auditor will state clause (c) of sec 44AB under clause 8 & as per clause 12
report profits u/s 44BB of Income Tax Act 1961.

Method of accounting [Clause 13]

• It requires to state method of accounting employed in PY.
• It also requires to state change in method of accounting vis-à-vis the preceding year.
• If so, details of change and effect on profit or loss are to be stated.
• Also details of deviation thereof, if any, from accounting standards prescribed under section
145 and effect thereof on profit or loss are stated.

CA SHUBHAM KESWANI 236

 • Section 145 provides that method of accounting be either cash or mercantile. Hybrid system
is not permitted.

Method of Valuation of Closing stock (Clause 14)

(a) Method of valuation of closing stock employed in PY.
(b) Details of deviation from method of valuation prescribed under section 145A and effect on P&L.

Non- Maintenance of Stock Register by Printing Entity that receives variety of Job Orders & having
variety of Materials à Is it fine?
• Explanation of entity for use of varieties of raw materials for different jobs undertaken may
be valid.
• Auditor needs to verify specified job-orders received and different raw materials purchased
for each job separately.
• The use of different papers (quality, quantity and size) ink, colour etc. may be examined.
• Auditor enquire with other similar printers in locality to ensure prevailing custom.
• At the same time, he has to report and certify under the clause 35(b) and clause 11(b) of Form
3CD read with the Rule 6G(2) of the Income-tax Act, 1961, about details of stock and account
books (including stock register) maintained.
• He (or his deputy) must verify closing stock of raw materials, work-in-progress and finished
goods of the concern, at least on date of its balance sheet.
• In case the said details are not properly maintained, he has to specifically mention the same
with reasons for non-maintenance of stock register by the entity.

Capital Asset converted to Stock in Trade [Clause 15]

Give the following particulars of the capital asset converted into stock-intrade:-
(a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade.

Audit checklist:
• Ask assessee whether he has converted any capital asset into SIT during PY.
• Details of capital assets converted into SIT during the year to be given.
• Check whether assessee has converted any capital asset into SIT during year under audit.
• If yes, then obtain details as to nature of such capital asset, its date and cost of acquisition and
amount at which asset has been converted into stock-in-trade.

Clause 16: Amounts not credited to the profit and loss account, being,-
(a) the items falling within the scope of section 28;
(b) proforma credits, drawbacks, refund of duty of customs or excise or service tax, or sales tax or
VAT, where such credits, drawbacks or refunds are admitted as due by authorities concerned;
(c) escalation claims accepted during the previous year;
(d) any other item of income;
(e) capital receipt, if any.

Proforma Credits, Drawbacks, Refund of Duty, Etc. [Clause 16(b)]

Ø Enquire whether there has been admitted any claim in respect of proforma
credits/drawbacks/refund of duties of customs or excise or both/sale tax/service tax/VAT by
authorities.

CA SHUBHAM KESWANI 237

Ø If yes, then obtain schedule from assessee indicating details of all such claims admitted by
authorities but not credited to P&L a/c.
Ø Cross check the details contained in schedule with the claim papers and other relevant
correspondence including assessment orders.
Ø Ensure that claims have been admitted as due by concerned authorities.
Ø Note that the item admitted by authorities will mean the item admitted before closing of a/cs.
Ø Ensure that accounting of such claims is in accordance with method of accounting regularly
followed by assessee.
Ø Ensure that all claims admitted have been cr. to p&l a/c. Any exception should be reported.
Ø Where cash system of accounting is followed then this fact should be stated in the report.

Escalation claims to Customers not accounted as income [Clause 16(c)]

• A tax auditor has to report under clause 16(c) of Form 3CD on any escalation claim accepted
during PY and not credited to P&L account.
• If such amount not credited to P&L a/c fact should be reported.
• The system of accounting followed in respect of this particular item may also be brought out
in appropriate cases.
• If assessee is following cash basis of accounting with reference to this item, it should be
clearly brought out since acceptance of claims during relevant PY without actual receipt has
no significance in cases where cash method of accounting is followed.
• Escalation claims should normally arise pursuant to a contract (including contracts entered
into in earlier years), if so permitted by contract.
• Only claims to which other party has given unconditional acceptance could constitute accepted
claims.
• Mere making claims by assessee or claims under negotiations cannot constitute accepted
claims. After ascertaining relevant factors as outlined above, decision whether to report or
not, can be taken.

Instances of Capital Receipt not cr. to P&L A/c [Clause 16(e)]

Guidance for reporting capital receipts: Capital receipts are not generally credited to p&l hence auditor
should take enough care to check out any transaction generating capital receipts by –
• Enquiring whether assessee is in receipt of any amount of capital nature during the previous year.
• Going through financial statements, in particular reserve account, to ascertain whether assessee has
received any such receipts and credited them directly to reserve account.
• Enquiring whether assessee has credited such receipts to p&l a/c.
• Checking that any such receipts is accounted in terms of method of accounting followed by assessee.

Illustrative examples of capital receipts:

(a) Capital subsidy received in form of Government grants, which are in nature of promoters’
contribution. For e.g., Capital Investment Subsidy Scheme.
(b) Government grant in relation to specific fixed asset where such grant is shown as a deduction
from gross value of asset by concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to profit and loss account.

Sale of Property at Price < Stamp duty Value

Clause 17 of Form 3CD requires tax auditor to furnish information if land or building is transferred
during PY for consideration less than value adopted by any authority of a State Government as under:

CA SHUBHAM KESWANI 238

 Details Consideration Value adopted or Whether provisions of 2nd proviso to subsection (1)
of Received or assesses or of section 43CA or 4th proviso to clause (x) of sub-
Property Accrued assessable section (2) of section 56 applicable? [Yes/No]

• Auditor should obtain list of all properties trfd by assessee during PY and furnish amt of
consideration received or accrued, as disclosed in books of account of assessee.
• For reporting value adopted or assessed or assessable, auditor should obtain from assessee copy of
regd sale deed. In case property is not regd, auditor may verify relevant docs from relevant authorities
or obtain third party expert like lawyer, solicitor representation to satisfy compliance of sec 43CA /
section 50C of the Act.

Capital expenditure incurred for scientific research assets [Clause 19]

Expenditure on Scientific Research covered under sec 35 of IT Act, 1961, is to be reported by tax
auditor under clause 19 of Form 3CD.
The tax auditor is required to report following:
(a) amount debited to profit and loss account, and
(b) amounts admissible as per provisions of the Income-tax Act, 1961 and also fulfils specified
conditions.

Payment to Clubs [Clause 21(a)]

• As per Clause 21(a) of Form 3CD, amt of expenditure incurred at clubs by assessee during
year being entrance fees and subscriptions, and cost for club services and facilities used
should be indicated.
• The payments made may be for directors and other employees in case of companies, and
partners or proprietors in other cases.
• The fact whether such expenses are incurred in course of business or whether they are of
personal nature should be ascertained.
• The tax auditor is required to furnish details of amounts debited to P&L a/c, being in nature
of capital, personal, advertisement expenditure etc.

Advertisement expenditure in Brochure of political Party [Clause 21(a)]

As per Clause 21(a), auditor is reqd to furnish details of amts debited to P&L a/c, being in nature of
advertisement exp. in any souvenir, brochure, tract, pamphlet or the like published by political party
in tax audit report.

Clause 21(b): Amounts inadmissible under section 40(a):

(i) As payment to non-resident referred to in sub-clause (i) [Pay to NR]
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted but has not been paid during the previous
year or in the subsequent year before the expiry of time prescribed under section 200(1)
(I) date of payment (II) amount of payment (III) nature of payment (IV) name and
address of the Payee (V) amount of tax deducted

(ii) As payment referred to in sub-clause (ia) [Pay to Resident]

(A) Details of payment on which tax is not deducted:

CA SHUBHAM KESWANI 239

 (I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and address of
the payee
(B) Details of payment on which tax has been deducted but has not been paid on or before the
due date specified in subsection (1) of section 139.
(I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and address of
the payer* (V) Amount of tax deducted (VI) Amount out of (V) deposited, if any

Cash Payments to Parties > Limit u/s 40A(3) [Clause 21(d)]

• Rs 35,000 for Goods Carriage & 10,000 for others per party per day
• If client says cash payment made because other party insisted then also report them
• Limit is per party not per bill
• Limit of 35k applies only if payee is engaged in goods carriage business not payer

Payment to Specified Persons u/s 40A(2)(b) [Clause 23]

Section 40(A)(2) provides exp. for which payment has been to certain specified persons (Related
Party) may be disallowed if, in opinion of Assessing Officer, expenditure is excessive or unreasonable
having regard to:
(i) fair market value of goods, services or facilities for which payment is made; or
(ii) for legitimate needs of business or profession of assessee; or
(iii) benefit derived by or accruing to assessee from such expenditure.

Clause 25: Any amount of profit chargeable to tax under section 41 and computation thereof.

The tax auditor should obtain a list containing all the amounts chargeable under section 41 with the accompanying
evidence, correspondence, etc. He should in all relevant cases examine the past records to satisfy himself about
the correctness of the information provided by the assessee. The tax auditor has to state the profit chargeable
to tax under this section. This information has to be given irrespective of the fact whether the relevant amount
has been credited to the profit and loss account or not. The computation of the profit chargeable under this
clause is also to be stated.

The tax auditor should maintain the following in his working papers for the purpose of furnishing details required
in the format provided in the e-filing utility:
S No. Name of person Amt of income Section Description of transn Computation if any

Delay in depositing GST or other indirect tax/cess/fees [Clause 26]

Any amt of GST/Tax payable on last day of PY (opening balance) as well as on last day of current
year has to be reported in Tax Audit Report under clause 26(A) and 26(B) in reference of Sec 43B.

Clause 26 (A) dealt GST/VAT payable pre-existed on the first day of previous year but was not
allowed in assessment of any preceding previous year and was either paid {clause 26(A) (a)}/ or/ and/
not paid during the previous year {clause 26(A)(b)}

Sec 26(A) The details will be as under in regard to opening balances:

S No Section Nature of o/s opening Amount paid Amt Amt unpaid
Liability balance not /set off written at end of
allowed in PY during year back to p&l year (b)
(a) a/c

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Sec 26(B) Liability incurred during the previous year:
S No Section Nature of Amount incurred Amount paid/set-off before Amount unpaid on due of
Liability in PY but due date of filing filing of return/date
remaining o/s on return/date upto which upto which reported in
last day of PY (a) reported in tax audit report, tax audit report,
whichever is earlier. whichever is earlier (b)

Clause 27(a): Amount of GST credits availed of or utilized during the PY and its treatment in profit
and loss account and treatment of outstanding GST credits in the accounts.

The amount of CENVAT/GST availed and utilised should be reported under this sub-clause. In some
cases, CENVAT/GST availed may be lesser than the CENVAT /GST credit utilised during the year on
account of opening balance in CENVAT/GST account or vice-versa and as such it would be advisable, in
order to avoid any misleading conclusion and inferences, to report the opening and closing balances of
CENVAT/GST. Further the sub-clause requires reporting of the credits availed of or utilized during
the previous year, it is desirable to report both the credits availed and the credits utilized.

In so far as the reporting of accounting treatment of CENVAT/GST credit is concerned the clause
requires that its treatment in profit and loss account and the treatment of outstanding CENVAT/GST
credit in the account have to be reported upon.

The tax auditor should verify and maintain the following information in his working papers for the
purpose of reporting in the format provided in the e-filing utility:
CENVAT/GST Amount Treatment in P&L A/c
Opening Balance
GST Availed
GST Utilised
Closing balance

Income or Expenditure of Prior period cr/dr to P&L A/c [Clause 27(b)]

Particulars of income or expenditure of prior period credited or debited to P&L a/c to be verified:
(i) Clause would be relevant only where assessee follows mercantile system of accounting.
(ii) Under cash system of accounting, expenses debited/ income credited to P&L a/c would be current
year’s expenses/income even though they may relate to earlier years.
(iii) The tax auditor should obtain particulars of expenditure or income of any earlier year debited or
credited to p&l a/c of relevant PY when mercantile system of accounting is followed.
(iv) Business or profession audited under any other law, info. may be available from annual accounts.
(v) Business or profession not required to get his accounts audited, close scrutiny of ledger in regard
to period for which expenditure or income is entered in books may be necessary.
(vi) Tax auditor should maintain following information in his working papers file for purpose of
reporting in format provided in the e-filing utility:
S No Type Particulars Amount Prior Period to which it relates

IFOS Reporting [Clause 29]

Clause 29: Whether during PY assessee recd consideration for issue of shares > FMV of shares as
ref in sec 56(2)(viib), if yes, furnish details.
29A: Amt included in IFOS u/s 56(2)(ix), if yes furnish details.
56(2)(ix): Amt recd as advance for capital assetà forfeited à treated as income

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29B: Amt of income chargeable to tax u/s 56(2)(x), if yes furnish details

Sec 56(2)(x): where any person receives, in any PY, from any person or persons on or after 1.4.17,—
(a) any sum of money, w/o consideration, > 50,000, whole of aggregate value of such sum;
(b) any immovable property,—
(A) without consideration, SDV > 50,000, SDV of such property;
(B) for a consideration, (SDV- consideration), if amount of such excess is more than higher of
following amounts:—
(i) 50,000; and
(ii) amount equal to 10% of consideration:
(c) any property, other than immovable property,—
(A) without consideration, aggregate FMV of which exceeds 50,000, whole of aggregate FMV of such
property;
(B) for a consideration < aggregate FMV of property by an amount exceeding 50,000, à (FMV-
Consideration)

Clause 30: Details of any amount borrowed on hundi or any amount due thereon (including interest on
the amount borrowed) repaid, otherwise than through an account payee cheque. [Section 69D].

30A. (a) Whether primary adjustment to transfer price, as referred to in Sec 92CE(1), has been made
during the previous year? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Under which clause of sub-section (1) of section 92CE primary adjustment is made?
(ii) Amount (in Rs ) of primary adjustment:
(iii) Whether excess money available with associated enterprise is required to be repatriated to
India as per the provisions of of section 92CE(2)? (Yes/No)
(iv) If yes, whether the excess money has been repatriated within the prescribed time (Yes/No)
(v) If no, the amount (in Rs) of imputed interest income on such excess money which has not been
repatriated within the prescribed time.

Clause 30B – Limitation on Interest Deduction 30B.

(a) Whether the assessee has incurred expenditure during PY by way of interest or of similar nature
exceeding 1 Cr as referred to in section 94B(1)?(Yes/No)
(b) If yes, please furnish following details:-
(i) Amount (in Rs) of expenditure by way of interest or of similar nature incurred:
(ii) EBITDA during PY (in Rs):
(iii) Amount (in Rs) of expenditure by way of interest which exceeds 30% of EBITDA
(iv) Details of interest expenditure brought forward as per subsection (4) of section 94B
(v) Details of interest expenditure carried forward as per subsection (4) of section 94B

Business Receipt in Cash

Clause 31 (a): Particulars of each loan or deposit in an amount exceeding limit specified in section
269SS (i.e. 20,000) taken or accepted during PY:-
(i) name, address and PAN (if available with assessee) of lender or depositor;
(ii) amt of loan or deposit taken or accepted;
(iii) whether loan or deposit was squared up during PY;
(iv) maximum amt o/s in the account at any time during PY;
(v) whether loan or deposit was taken or accepted by cheque or bank draft or use of ECS through a
bank a/c; (v) in case loan or deposit was taken or accepted by cheque or bank draft, whether the
same was taken or accepted by an account payee cheque or an a/c payee bank draft.

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*(These particulars need not be given in the case of Govt co., banking company or corporation
established by a Central, State or Provincial Act.)

For reference:
Sec 269SS: Prohibits Accepting loan/deposit from a person(cumulatively) >= 20,000 otherwise than
by a/c payee cheque/bank draft
Section 269ST: no person shall receive >=2L from a person/day in a single
transaction/event/occasion during PY other than a/c payee cheque/bank draft/ECS

Clause 31 (ba) particulars of each receipt in an amount exceeding limit specified in Sec 269ST (i.e. 2L),
in aggregate from a person in a day or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person, during PY, where receipt is otherwise than by cheque
or bank draft or use of ECS through bank account:-
i. Name, address and PAN (if available with assessee) of payer
ii. Nature of transaction
iii. Amount of receipt
iv. Date of receipt
Particulars need not be given in case of receipt by or payment to a Govt. company, a banking Company,
a post office savings bank, cooperative bank

Speculation loss on Purchase & sale of securities [Clause 32(e)]

A tax auditor has to furnish details of speculation loss incurred during PY, under Clause 32(e) of Form
3CD, regarding whether Co. is deemed to be carrying on speculation business as referred in expln to
Sec 73.
Expln. to sec 73 provides that where any part of business of Co. consists in purchase and sale of shares
of other companies, such Co. shall, for purpose of this section, be deemed to be carrying on speculation
business to extent to which business consists of purchase and sale of such shares.

Disqualifications in Cost Audit Report

• A tax auditor is reqd to check under Clause (37) of Form 3CD whether cost audit was carried out
& if yes, provide details of disqualification or disagreement on any matter/item/value/qty as may
be reported/identified by cost auditor.
• The tax auditor should obtain copy of cost audit from assessee.
• Even though tax auditor is not reqd to make detailed study of such report, he has to take note of
details of disqualification or disagreement on any matter/item/value/qty as may be
reported/identified by the cost auditor.
• The tax auditor need not express any opinion in a case where such audit has been ordered but
same has not been carried out.
Accounting Ratios (Clause 40)
Details regarding turnover, gross profit, etc., for PY and preceding PY should be provided as follows:
S No. Particulars PY Preceding PY
1 Total turnover of assessee
2 Gross profit or turnover of assessee
3 Net profit/turnover of assessee
4 Stock in trade/turnover
5 Material consumed/FG produced

• Details reqd to be furnished for principal items of goods traded or manufactured or services
rendered.

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 • These ratios have to be calculated only for assessees who are engaged in manufacturing or
trading activities.
• This clause is not applicable to assessees carrying on profession.
• Moreover, ratios have to be given for business as a whole and need not be given product wise.

Demand raised under Tax laws other than Income tax Act (Clause 41)
Please furnish details of demand raised or refund issued during PY under any tax laws other than
Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant proceedings.
• Tax auditor should obtain copy of all demand/ refund orders issued by govt authorities during
PY under other tax laws. Even though demand order issued in current PY it may relate to other
PY then also reporting reqd.
• Adjustments of refund against demand also to be reported.

S Name Demand Date of FY to which Amt of Adjustment Remark

No. of or demand demand or demand of refund s
Act Refund raised/ refund raised/refun against
order no. refund issued relates d issued demand, if
any

SFT Reporting (Clause 42)

Clause 42 (a) Whether the assessee is required to furnish statement in Form No.61 or Form No. 61A
or Form No. 61B? (Yes/No)
(b) If yes, please furnish:

With respect to Form 61, tax auditor should verify whether taxpayer has entered into any transaction
where the other party was required to quote PAN. He should verify whether taxpayer has obtained
declaration in Form No. 60 where the other party has not furnished his PAN. Wherever the taxpayer
has received declarations in Form No. 60, the auditor should verify if the taxpayer has filed Form No.
61 including therein all the necessary particulars.

With respect to Form 61A, the tax auditor should ascertain whether the taxpayer is required to report
any transactions under Section 285BA read with Rule 114E. It may be noted that specified transactions
under Section 285BA include the issue of bonds, issue of shares, buyback of shares by a listed
company, etc. These transactions may not happen every year and hence special attention should be
given in the year when a company taxpayer issues any security or a listed company undertakes buyback
of shares.

While verifying the same, the tax auditor should ensure that the provisions of Rule 114E(3) have been
properly considered and applied. Failure to do so may result in a certain transaction not being reported.
It may be noted that the payment may be received for various transactions and on different dates,
and hence these may not be covered under Section 269ST but will have to be reported under Section
285BA.

With respect to Form 61B, the tax auditor should review the due diligence procedures carried out by
the taxpayer in accordance with provisions of Rule 114H and the results of such procedures. The tax
auditor should review the list of Reportable Accounts identified by the due diligence process and the
information to be maintained and reported by the taxpayer.

In case any reportable account has been omitted, or there is any error or omission in Form 61B, the
same may be reported under the Form No. 3CD. The auditor should verify if the taxpayer has filed
Form No. 61B for correcting errors or omissions in the form filed originally. In such a case the auditor

CA SHUBHAM KESWANI 244

should give details of both the forms filed. The errors in the original Form 61B which are corrected in
the revised Form 61B need not be reported under Form No. 3CD.

The tax auditor should verify that Form 61B is duly signed by the designated director and filed.

Country by Country Reporting

Clause 43 (a) Whether the assessee or its parent entity or alternate reporting entity is liable to
furnish the report as referred to in section 286(2) (Yes/No)
(b) if yes, please furnish following details:
(i) Whether report has been furnished by assessee or its parent entity or an alternate reporting entity
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
• Under Sec 286, international group has to furnish CbCR containing info about whole group
comprising of various constituent entities.
• Such report is to be filed in India if parent entity is resident of India or international group
has appointed constituent entity resident in India to file CbCR on behalf of whole group.
• The report under Sec 286(2) is filed by parent entity which is resident in India or alternate
reporting entity resident in India.
• The tax auditor should verify if taxpayer is required to file Form 3CEAC based on satisfaction
of the conditions prescribed.
• Tax auditor should also verify if taxpayer whose parent is non-resident has filed Form No.
3CEAC.
• The tax auditor may obtain a necessary certificate from taxpayer in respect of constitution of
the international.

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 Reports vs Certificate

Distinction between Audit Report & Certificate

• The term ‘report’ is used where an expression of opinion is involved.
• The term ‘certificate’ is preferable where auditor comments on or verifies facts such as a
verification of investment by inspection or the checking of ballot papers on a poll in a company
meeting.
• Under the Companies Act, 2013, a number of situations are there where an auditor is required
to issue a certificate rather than a report, like under Section 66 of the Companies Act, 2013,
an auditor is required to file a certificate in the tribunal where company is proposing for the
reduction of capital.
• However, the report under Section 143 of the Companies Act, 2013, is an opinion based report
and is not a certificate.

Some situations where Audit Reports and Certificates are required is given below -
(1) Under the Payment of Bonus Act, 1965, CA may be required to issue a ‘report’ on computation of
bonus payable.

The report may be as under:

“We have reviewed the figures in above computation in comparison with books and records produced
to us, audit of which has already been completed by us and report that subject to the notes given on
face of the computation in our opinion, and to the best of our knowledge and belief and according to
information and explanation given to us, above computation is in due accordance therewith and has been
made on a basis reasonably consistent with provisions of Payment of Bonus Act, 1965.”

Place: For X & Co.

Date: Chartered Accountants

(2) Auditor’s Report in accordance with Regulation 54 of the SEBI (Mutual Fund) Regulations, 1993.

(i) All Mutual funds shall be required to get their accounts audited in terms of a provision to that
effect in their trust deeds. The Auditor’s Report shall form part of Annual Report. It should
accompany the Abridged Balance Sheet and Revenue Account. The auditor shall report to Board of
Trustees and not to unit holders.

(ii) The auditor shall state whether:

1. He has obtained all information and explanations which, to the best of his knowledge and
belief, were necessary for the purpose of his audit.
2. The Balance Sheet and the Revenue Account are in agreement with the books of account of
the fund.

(iii) The auditor shall give his opinion as to whether:

1. The Balance Sheet gives a true and fair view of the scheme wise state of affairs’ of the fund
as at the balance sheet date, and
2. The Revenue Account gives a true and fair view of the scheme wise surplus/deficit of the fund
for the year/period ended at the balance sheet date.

CA SHUBHAM KESWANI 246

 Professional Ethics
Fundamental Principles
a) Integrity:
• straightforward and honest in professional & business relationships
• shall not knowingly be associated with information
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided negligently; or
(c) Omits required information.

b) Objectivity: not to compromise professional or business judgment because of bias,

conflict of interest or undue influence of others

c) Professional Competence & Due Care:

• Attain & maintain professional knowledge & skill
• Act diligently
• Exercise sound judgment
• Continuous awareness & understanding of technical, professional & business
developments
• Reasonable steps to ensure those working in his authority have training &
supervision

d) Confidentiality: Not disclose info acquired from client or employer (including prospective).
Not use such info for personal advantage. Continues even after relationship has ended.

Circumstances where professional accountants are or might be required to disclose confidential

information or when such disclosure might be appropriate:
• Disclosure is required by law
• Disclosure is permitted by law and is authorized by client or employing org;
• There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with requirements of Peer Review or Quality Review of the ICAI;
(ii) To respond to inquiry or investigation by professional or regulatory body
(iii) To protect the professional interests in legal proceedings; or
(iv) To comply with technical and professional standards, including ethics
requirements.

In deciding whether to disclose confidential information, professional accountants should consider

the following points:
(a) Whether interests of any party, including 3rd parties might be affected
(b) Whether all relevant info is known and substantiated, and
(c) The proposed type of communication, and to whom it is addressed;
(d) Whether parties to whom communication is addressed are appropriate recipients.

e) Professional Behaviour: avoid any conduct that accountant knows or should know might
discredit the profession.

If a professional accountant faces a situation when complying with one fundamental principle
conflicts with others, he should consult:
• Others within the organization
• TCWG
• ICAI
• Legal counsel

CA SHUBHAM KESWANI 247

 Types of Threats
• Self-interest threat –threat that a financial or other interest will inappropriately influence a
professional accountant’s judgment or behaviour;
• Self-review threat –threat that a professional accountant will not appropriately evaluate the
results of a previous judgment made; or an activity performed by the accountant, or by
another individual within the accountant’s firm or employing organization, on which the
accountant will rely when forming a judgment as part of performing a current activity;
• Advocacy threat –threat that a professional accountant will promote a client’s or employing
organization’s position to the point that the accountant’s objectivity is compromised;
• Familiarity threat –threat that due to a long or close relationship with a client, or employing
organization, professional accountant will be too sympathetic to their interests or too
accepting of their work;
• Intimidation threat –threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue
influence over the accountant.

Circumstances that may create self-interest threats

• Direct financial interest in client
• Undue dependence on total fees from a client.
• Concern about the possibility of losing a client.
• Potential employment with a client.
• Having a close business relationship with a client.
• Having access to confidential information of the client that might be used for personal gain.

Circumstances that may create Self Review Threat

• Loan to or from assurance client or any of its directors or officers
• Professional accountant holding financial interest in, or receiving a loan or guarantee from,
employing organization.
• Professional accountant participating in incentive compensation arrangements offered by
employing organization.
• Professional accountant having access to corporate assets for personal use.
• Professional accountant being offered a gift or special treatment from supplier of employing
organization.

Examples of circumstances that may create advocacy threats:

• Promoting shares in entity when that entity is financial statement audit client.
• Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.
• lobbying in favor of legislation on behalf of a client.

Examples of circumstances that may create familiarity threats

• A member of engagement team having close or immediate family relationship with director or
officer of the client.
• A member of engagement team having a close or immediate family relationship with employee of
client who is in position to exert direct and significant influence over subject matter of
engagement.
• A former partner of firm being director or officer of client or employee in position to exert
direct and significant influence over the subject matter of the engagement.
• Long association of an audit team member with the audit client.

CA SHUBHAM KESWANI 248

 Examples of circumstances that may create intimidation threats
• Being threatened with dismissal or replacement
• Being feeling pressured to agree with the judgment of a client because the client has
more expertise on the matter in question.
• Being informed that a planned promotion will not occur unless the accountant agrees
with an inappropriate accounting treatment.

Examples of actions that in certain circumstances might be safeguards to address threats include:
• Assigning additional time and qualified personnel to reqd tasks when engagement has been
accepted.
• Having appropriate reviewer, not member of team, review work performed or advise to address
a self-review threat.
• Using different partners and engagement teams with separate reporting lines for provision of
non-assurance services.
• Involving another firm to perform or re-perform part of engagement .
• Separating teams when dealing with matters of a confidential nature.

Disabilities for the Purpose of Membership (Sec 8 of the CAs Act, 1949)
• Under 21 years
• Unsound mind and stands so adjudged by competent court;
• Undischarged insolvent;
• Being a discharged insolvent, has not obtained from court a certificate stating that
insolvency was caused by misfortune without any misconduct on his part;
• Convicted by competent Court within or without India, of offence involving moral turpitude
and punishable with transportation or imprisonment unless CG by order in writing, removed
disability;
• Removed from membership of ICAI been guilty of professional or other misconduct;

Types of Members
Associate Member: Person, whose name has been entered in Register, & entitled to use the letters
A.C.A. after his name.

Fellow Member: Following types of members shall be registered as Fellow of ICAI, on payment of
such fees along with the application-

(i) Associate member who has been in continuous practice in India for at least 5 years,
(ii) Member who has been associate for continuous period of not less than 5 years & who
possesses such qualification experience equivalent to continuous practice for period of 5 years
as CA.
Removal of Name from the Register: As per Sec 20 of Act, Council may remove, from Register, the
name of any member in following cases-
i. who is dead;
ii. from whom request received;
iii. not paid prescribed fee required to be paid by him;
iv. Disqualified u/s 8

CA SHUBHAM KESWANI 249

 Effective date of Restoration in case of Membership Removal
Application for restoration and requisite fees Restoration shall be with effect from the date
are made within same year of removal on which it was removed from the Register.
Removal of name under orders of Board of Restoration shall be in accordance with such
Discipline or the Disciplinary Committee or the orders.
Appellate Authority or the High Court
In other cases Restoration shall be with effect from the date
on which the application and fee are received.

Penalty for Falsely Claiming to be a Member- Sec 24 of the CAs Act, 1949 provides that any
person who-
(i) not being a member of ICAI;
(a) represents that he is member of ICAI; or
(b) uses designation CA;
(ii) being a member of ICAI, but not having certificate of practice, represents that he is in
practice or practice as a CA,
shall be punishable on first conviction with fine which may extend to 1000, and on any
subsequent conviction with imprisonment which may extend to 6 months or with fine which
may extend to 5,000, or with both.

Cancellation and Restoration of Certificate of Practice

Certificate of Practice (COP) shall be liable for cancellation, if:
(i) name is removed from the Register; or
(ii) Council is satisfied,that such certificate was issued on the basis of incorrect,
misleading or false information, or by mistake or inadvertence; or
(iii) a member has ceased to practise; or
(iv) a member has not paid annual fee for COP till 30th day of September of the relevant
year. Where COP is cancelled, the holder shall surrender the same to the Secretary.

Regulation 11 on restoration of COP states that, on an application made in approved Form and
payment of such fee, Council may restore COP w.e.f date on which it was cancelled, to member whose
certificate has been cancelled due to non-payment of the annual fee for the COP and whose
application, complete in all respects, together with fees, is received by the Secretary before expiry
of relevant year.

Members - deemed to be in Practice

As per Sec 2(2): “A member of ICAI shall be deemed “to be in practice” if he:
(i) engages himself in practice of accountancy; or
(ii) offers to perform or performs service involving auditing or preparation, verification
or certification of F.S. or holds himself out as accountant; or
(iii) renders professional services about matters of principle or relating to accounting,
presentation or certification of financial facts/data; or
(iv) such other services in opinion of Council, are rendered by CA in practice;

Explanation –Member who is salaried employee of CA in practice à deemed to be in practice for

limited purpose of training of Articled Assistants”.

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Pursuant to Sec 2(2)(iv) above, the Council has passed a resolution permitting a CA in practice to
render entire range of “Management Consultancy and other Services”.

The expression “Management Consultancy and other Services” shall include the following-
i. Financial management planning and financial policy determination.
ii. Capital structure planning and advice regarding raising finance.
iii. Working capital management.
iv. Preparing project reports and feasibility studies.
v. Preparing cash budget, cash flow statements, profitability statements, statements of
sources and application of funds etc.
vi. Budgeting including capital budgets and revenue budgets.
vii. Inventory management, material handling and storage.
viii. Market research and demand studies.
ix. Price-fixation and other management decision making.
x. Management accounting systems, cost control and value analysis.
xi. Control methods and management information and reporting.
xii. Personnel recruitment and selection.
xiii. Setting up executive incentive plans, wage incentive plans etc.
xiv. Management and operational audits.
xv. Valuation of shares and business and advice regarding amalgamation, merger and
acquisition. Acting as Registered Valuer under Cos. Act 2013.
xvi. Business Policy, corporate planning, organisation development, growth and diversification.
xvii. Organisation structure and behaviour, training programmes, work study, job-description,
job evaluation
xviii. Systems analysis and design, and computer related services and to carry out other
professional services relating to EDP.
xix. Acting as advisor or consultant to an issue, including such matters as:
a. Drafting of prospectus and memorandum containing salient futures of prospectus.
Drafting and filing of listing agreement and completing formalities with Stock
Exchanges, Registrar of Companies and SEBI.
b. Preparation of publicity budget, advice regarding arrangements for selection of (i) ad -
media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to
issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the
underwriting arrangement.
c. Advice regarding selection of various agencies connected with issue, namely Registrars
to Issue, printers and advertising agencies.
d. Advice on the post issue activities, e.g., follow up steps which include listing of
instruments and dispatch of certificates and refunds.
Explanation – Portfolio mgt, underwriting & broking (PUB) not permitted.
xx. Investment counselling in respect of securities
xxi. Registrar to an issue and for transfer of shares/other securities.
xxii. Quality Audit.
xxiii. Environment Audit.
xxiv. Energy Audit.

CA SHUBHAM KESWANI 251

 xxv. Recovery Consultant in the Banking Sector.
xxvi. Insurance Financial Advisory Services under IRDA Act 1999, including Insurance
Brokerage.
xxvii. Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016
xxviii. Admin Services: Such services require little to no professional judgment and are clerical
in nature.
Note: Member of ICAI is deemed to be in practice during period he renders ‘service with armed
forces’.

Important Note:
A CA whose name has been removed from membership for prof. or other misconduct à during such
period of removal à will not appear before various tax authorities or other bodies before whom
he could have appeared in his capacity as a member of ICAI à Because once a person becomes a
member of ICAI; he is bound by provisions of CA Act, 1949 and its Regulations

Companies not to practice as CAs à If LLP has Co. as partner it can’t engage in practice

Member in Practice Prohibited from using a Designation Other Than CA – Sec 7

• Merchant Banker / Advisor to an issue: Members may obtain registration as category IV

Merchant Banker & act as Advisor or Consultant to issue. In client Companies’ offer
documents and ads regarding capital issue, name and address of CA or firm of CAs acting as
Advisor or Consultant to the Issue could be indicated under the caption “Advisor/Consultant
to the Issue”. However, name & address of such CA/firm of CAs should not appear
prominently.
• The members of ICAI who are also Directors in Companies, members of Political parties or
CAs Cells in political parties, holding different positions in clubs are not permitted to
mention these positions as these would be violative of provisions of Sec 7 of the Act.
• Member can’t designate as Cost Accountant; he can use letters A.C.M.A (Associate) or
F.C.M.A (Fellow) after his name.
• Permitted to mention membership of foreign Institute of Accountancy, recognized by Council
through MOU / Mutual Recognition Agreement (MRA) with ICAI.
• Improper for CA to state on professional docs à Income-tax Consultant, Cost Accountant,
Company Secretary, Cost Consultant or a Management Consultant.
• Designation “Corporate Lawyer” not permitted.
• Use of initials ‘CPA’ not permitted on visiting cards.

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 Branch office (Section 27)

Sec 27 of Act: If a CA in practice or Firm of CAs has more than one office in India, each one of
such offices should be in separate charge of member of ICAI.

Exemption for Hilly Areas

• Temp office in plains allowed for limited period not exceeding 3 months pa
• No need to close regular office & correspondence made at reg office
• Name board on temp office not displayed when its not functional
• Temp office not mentioned on Visit cards/letter heads as Place Of Business
• Before winters, member/firm informs ICAI about opening temp office from date & after
closure intimated ICAI via regd post

To comply with requirement of being in charge of office:

• Member to reside in place office situated/attends the office >= 182 days
• Member can be in-charge of two offices if they are in one and the same Accommodation

Council Decisions:

i) Use of the name-board: nameboard in place of residence allowed of member with

designation of CA, provided it is nameplate of individual member & not of firm.
ii) The exemption may be granted to member or firm of CAs in practice to have a second
office without such second office being under separate charge of member of ICAI,
provided-
a. second office is in same premises, in which first office is located or,
b. second office is in same city, in which first office is located or,
c. second office is located within 50 km. from the municipal limits of a city, in which the
first office is located.

CA SHUBHAM KESWANI 253

 KYC Norms
The KYC Norms approved by the Council of ICAI are given below:
1. Where Client is an Individual/ Proprietor
A. General Information
• Name of the Individual
• PAN No. or Aadhar Card No. of the Individual
• Business Description
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement

2. Where Client is a Corporate Entity

A. General Information
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement
C. Regulatory Information
• Company PAN No.
• Company Identification No.
• Directors’ Names & Addresses
• Directors’ Identification No.

3. Where Client is a Non-Corporate Entity

A. General Information
• Name and Address of the Entity
• Copy of PAN No.
• Business Description
• Partner’s Names & Addresses (with their PAN/Aadhar Card/DIN No.)
• Copy of last Audited Financial Statement
B. Engagement Information Type of Engagement

CA SHUBHAM KESWANI 254

 First Schedule

PART I - Professional Misconduct in relation to CAs in Practice

A CA in practice is deemed to be guilty of professional misconduct if he:

Clause (1):
• allows any person to
• practice in his name as a CA unless such person is also
• a CA in practice and
• is in partnership with or
• employed by him.
Ø The above clause is intended to safeguard public against unqualified accountant practicing
under the cover of qualified accountants.
Ø It ensures that work of accountant will be carried out by a CA who may be his partner, or his
employee and would work under his control and supervision.

Clause (2):

• pays or allows or agrees to pay or allow, directly or indirectly,

• any share, commission or brokerage in the fees or profits of his professional business, to any
person other than
• a member of the ICAI or a partner or a retired partner or the legal representative of a
deceased partner, or a member of any other professional body or with such other persons
having such qualification as may be prescribed,
• for the purpose of rendering such professional services from time to time in or outside India.

Reg. 53A: Professional bodies:

ICSI (CS), ICWAI (Cost a/c), Bar Council (Advocate), Inst of Architects (Architect), Inst of
Actuaries (Actuary), Engineer, LLB(Lawyer), MBA

Example: CA gave 50% of audit fees received by him to complainant, not a CA, under nomenclature
of office allowance and such arrangement continued for no. of years, held by Council that in
substance CA had shared his profits and was guilty of professional misconduct. It is not
nomenclature to a transaction that is material, but it is substance of transaction, which is to be
looked into.

Note: Paying % of profits to article as stipend not allowed even if financial condition weak

Share of Profit/Sale of Goodwill (Death Cases)

Partnership Firm: Legal representative (LR) will continue to receive share if Deed provides for it.
Sole Proprietorship(SP) Firm:
1. No sharing of fees between LR & purchaser of G/W on death of SP + payments in instalments
allowed if agreement allows
2. Goodwill can be transferred to other CA if:
• Sale completed within 1 year of death
• If dispute of legal heir à inform ICAI within 1 year about dispute & name preserved for 1
year from dispute settlement.

CA SHUBHAM KESWANI 255

 Mr. Qureshi, CAiP died in road accident. His widow proposes to sell practice of husband to Mr.
Pardeshi, CA, for ` 5 lakhs. The price also includes right to use the firm name - Qureshi and
Associates. Can widow of Qureshi sell practice and can Mr. Pardeshi continue to practice in that
name as a proprietor?

Sale of Goodwill: With reference to Clause (2) of Part I to First Schedule to Chartered
Accountants’ Act, 1949, Council of ICAI considered whether goodwill of proprietary concern of CA
can be sold to another member who is otherwise eligible, after death of proprietor.
It lays down that sale is permitted subject to certain conditions. It further resolved that legal heir
of deceased member has to obtain permission of Council within a year of the death of proprietor
concerned.

Conclusion: Thus, in a given case, the widow of Mr. Qureshi, who has proposed to sell the practice
for ` 5 lakhs is in effect proposing the sale of goodwill. Thus, the act of Mrs. Qureshi is
permissible and Mr. Pardeshi can continue to practice in that name as a proprietor.

Clause (3): accepts or agrees to accept any part of profits of professional work of person who is
not member of ICAI.

Provided that nothing herein contained shall be construed as prohibiting a member ‘from entering
into profit sharing or other similar arrangements, including receiving any share commission or
brokerage in the fees, with member of such professional body or other person having
qualifications, as is referred to in item (2) of this part.

Referral fees amongst members: It is not prohibited for a member in practice to charge Referral
Fees, being fees obtained by a member in practice from another member in practice in relation to
referring client to him.

Note: Accepting commission from regd valuer for referring valuation assignments à Guilty

Clause (4):

• enters into partnership, in or o/s India, with person other than

• CA in practice or such other person who is member of any other professional body having such
qualifications as may be prescribed,
• including a resident who but for his residence abroad would be entitled to be regd. as member
under section 4(1)(v) or
• whose qualifications are recognized by CG or Council for purpose of permitting such
partnerships.

Eg: CA had engaged himself as partner in two business firms and MD in 2 Companies and holding
Certificate of Practice without obtaining permission of ICAI. Held that he was guilty of
professional misconduct inter under Clauses (4) and (11).

Clause (5) Secures either through the services of a person who is not an employee of such CA or
who is not his partner or by means which are not open to a CA, any professional business. Provided
that nothing herein contained shall be construed as prohibiting any agreement permitted in
terms of item (2), (3) and (4) of this part.

Clause (6) Solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means.

CA SHUBHAM KESWANI 256

Provided that nothing herein contained shall be construed as preventing or prohibiting –
(i) Any CA from applying or requesting for or inviting or securing professional work from another
CA in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organizations from time to time and securing professional work as a consequence.

As per Council guidelines, member in practice shall not respond to any tender in areas of services
which are exclusively reserved for CAs, such as audit and attestation services. Such restriction
not applicable where min. fee of assignment prescribed in tender document or where areas are
open to other professionals along with CAs.

The members should not adopt any indirect methods to adventure their professional practice
with a view to gain publicity and thereby solicit clients or professional work.

Such a restraint must be practiced so that members may maintain their independence of
judgment and may be able to command respect of their prospective clients.

An advertisement of Coaching /teaching activities by member in practice may amount to indirect

solicitation, as well as solicitation by any other means, and may therefore be violative of
provisions of Clause (6) of Part I of First Schedule to CAs Act, 1949.
• Members may put, o/s Coaching/teaching premises, sign board mentioning the name of
Coaching / teaching Institute, contact details and subjects taught therein only.
• Advert/notes in press: Not circulate letters to possible clients
Exceptions:
Ø May advertise changes in partnerships or dissolution of firm, or change in address and
telephone numbers. Bare statement of facts allowed and consideration given to
appropriateness of area of distribution of newspaper or magazine and number of
insertions.
Ø Permitted to issue classified ad in journal/ newsletter of ICAI intended to give info for
sharing professional work on assignment basis or seeking partnership or salaried
employment of accountancy nature, provided it only contains accountant’s name, address
or telephone number, fax number, e-mail address and address(es) of social Networking
sites of members. However, mere factual position of experience and area of
specialization, relevant to seek response to the advertisement, are permissible.
• Application for empanelment for allotment of audit and other professional work: Free to
write to concerned org. Not proper for CA to make roving enquiries. Permissible to quote
fees on enquiries received from bodies, which maintain such panel.
• Publication of Books, Articles or Presentation: Not permissible for member to mention in
book or article published, or presentation made by him, any professional attainment(s),
whether of member or firm. He may indicate in book, article or presentation designation “CA”
as well as name of firm.
• Issue of Greeting Cards or Invitations: Designation “CA” as well as name of firm may be used
in greeting cards, invitations for marriages and religious ceremonies and any invitations for
opening or inauguration of office of members, change in office premises and change in
telephone numbers, provided that invitations are sent only to clients, relatives and friends of
the members concerned.
• Advertisement for Silver, Golden, Platinum or Centenary celebrations of CA Firms may be

CA SHUBHAM KESWANI 257

 published in newspaper or newsletter.
• Sponsoring Activities
(a) A member in practice or Firm of CAs is not permitted to sponsor an event. May sponsor
event conducted by a Programme Organizing Unit (PoU) of ICAI, provided it has prior
approval of Continuing Professional Education (CPE) Directorate of ICAI.
(b) Members sponsoring activities relating to CSR may mention their individual name with
the prefix “CA”. However, the mention of Firm name or CA Logo is not permitted.
• Sharing Firm Profile with prospective Client: Not permitted to share Firm profile with a
prospective Client unless it is in response to a proposed client’s specific query, and otherwise
not prohibited to be used by the client.
• Television or Movie Credits: Exhibition of name is not made differently as compared to other
entries in the credits.
• Soliciting professional work by making roving enquiries: Not permissible for member to
address letters, emails or circulars to persons who are likely to require services of CA since it
would tantamount to advertisement.
• Seeking work from Professional Colleagues: Issue of advertisement or a circular by CA,
seeking work from professional colleagues on any basis whatsoever except as provided above
would be in violation
• Scope of representation which an auditor is entitled to make under Section 140(4) of the
Companies Act, 2013: Opportunity not being abused to secure needless publicity. The letter
should merely set out in dignified manner how he has been acting independently and
conscientiously through the term of office and in addition, indicate his willingness to continue
as auditor if reappointed by shareholders.
• Acceptance of original professional work by a member emanating from the client introduced to
him by another member: Member not accept original professional work emanating from client
introduced to him by another member. If any professional work of such client comes directly, it
should be his duty to ask the client that he should come through other member dealing generally
with his original work.
• Giving Public Interviews: Not result in publicity. Details about members or their firms not
given in a manner highlighting professional attainments. Detail given as response to specific
question, and factual nature only.
• Members and/or firms who publish advertisements under Box numbers: prohibited from
inserting advertisements under box numbers in newspapers. It is violation of this clause.
• Educational Videos: No reference made to CAs Firm wherein member is a partner/ proprietor.
It should not contain contact details or website address.
• CA sent letters to other CAs claimed to be pioneer in liasoning with govt depts as expertise
àheld guilty in this clause

Website for CA Firms

• Should be on Pull model instead of Push model
• Info on website shouldn’t be circulated own own or emails except on specific ‘pull’ request
• Not issue material to solicit users to visit their website
• Info that can be displayed:
ü Member/firm Name

CA SHUBHAM KESWANI 258

 ü Year of establishment
ü Address of firm/member + Tel nos + E mail ids
ü Nature of services rendered (specific pull request)
ü Partners [Name, Year of qualification, Other qualification, Phone, email, Area of
experience (pull request)]
ü Details of employees (like partners)
ü Job vacancies
ü No of article assistants (pull request)
ü Nature of assignments handled (pull request)
ü Name of clients & fees charged can’t be given (Note)

Note: It can be given if required by regulator (whether or not constituted under a statute in India
or o/s India) only to extent reqd & period reqd by regulator.
Where such disclosure of names of clients and/or fees charged is made on the website, the
member/ firm shall ensure that it is mentioned on the website [in italics], below such disclosure
itself, that

“This disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in
[name of the country/ area where such regulator has jurisdiction] vide [Rule/ Directive etc. under
which the disclosure is required by the Regulator].

• Display of Passport size pic permitted

• May include bulletin boards, articles, prof info, & educational videos
• Chat rooms can be provided with confidentiality protocol
• Can provide Document Management Facility
• Can share link to Social Networking Site but not solicit to visit or like their pages
• Can provide online advice on specific request for free/payment
• Ensure adequate secrecy of matters of clients
• No ad on website of banner or any nature
• May provide link to website of ICAI, Regional councils, Branches & website of Govt/depts/Reg
authorities/Professional bodies
• Website name should be similar to firm name & not amount to solicitation
• Mention info not at material variance from ICAI’s records

Online Third Party Platforms

• Some websites provide consultancy services of CAs or CA Firms
• Contact address of CA shouldn’t be provided
• It should not advertise professional achievements or status of CAs just mention they are
CAs
• Name of CA Firm with suffix “Chartered Accountants’ not permitted

Publication of Name or Firm Name by CAs in Telephone or other Directories published by

Telephone Authorities or Private Bodies
• Name under section ‘Chartered Accountants’
• Member/firm should be from town/city of directory publication
• Order of entries should be alphabetical
• Entry shouldn’t be made in a differential or prominent manner giving impression of
publicity /advertisement

CA SHUBHAM KESWANI 259

 • Entries shouldn’t be restricted & open to all CAs of that town
• Members can also include their names in Trade/social directories

Application based Service provider Aggregators (Eg UrbanClap)

• Not permissible for CAs

Specialised Directories for limited circulation

• name, description and address of member (or firm) may appear in any directory or list of
members of a particular body in which the names are listed alphabetically.
• Member shouldn’t give name of clients
• May supply info for spl. directories on own discretion

Exemptions:
• Advertisement for following purpose allowed:
ü For recruiting staff for own office
ü Inserted on behalf of client for staff for their office or acquisition or disposition
of property
ü For sale of business or property by member acting in prof capacity as trustee,
liquidator or receiver (litre)
ü When advertising for staff its desirable to avoid saying “Well known firm”.
Examples:
M/s XYZ, firm of CAs created website “www.xyzindia.com”. Website besides containing details of
firm and bio-data of partners also contains passport size photographs of all partners of firm.

Hosting Details on Website: As per Clause (6) of Part I of First Schedule to Chartered Accountants
Act, 1949, CA of firm can create its own website using any format subject to guidelines. However,
website should be so designed that it does not solicit clients or professional work and should not
amount to direct or indirect advertisement. Guidelines of ICAI allow a firm to put up the details of
firm, bio-data of partners and display of a passport size photograph.
Conclusion: In the case of M/s XYZ, all guidelines seem to have been complied and there appears to
be no violation of Chartered Accountants Act, 1949 and its Regulations.

M/s LMN, firm of Chartered Accountants responded to tender from State Government for
computerization of land revenue records. For this purpose, firm also paid ` 50,000 as earnest
deposit as part of terms of tender.

Responding to Tenders: Clause (6) of Part I of First Schedule to Chartered Accountants Act, 1949
lays down guidelines for responding to tenders, etc. As per guidelines if a matter relates to any
services other than audit, members can respond to any tender. Further, in respect of non-exclusive
area, members are permitted to pay reasonable amount towards earnest money/security deposits.

Conclusion: In instance case, since computerization of land revenue records does not fall within
exclusive areas for chartered accountants, M/s LMN can respond to tender as well as deposit `
50,000 as earnest deposit and shall not have committed any professional misconduct.

Mr. Honest, CAiP, wrote two letters to M/s XY Chartered Accountants firm of CAs; requesting them
to allot him some professional work. As he did not have significant practice or clients he also wrote
letter to M/s ABC, a firm of CAs for securing professional work. Mr. Clever, another CA, informed

CA SHUBHAM KESWANI 260

ICAI regarding Mr. Honest's approach to secure the professional work. Is Mr. Honest wrong in
soliciting professional work?

Securing Professional Work: Clause (6) of Part I of First Schedule to Chartered Accountants Act,
1949 states that CAiP shall be deemed to be guilty of misconduct if he solicits clients or professional
work either directly or indirectly by a circular, advertisement, personal communication or interview or
by any other means.

Provided that nothing herein contained shall be construed as preventing or prohibiting any CA from
applying or requesting for or inviting or securing professional work from another CAiP. Such restraint
has been put so that members maintain their independence of judgment and may be able to command
respect from their prospective clients.

Conclusion: In given case, Mr. Honest wrote letters only to other CAs, M/s XY and M/s ABC requesting
them to allot some professional work to him, which is not prohibited under Clause (6). Thus, Mr. Honest
has not committed any professional misconduct by soliciting professional work.

Clause (7)
Ø Advertises his professional attainments or services, or
Ø uses any designation or expressions other than the CA on professional documents, visiting
cards, letter heads or sign boards unless it be a degree of a University established by law
in India or recognized by the Central Government or a title indicating membership of the
Institute of CAs or of any other institution that has been recognized by the Central
Government or may be recognized by the Council.

Member in practice may advertise through a write up, setting out service provided by him or firm
and particulars of his firm subject to such guidelines as issued by Council.

• Use of designation ‘Member of Parliament’, ‘Municipal Councilor’ not permitted.

• A member can mention “Insolvency Professional” or “Registered Valuer” respectively on his
visiting card and letter head.
• Date of setting-up practice: Should not be mentioned on the letter heads and other professional
documents.
• Notice in the Press relating to the Success in an Examination: It should not contain any element
of undesirable publicity. Candidate’s name and address, school and local background, examination
passed with details of any prize or place gained, name of principal, firm and town in which principal
practices may be published.
• Reports and Certificates: Manner of publication limited to what is necessary to enable report or
certificate to serve its proper purpose. Members should use letterhead for issuing reports and
certificates.
• Appearance of CAs on Electronic Media (including Internet): Members may appear on television,
films and Internet and Radio or give lectures at forums and may give their names and describe
themselves as CAs. Spl. qualifications or specialised knowledge directly relevant to subject
matter of prog. may be given. Firm name may also be mentioned; however, exaggerated claim or
comparison is not permissible. It must not be promotional of him or his firm but must be an
objective professional view of topic. Mention of membership of Institute is desirable in such
cases to achieve suitable publicity for ICAI.
• Members giving talks or lectures or attending conference may describe themselves as CAs only
when they are acting in their capacity as CAs. However, reference to professional firm of the
member should not be given.

CA SHUBHAM KESWANI 261

• Organising Training Courses, Seminars etc. for his staff: CAiP may invite staff of other CAs
and clients to attend the same. Undue prominence should not be given to name of CA in any
booklet or document.
• Writing Articles or Letters to the Press: May give their names and use the description
CAs.
• Size of Sign Board: Use of glow signs or lights on large-sized boards not permissible.
• Public Announcements with details of Directors: Many Cos have CAs as directors. The prospectus
or public announcements shouldn’t publish descriptions about CA’s expertise, specialisation &
knowledge in any field.
Member should invite attention of mgt to provisions and request that before communication, is
issued, it should be approved by him.
The use of expression ‘CA’ is permissible. Directorships held by member in other Companies can
be given, but name of firm in which member is partner, should not be given.
• Use of logo/monogram of any kind/form/ style/design/colour etc. is prohibited.
• Printing QR code on visiting card allowed giving name/address/contact details/firm name

Notes:
• Giving names of all firms in which CA is partner on letterhead is allowed
• When CA while delivering speech at Conference talks about his expertise & services of firm &
requests audience to approach him à guilty under clause 6 & 7
• CA after Demonitisation messaged ppl that he offers cash conversion service à guilty of Prof
misconduct under Clause 6 & 7 + Other misconduct under clause 2 of Part IV of First Schedule
read with Sec 22 of CA Act 1949

Advertisements through write up

ü Honest & truthful
ü No exaggerated claims
ü No disparaging references or unsubstantiated comparisons
ü Not bring profession to disrepute
ü Not contain testimonials
ü Not contain info about achievements or awards (except awards by CG/SG/ Regulatory
Bodies)
ü Monogram of any sort not permissible
ü Membership no/firm reg no to be mentioned
ü Font size upto 14

Eg. The offer document of listed company in which Mr. D, practising CA is a director mentions name
of Mr. D as a director along with his various professional attainments and spheres of specialisation.

Council of ICAI has in communication to members stated that if public Co, in which CAiP is director,
issues prospectus or gives any announcement that gives descriptions about CA’s expertise,
specialisation and knowledge in any particular field, it shall constitute a misconduct under Clauses (6)
and (7) of Part I of the First Schedule to Chartered Accountants Act, 1949.

The Council further stated that in such cases member concerned has to take necessary steps to ensure
that such prospectus or public announcements or public communications do not advertise his
professional attainments and also that such prospectus or public announcements or public

CA SHUBHAM KESWANI 262

communications do not directly or indirectly amount to solicitation of clients for professional work by
the members.

Conclusion: Thus, Mr. D would be guilty of professional mis - conduct and liable for disciplinary action.

Clause (8) accepts a position as auditor previously held by another chartered accountant or a
certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932
without first communicating with him in writing.

As a matter of professional courtesy and professional obligation it is necessary for new auditor
appointed to communicate with such earlier auditor.

Objective is to ascertain whether there are any circumstances which warrant him not to accept
appointment.

The professional reasons for not accepting an audit would be:

(a) Non-compliance of Sec 139 and 140 of Companies Act, 2013
(b) Non-payment of undisputed Audit Fees by auditees other than in case of Sick Units
(c) Issuance of qualified report*

*may accept audit if satisfied that attitude of retiring auditor was not proper and justified. If he
feels that retiring auditor qualified report for good and valid reasons, refuse to accept audit. There
is no rule, written or unwritten, which would prevent auditor from accepting appointment offered
to him in these circumstances. Before accepting audit, ascertain full facts of case.

What should be the correct procedure to adopt when a prospective client tells you that he
wants to change his auditor and wants you to take up his work?

Company should be asked whether retiring auditor had been informed of intention to change. If
answer is ‘Yes’, then communication should be addressed to retiring auditor. If it is learnt that
old auditor hasn’t been informed, and client is not willing to inform, it would be necessary to ask
reason for proposed change. If no valid reason for change, it would be healthy practice to not
accept audit. If he decides to accept audit he should address a communication to retiring auditor.

Members should retain positive evidence of delivery of communication to addressee. In opinion of

Council, following would provide such evidence: -

(a) Communication by a letter sent through “Registered Acknowledgement due”, or

(b) By hand against a written acknowledgement, or
(c) Acknowledgement of communication from retiring auditor’s vide email address
registered with Institute or his last known official email address, or
(d) Unique Identification Number (UDIN) generated on UDIN portal

*Letters posted under Certificate of Posting not considered valid (No positive evidence of delivery)

Premises found Locked : Deemed as having been delivered to retiring auditor.

Firm not found at the given Regd address : Address of communication is same as regd with ICAI
on date of dispatch, letter will be deemed to be delivered, unless retiring auditor proves it was not
really served and he was not responsible for such non-service.

CA SHUBHAM KESWANI 263

Joint audit with earlier auditor: As a matter of professional courtesy and obligation it is
necessary for new auditor appointed to act jointly with earlier auditor to communicate with
such earlier auditor.

Special Audit under Income Tax Act, 1961: It would be healthy practice if Tax Auditor conducting
spl audit under Income Tax Act,1961 communicates with member who conducted Statutory Audit.

Council decisions:
• Requirement for communicating with previous auditor being CAiP would apply to all types
of Audit viz., Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit
or any other kind of audit.
• Communication in case of Assignments done by other professionals: Communication is
mandatorily reqd for all types of Audit/Report where previous auditor is a CA.
For assignments done by other professionals not being CAs, it would be a healthy practice
to communicate.
• Lack of time in acceptance of Government Audits: No time to wait for reply from outgoing
auditor, incoming auditor may give conditional acceptance of appointment and commence
work.
In acceptance letter, make clear to client that acceptance of appointment is subject to
professional objections, from previous auditors and that he will decide about final
acceptance after considering information recd from previous auditor.

Clause (9) accepts an appointment as auditor of company without first ascertaining from it whether
requirements of Section 225 of the Companies Act, 1956 (1 of 1956), in respect of such appointment
have been duly complied with;

Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly
complied with.

It would not be sufficient for incoming auditor to accept certificate from mgt that provisions of
above sections have been complied with. It is necessary to verify relevant records of Co. and
ascertain as to whether Co. has complied with provisions of above sections. If Co. is not willing to
allow incoming auditor to verify relevant records, should not accept audit assignment.

ESB Guidelines in case of removal/resignation by Auditor

A. Auditor willing for reappointment but not reappointed à shall file with ICAI a copy of
statement which is also sent to shareholders by mgt of Co (Obligatory for incoming auditor to
obtain such copy from BOD & consider before accepting audit)
B. Auditor resigns à send communication to BOD + ICAI stating professional reasons
(Obligatory for incoming auditor to obtain such copy from BOD & consider before accepting
audit)
C. ESB can ask for add. info if required
D. Also applicable to removal of auditor by govt/other statutory bodies

CA SHUBHAM KESWANI 264

Clause (10)
• Charges or offers to charge,
• accepts or offers to accept
• in respect of professional employment
• fees based on percentage of profits or contingent upon findings, or results of such
employment, except as permitted under any regulations made under this Act.

Exceptions: Regulation 192

(a) Receiver or a liquidator, fees based on percentage of realization or disbursement of assets;
(b) Auditor of co-operative society, fees based on percentage of paid up capital or working capital
or the gross or net income or profits;
(c) Valuer for purposes of direct taxes and duties, fees based on percentage of value of property
valued;
(d) management consultancy services, fees contingent upon findings, or results of such work;
(e) fund raising services, fees based on percentage of fund raised;
(f) Debt recovery services, fees based on percentage of debt recovered;
(g) services related to cost optimisation, fees based on percentage of benefit derived; and
(h) any other service or audit as may be decided by Council.
[Following activities have been decided by Council under “h” above :-
(i) Acting as Insolvency Professional (ii) Non-Assurance Services to Non-Audit Clients]

Note: Getting a loan sanctioned from bank is not covered under fund raising service à hence
CAiP can’t charge fees basis % of loan raised by client

Clause (11) Engages in business or occupation other than profession of chartered accountant unless
permitted by Council so to engage.

Provided that nothing contained herein shall disentitle a chartered accountant from being a director
of a company (Not being managing director or a whole time director*) unless he or any of his
partners is interested in such company as an auditor.

Exception: Ch-XVII of Council General Guidelines to be discussed later.

Subject to control of Council, CAiP may act as liquidator, trustee, executor, administrator,
arbitrator, receiver, adviser or representative for costing, financial or taxation matter, or may take
up appointment that may be made by the CG or a State Government or a court of law or any other
legal authority or may act as Secretary in his professional capacity, provided his employment is not
on a salary-cum-full-time basis.

Permission granted generally –

• Employment under CAiP or firms of such CAs.
• Private tutorship.
• Authorship of books and articles.
• Holding of Life Insurance Agency License for purpose of getting renewal commission.
• Attending classes and appearing for any examination.
• Holding of public elective offices such as M.P., M.L.A. and M.L.C.
• Honorary office leadership of charitable-educational or other non-commercial organisations.
• Acting as Notary Public, Justice of the Peace, Special Executive Magistrate and the like.
• Part-time tutorship under coaching organisation of Institute.
• Valuation of papers, acting as paper-setter, head-examiner or a moderator, for any examination.

CA SHUBHAM KESWANI 265

• Editorship of professional journals (Eg Company Audit Journal)
• Acting as Surveyor and Loss Assessor under the Insurance Act, 1938
• Acting as recovery consultant in banking sector
• Owning agricultural land and carrying out agricultural activity

Specific Resolution - Members in practice may engage in the following categories of business or
occupations, after obtaining the specific and prior approval of the Council in each case:
• Employment in business concerns provided member and/or his relatives do not hold “substantial
interest” in such concerns. (20% or more)
• Full-time or part-time employment in non-business concern.
• Office of MD or a WTD of body corporate provided member and/or any of his relatives don’t
hold substantial interest in such concern
• Interest in family business concerns (including such interest devolving on the members as a result
of inheritance / succession / partition of family business) or concerns in which interest has been
acquired as a result of relationships and in management of which no active part is taken.
• Interest in an educational institution.
• Part-time or full-time lectureship for courses other than those relating to Institute’s examinations
conducted under the auspices of the Institute or the Regional councils or their branches.
• Part-time or full-time tutorship under any educational institution other than coaching
organization of Institute.
• Editorship of journals other than professional journals.
• Any other business or occupation for which Executive Committee considers that permission may
be granted.
Notes:
• No bar for member to be promoter / signatory to Memorandum and Articles of Association of Co.
• No bar for such promoter / signatory to be Director Simplicitor of that Co.
• Teaching hours should not exceed 25 hrs a week in order to be able to undertake attest functions.
• Trading in commodity derivates treated as business
• Need specific permission of Council for becoming director if partner is Auditor of Co.
Q. Whether the auditor of a Subsidiary Company can be a Director of its Holding Company?
The Ethical Standard Board (ESB) via a clarification, decided that auditor of a Subsidiary Co. can’t
be a Director of its Holding Company, as it will affect independence of an auditor.
Public conscience needs to be kept ahead of the law.

Clause (12) Allows a person not being a member of the institute in practice or a member not being
his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.

Exceptions:
Council has clarified that power to sign routine documents on which professional opinion or
authentication is not required to be expressed may be delegated in the following instances and such
delegation will not attract provisions of this clause:
(i) Issue of audit queries during course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for purpose of audit.

CA SHUBHAM KESWANI 266

(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording results
thereof in books of clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of Income
Tax Act.
(x) Any other matter incidental to office administration and routine work involved in practice of
accountancy.

Authority delegated by CA à But Authority not used à not a defence for firm/CAà Prof
misconduct

Sec-26 à No person other than member of ICAI will sign document on behalf of CAiP
Note: Issue of stock certificate by assistant shall also make CAiP guilty

PART II – Professional misconduct in relation to members of the Institute inservice

A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:

Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the
emoluments of the employment undertaken by him.

Can share with relatives,dependents,friends etc. if it’s not consideration for procuring or
retaining a job.

Job must be procured and retained with own professional capabilities and not by any financial
deal impairing professional dignity.

Clause (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered
accountant or broker engaged by such company, firm or person or agent or customer of such
company,firm or person by way of commission or gratification.

A member in foregoing circumstances would be guilty of misconduct regardless of fact that he

was in whole-time or part-time employment or that he was holding COP along with his
employment.

(CAiP & Employment refers lawyer to employer à Gets referral fees from lawyer à Guilty in
this clause)

PART III - Professional misconduct in relation to members of the Institute generally

Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.

Clause (2) does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.

Where a Chartered Accountant had continued to train an articled clerk though his name was
removed from the membership of the Institute and he had failed to send any reply to the Institute

CA SHUBHAM KESWANI 267

asking him to send his explanation as to how he was training as his articled clerk when he was not a
member of the Institute. Held that he was guilty under Clause (2) of Part III of the First Schedule.

Clause (3) while inviting professional work from another chartered accountant or while responding to
tenders or enquiries or while advertising through a write up, or anything as provided for in items (6)
and (7) of Part I of this Schedule, gives information knowing it to be false.

PART IV- Other misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he –

Clause (1) is held guilty by any civil or criminal court for offence which is punishable with
imprisonment for a term not exceeding six months.

Clause (2) in the opinion of the Council, brings disrepute to the profession or the Institute as a
result of his action whether or not related to his professional work.

CA is expected to maintain highest standards of integrity even in his personal affairs and any deviation
from these standards, even in his non-professional work, would expose him to disciplinary action.

Note: Before starting any ans. of this clause ICAI gives this line à Section 21 of the Chartered
Accountants Act, 1949 provides that a member is liable for disciplinary action if he is guilty of any
professional or “Other Misconduct.”

Examples, where a member may be found guilty of “Other Misconduct”:

• Retains books of a/c and documents of client and fails to return on request without reasonable
cause.
• Makes material misrepresentation.
• Uses the services of his articled or audit assistant for purposes other than professional practice.
• Conviction by a competent court of law for any offence under Sec 8 (v) of the CAs Act 1949.
• Misappropriation of money by office-bearer of Regional Council of ICAI and utilisation for his
personal use.
• Not replying within reasonable time and without good cause to letter of public authorities.
• Assessment records of IT Dept belonging to client of were found in almirah of bed-room of CA.
• Where CA had adopted coercive methods on a bank for having a loan sanctioned to him.

The Second Schedule

Director discipline opinion àmember guilty of prof/other misconduct in 2nd or both schedule
àDisciplinary Committee

Part I - Professional Misconduct in relation to Chartered Accountants in Practice

A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he

Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as required
by any law for the time being in force.

Exceptions:
• Disclosure allowed only with consent of client or as part of professional duties (Eg
submitting info to Exchange Control Authorities)

CA SHUBHAM KESWANI 268

• No misconduct in case of legal compulsion as reqd by Evidence Act
• Sec 143(12) – Reporting of fraud

Eg. CA while presenting paper at event shared vital info of his client to help Nation à Held guilty

Note: When external party like Bank asks for info of your working papers à This clause + SA 200
Confidentiality is to be maintained + SA 230 Property of Auditor (discretion)

Clause (2) Certifies or submits in his name or in the name of his firm, a report of an examination of
financial statements unless the examination of such statements and the related records has been made
by him or by a partner or an employee in his firm or by another chartered accountant in practice.

Clause (3) Permits his name or the name of his firm to be used in connection with an estimate of
earnings contingent upon future transactions in manner which may lead to the belief that he vouches
for the accuracy of the forecast.

He can prepare profit forecast provided he indicates clearly in his report the
• sources of information,
• the basis of forecasts and
• major assumptions made in arriving at the forecasts, so long as he does not vouch for the
accuracy of the forecasts.

Clause (4) Expresses his opinion on financial statements of any business or enterprise in which he, his
firm, or a partner in his firm has a substantial interest.
• CA can’t certify f/s of concern where he’s employed
• Not audit a/c of college where he is part time lecturer
• Not audit trust if partner is either trustee or employee of trust
• Applicable to all types of Audit
• The client shouldn’t be relative of member
• Not permitted to prepare books of a/cs for auditee clients
• Stat auditor can’t be internal auditor
• Internal auditor can’t be appointed as Tax/GST Auditor
• Cooling off period: Not accept Audit of Co for 2 years from date of completion of
tenure/resignation as Director.

Note: Evaluating costs or other assignments of such nature à not covered in this clause

Clause (5) Fails to disclose a material fact known to him which is not disclosed in a financial statement,
but disclosure of which is necessary in making such financial statement not misleading where he is
concerned with that financial statement in a professional capacity.

Example:
• CA failed to report to shareholders of Co. about non-creation of sinking fund as per
Debenture Trust Deed and did not make clear that amounts shown as towards sinking fund
were borrowed from managing agents of the company -Held, that the chartered accountant
was duty bound to see that nature and subject matter of the charge over a security and the
nature and mode of valuation of the sinking fund investment were disclosed in Balance
Sheet, held guilty of misconduct.

CA SHUBHAM KESWANI 269

 • CA knew Co. had taken loan of 10L from EPF which wasn’t disclosed in F.S. àHeld
guilty
Note:
If CA appears before tax authorities on behalf of client à submits info or expln that’s found
false misleading à not guilty as data provided by mgt + acting on instructions of client

Clause (6) Fails to report a material misstatement known to him to appear in a financial statement
with which he is concerned in a professional capacity.

Example:
The Respondent had failed to give disclosure of Contingent Liabilities in F.S. against Corporate
Guarantee given in favour of Group Company. Respondent should have verified charges created on
basis of material available with Company and Registrar of Companies. Further, charge of Rs.4.35
crores against the Balance Sheet size of Rs.26.12 crores was significant. Hence, omission of such
information from F/S makes them misleading and thereby reflects gross negligence on the part
of the Respondent in conducting audit and failing to report material misstatement in financial
statements of. Held guilty of professional misconduct under Clauses (6) and (7) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.

Clause (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
• It is a vital clause which gets attracted whenever it is necessary to judge whether accountant
has honestly and reasonably discharged his duties.
• The expression negligence covers a wide field and extends from frontiers of fraud to
collateral minor negligence.

Examples:
• CA fails to indicate mode of valuation of investments in shares reqd by Cos. Act 2013
• Conducted Stock audit without visiting the site, relied on mgt reports
• Wrongly certified increase in Paid up share capital of Pvt ltd Co in Balance Sheet (Clause 7/8/9
of Part 1 of Second Schedule to CA Act 1949)
• Issued turnover certificate of betel nuts to firm for import license w/o checking books & docs
but relying on article clerk à Guilty
• Issued certificate of consumption of Raw material based on minutes of BODà guilty clause 2 &
7 of this schedule
• Issued incorrect certificate of export of Onions
• Issued report subject to separate notes (No audit report is issued with Notes)
• Failure to examine cash balance & passbook i.e. basic audit procedure
• Not submitted his report in due time to enable Co to comply with Statutory requirement
• Wrong audit report issued to School, claimed correction slip sent but couldn’t prove
• Issued 2 certificates of circulation for 1 daily newspaper àclause 7 & 8 (Should have issued
only 1)
• A material prior period adjustment made to accounts àauditor didn’t consider materiality à
didn’t exercise due diligence + wrong opinion insufficient info + didn’t follow SA à Clause 7,8 & 9
• Failed to check a forged signature which he could have checked
• Shared password of his digital signature certificate with client àGuilty

CA SHUBHAM KESWANI 270

Clause (8): Fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.

Examples:
• Transaction took place between ABC Firm & R developers but reported in books of ABC
Construction. Loan amount was material. Guilty under clause 6, 7 & 8 of Part I of Second
Schedule to CA Act 1949
• CA issued false certificates to several parties for past exports for monetary consideration
without verifying any supporting records or documents which helped parties to make imports
free of duty.
Held that he was guilty of professional misconduct within the meaning of clauses (2), (7) & (8)
of Part I of the second schedule of CA Act, 1949 in terms of section 21 & 22 of the said Act
• CA audited books of A ltd that had investment of Rs 10L, later it was found real value was 25k à
CA guilty under clause 2, 7, 8 of Part I of Second Schedule of CA Act,1949
• Certificate of circulation of Periodical w/o verifying undelying record bank statements, printer
bills, sales records etc à Guilty under clause 7 & 8

Clause (9) Fails to invite attention to any material departure from the generally accepted procedure
of audit applicable to the circumstances

Generally accepted audit procedure = Engagement and Quality Control Standards, Statements,
General Clarifications, Guidance Notes Technical Guides, Practice Manuals, Studies and Other
Papers.

Special Points:
• Audit of listed cos : Done by Auditor subject to Peer Review process of ICAI & hold valid
certificate issued by Peer Review Board of ICAI
• Firm Reg No & Membership No to be mentioned on reports pursuant to attestation engagements
• UDIN is mandatory to be generated for all kinds of certifications

Examples:
• CA didn’t conduct sample checking of bank a/c of Co & didn’t do vouching & depended on work of
Article Assistant à guilty under clause 7,8,9
• CA didn’t check bank column totals, didn’t verify contra entries, test checked when no internal
check present,didn’t check Bank recos à guilty under clause 7,8,9

Clause (10) fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they are
intended within a reasonable time.

Spl points:
• Advance received against services excluded from scope
• Money recd for expenses to be incurred in reasonably short time not to be deposited in bank a/c
• Money recd in capacity of trustee, executor liquidator, etc keep in separate bank a/c

Mazedar Kisse:

• Refund voucher issued by Income Tax dept in name of client credited to his a/c à Guilty under
clause 7 & 10
• CA acting as financial advisor to client converted his own a/c to joint a/c with client withouthis
consent & fraudulently discharged 3 FDRs in client’s name. Gulity à Clause 10 of Part I of

CA SHUBHAM KESWANI 271

 Second Schedule + Other Misconduct u/s 22 read with sec 21

PART II - Professional misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he –

Clause (1) contravenes any of the provisions of this Act or the regulations made there under or
any guidelines issued by the Council.

Examples:
• CA certified in Form K-2 audit clerk in service with him, the article employed elsewhere 11-5 pm
& then come to office work till 8 pm.
• Took article intern under him even when no vacancy was there, intern got to know that
Articleship deed not regd.
• Issued certificate as a CA even if no COP there with him. Guilty as violation of Section 6
• In pvt circular to clients in addition to CA described himself as Investment Consultant Public
Accountant
• Took loan from firm where article & his father were interested
• Didn’t pay stipend as per Reg 48 to article, only paid when article left. Said he had agreement
to pay fees annually à held guilty
• Accepted audit even when UNDISPUTED audit fees wasn’t paid to earlier auditor à Guilty
under Clause 1 of Part II of Second Schedule of CA Act 1949
• Conducted more TAX audits than prescribed limit

Clause (2) being an employee of any company, firm or person, discloses confidential information
acquired in the course of his employment except as and when required by any law for the time
being in force or except as permitted by the employer.

Clause (3) Includes in any information, statement, return or form (SIRF) to be submitted to the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline.
Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing
them to be false.

Examples:
• A CA manager in firm applied for admission as fellow to ICAI saying he’s partner in firmà made
a statement that’s false à Guilty
• In a hearing before Disciplinary Committee made a false statement on oath
• CA in full time employment in a Co while filling bank empanelment form gave declaration that he
was not in any occupation/business/vocation e t c
• CA being manager of Co devoting 30 hrs. per week showed himself as CA in full time practice for
employment for Bank branch Audits

Clause (4) Defalcates or embezzles money received in his professional capacity.

SA 240 à Defalcation & embezzlement of money recd in prof capacity à Fraud

Part III - Other misconduct in relation to members of the Institute generally

A member of Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment
for a term exceeding 6 months.

CA SHUBHAM KESWANI 272

 Council General Guidelines (Final Stage of Chapter)

Chapter I: Applicable to all the Members of the Institute whether in practice or not

Chapter II: A member of the ICAI who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.

Chapter V: Maintenance of books of account

Member or firm in practice shall maintain following books of a/c:

• Cash Book
• Ledger

Chapter VI: Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961
A member of the Institute in practice shall not accept, in a financial year, more than the “specified
number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
• As per clarification on Tax Audit Assignments, if there are 10 partners in a firm of CAs in
practice, then all
• partners of the firm can collectively sign 600 tax audit reports. This max. limit of 600 tax
audit assignments may be distributed between partners in any manner. For instance, 1 partner
can individually sign 600 tax audit reports & remaining 9 partners are not signing any tax audit
report.
• In computing “specified no. of tax audit assignments” each year’s audit would be taken as
separate
• assignment.
• Mr A partner in ABC as well as ADE, then also only 60 allowed for A
• Mr A partner in ABC & also in A proprietorship, then also 60 allowed to A
• Audits u/s 44AD, 44ADA, & 44AE of IT Act 1961 not counted
• Audit of H.O. & Branch office counted as 1 assignment
• Audit of More than 1 branch of same concern = 1 assignment
• Mr Badal is part time practicing partner then will he be considered for limit? No

Chapter VII: Appointment of an Auditor in case of non-payment of undisputed fees

• A member of the Institute in practice shall not accept the appointment as auditor of an
entity in case the undisputed audit fee of another Chartered Accountant for carrying out the
statutory audit under the Companies Act, 2013 or various other statutes has not been paid:
• Provided that in the case of sick unit, the above prohibition of acceptance shall not apply.
• Undisputed audit fees include expense incurred by Auditor
• Sick unit means unit regd for 5 years or more & has accumulated loss >= Net worth

Chapter VIII: Specified no of Audit assignments

A member of the Institute in practice shall not hold at any time appointment of more than the
“specified number of audit assignments” of Companies under Section 141 of the Companies Act 2013.
• 30 audits per CA in full time practice allowed
• One Person Co & Dormant Co excluded from limit
• No of partners on date of acceptance to be considered

Chapter IX Appointment as Statutory auditor

• A member of Institute in practice shall not accept appointment as statutory auditor of
PSU(s)/ Govt Company(s)/Listed Company(s) and

CA SHUBHAM KESWANI 273

 • other Public Company(s) having turnover of 50 Cr or more in a year
• where he accepts any other work(s) or assignment(s) or service(s) in regard to the same
Undertaking(s)/ Company(s) on a
• remuneration which in total exceeds fee payable for carrying out stat audit of same
Undertaking /Co.

Other work excludes:

• audit under any other statute.
• certification work required to be done by statutory auditors; and
• any representation before an authority

Chapter X Appointment of an auditor when he is indebted to a concern

Member in practice or partner of firm in practice or firm or relative of such member or partner shall
not accept appointment as auditor of concern while indebted to concern or given any guarantee or
provided any security in connection with indebtedness of any 3rd person to concern, for limits fixed
in statute and in other cases for amount exceeding 100,000/-.

Notes:
• Recovery of fees on progressive basis doesn’t mean indebtness.
• Limit as per Cos. Act for indebtness is 5L & for guarantee or security is 1L

Chapter XI Directions in case of unjustified removal of auditors

Incoming auditor(s) not to accept the appointment as auditor(s), in case of unjustified removal of
earlier auditor(s).

Chapter XIII Guidelines on Tenders

• Member in practice shall not respond to any tender issued by any organization or user of
professional services
• in areas of services which are exclusively reserved for CAs, such as audit and attestation
services.

Not applicable
• where minimum fee of the assignment is prescribed in tender document itself or
• where areas are open to other professionals along with CAs.

Chapter XV: Networking

Where larger structure is aimed at co-operation and entities within structure share significant
part of professional resources, it is deemed to be a network.

Professional resources include:

• Common systems that enable firms to exchange info such as client data, billing and time
records;
• Partners and staff;
• Technical departments that consult on technical or industry specific issues, transactions or
events for assurance engagements;
• Audit methodology or audit manuals; and
• Training courses and facilities

The different forms of Network can be as under:-

• Network can be constituted as a mutual entity which will act as a facilitator for
constituents of Network. In such case Network itself will not carry out any professional
practice.
• Network can be constituted as a partnership firm subject to condition that total number
of partners does not exceed 20.
• Network can be constituted as a LLP subject to provision of Chartered Accountant Act and

CA SHUBHAM KESWANI 274

 Rules and such other laws as may be applicable.
• Network can be constituted as company subject to the guidelines prescribed by Institute
for corporate form of practice and formation of management consultancy services
company. (Chap xvii)
• Network Firms shall consist of sole Practitioner/proprietor, partnership or any such entity
of professional accountants as may be permitted by the Act.
• Firm is allowed to join only one network.
• Firms having common partners shall join only one Network.

Naming of Network
1.The Network may have distinct name which should be approved by ICAI. To distinguish a “Network”
from a “firm” of CAs, the words “& Affiliates” shall be used after the name of network and words “&
Co.” /“& Associates” shall not be used. The prescribed format of application for approval of Name for
Network is at Form ‘A’ (enclosed). The names of the network may be as mentioned in Appendix II.

2.ICAI shall approve or reject name of Network and intimate to Network at its address mentioned in
Form ‘A’ within 30 days from date of receipt of said Form.

3.Mere approval of name of Network shall not entitle Network to carry on practice in its own name.

Registration of Network with entities in India

1. After name of Network approved, Institute same shall reserve name for period of three (3)
months from date of approval.
2. Network shall get itself registered with Institute by applying in Form B within period of 3
months, failing which name assigned shall stand cancelled on expiry of said period.
3. Registration of Network with Institute is mandatory.
4. If different Indian firms are networked with a common Multinational Accounting Firm, they
shall be considered as part of network.

Listing of Network with entities outside India

1. Authorized representative of Indian Member firm (s)/Member constituting Network with
entities outside India shall file declaration with ICAI in Form `D’ for Listing such Network within
30 days from date of entering into Network arrangement.

2. Proprietary/individual members, partnership firms as well as members in LLP or any such other
entity, shall be permitted to join such network with entities outside India provided that they can
join only one network and firms having common partners shall join only one such network.

Framework of Internal Byelaws of Network:

Bye-laws may contain following clauses on which the affiliates of the network may enter into a
written agreement among themselves:
(i) Appointment of a Managing Committee
(ii) Administration of network
(iii) Contribution of membership fees to meet the cost of the administration of the network.
(iv) Identifying a partner of any of member firms of network to be responsible for the assignment
(engagement partner)
(v) Dispute settlement procedures through arbitration and conciliation
(vi) Development of training materials for members of the network
(vii) Issue of News-letters for staff and clients
(viii) Development of software for different types of assignments
(Manage/Administer/EP/Fees/Dispute settle/Train/Newsletters/Softwares)

CA SHUBHAM KESWANI 275

Ethical Compliance: It will be necessary for such network to comply with applicable ethical
requirements prescribed by ICAI and following requirements in particular: -

1. If one firm of network is statutory auditor of entity then associate [including networked firm(s)] or
said firm directly/indirectly not accept internal audit or book-keeping or other assignments prohibited
for stat auditor firm.
2. Guidelines of ceiling on Non-audit fees is applicable in relation to Network as follows:
- i) For a Network firm who is doing statutory audit (including its associate concern and/or firm(s)
having common partnership), it shall be same as mentioned in said notification; and
ii) For other firms of same Network collectively, it shall be 3 times of fee payable for carrying out
statutory audit of same undertaking/ company.
3. In cases where rotation of firms prescribed by regulatory authority, no member firm of network
can accept appointment as auditor in place of any member firm of network which is retiring.
4. Network may advertise to extent permitted by Advertisement Guidelines issued by ICAI. Firms
constituting network are permitted to use words “Network Firms” on their professional stationery.
5. Constituent member firms of Network and Network shall comply with all Ethical Standards
prescribed by Council from time to time.

Change in constitution of registered Network:

In case of change in constitution of regd Network on account of any entry into or exit from
Network, network shall communicate to ICAI by filing Form ‘C’ within 30 days from date of change in
the constitution.

Chapter XIV Unique Document Identification Number (UDIN) Guidelines

• To curb malpractice of false certification/ attestation by unauthorised persons & reduce
bogus certificates.
• Mandatory for all certificates, GST & Tax audit reports & other audit/assurance attest
functions

Chapter XVI Logo Guidelines

The logo consists of letter ‘CA’ with a tick mark inside a rounded rectangle with white background.

Chapter XVII Guidelines for Corporate form of Practice

• Council has allowed members in practice to be MD/WTD/Manager of a Body Corporate that is

exclusively engaged in providing Management Consultancy & Other Services permitted u/s
2(2)(iv) of CA Act 1949
• No restriction on equity holding in such Company
• Entitled to do attest functions & train article assistants
• Name of Mgt Consulting Co to be approved by ICAI & registered with it
• Compliances for Mgt Consulting Co:
ü Not to accept Internal audit or bookkeeping service or other assignments from entity where
practitioner or firm is auditor
ü Ceiling of non-audit fees applicable to it
ü Mgt consulting co shall comply with clause 6 & 7 of Part 1 of First Schedule of CA Act 1949

CA SHUBHAM KESWANI 276

 Recommended Self-Regulatory Measures

• Branch Audits
ü Branch audit of Co shouldn’t be conducted by Stat Auditors consisting 10 or more
members
ü But by local firms of auditors less than 10 members
ü Restriction not apply in following cases:
o A/c records of branch at HO
o Significant operations carried out at Branch
• Joint Audit
ü Large Cos should have practice of having firms with < 5 members as Joint Auditors
ü Senior firms shouldn’t object to such practice
• Ratio b/w Qualified & Unqualified Staff
ü Atleast 1 member for every 5 non-members excluding articled/audit assistants,
typists, peons, & others not engaged in professional work
• Disclosure of Interest by Auditors
ü Disclose the payments received for other services through medium of different
firm or firms where he maybe a partner or proprietor
• Recommended minimum scale of fees
Recommended Min. fees for professional services is to be charged

Recent Decisions of Ethical Standards Board

• CA may be Equity research adviser but can’t publish retail report as it’d be business or
occupation
• Member of trust can’t be its auditor
• May engage himself as Registration Authority for obtaining Digital Signature Certificate
for clients
• Can hold credit card of bank even if auditor of same bank but o/s balance shouldn’t exceed
1L from limit (If limit 2L, o/s balance can’t be > 3L)
• CA can act as mediator in Court
• Can’t accept audit of bank if taken loan against FD
• CA in practice can’t become Financial Advisors & receive fees/commission from Financial
Institutions such as Mutual Funds, Insurance cos, NBFCs
• Can’t exercise lien over client docs for non-payment of fees
• Not permissible to print vision or values behind visiting cards as it’d result in solicitation &
thus violative of Clause 6 of First Schedule of CA Act 1949
• Not permissible to take agencies of UTI, GIC & NSDL
• Permissible to be settlor of a trust (provides property to beneficiary)
• Can’t hold customs broker license
• CA in employment can appear as Tax representative before tax authorities on behalf of
employer but not for other employees of that employer
• Stat auditor of bank can’t do stock audit of such bank
• Internal auditor of PF trust of Govt co can’t be stat auditor
• Concurrent auditor of bank X can’t be stat auditor of bank Y which is sponsored by X
• CA/ CA firm can act as internal auditor of Co & stat auditor of its EPF
• Internal auditor not to undertake Tax Audit

CA SHUBHAM KESWANI 277

 Disciplinary Proceedings

Receipt of complaint + Fees by Disciplinary directorate (DD)

GUILTY NON-GUILTY

First Schedule Second Schedule or both Board of

Discipline

Board of Disciplinary
Discipline Committee Accept Reject
(BOD) (DC)

Close • Advise DD to
GUILTY* matter investigate further
GUILTY*
• May proceed if
matter of 1st
• Reprimand
• Reprimand Schedule
• Remove name
• Remove name • Refer to DC if 2nd
permanently
upto 3 months Schedule
or any
• Fine upto 1L
duration
• Fine upto 5L

If not found guilty à Matter closed

Appeal:
Can be made by member or Director (Discipline) within 90 days à Appellate Authority

Orders possible:
• Confirm, modify or set aside order
• Impose, set aside, reduce or enhance penalty
• Remit case to BOD/DC to reconsider
• Such order it thinks fit

CA SHUBHAM KESWANI 278

 Non-Compliance with Laws and Regulations (NOCLAR)
Non-compliance with laws and regulations comprises of acts of omission or commission, intentional or
unintentional, which are contrary to prevailing laws or regulations committed by:
• a client/professional accountant’s employing organisation;
• or TCWG or Mgt or other individuals
• working for or under direction of a client/ employing organisation.

Some important facts about NOCLAR are given below:

• During Course of Providing a Service: NOCLAR will be applicable if a professional accountant

encounters, or is made aware of, non-compliance or suspected non-compliance while providing a
professional service to a client. He is not required to investigate, nor responsible for ensuring
compete compliance.

• Expertise of Laws not Required: A professional accountant is expected to apply knowledge and
expertise, and exercise professional judgment. However, he is not expected to have a level of
knowledge of laws and regulations greater than that which is required to undertake the
engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined
by a court or other appropriate adjudicative body.

• Certain Matters Expressly out of Purview: Matters that are clearly inconsequential, or relating to
personal misconduct pertaining to business activities of client not covered.

• Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the matter
to an appropriate authority would be precluded if doing so would be contrary to law or regulation.

Applicability of NOCLAR in India:

• The IESBA Code of Ethics makes NOCLAR applicable to all assignments (members in
practice), and to all employers (members in service).
• ICAI Code has restricted applicability of NOCLAR to Audits assignment of listed entities
(members in practice) and for members in service applicability has been restricted to
employees of listed entities.

Documentation Requirements in NOCLAR: Revised Code over and above require professional accountant
to follow additional documents requirements as under:
• How management / TCWG have responded to the matter.
• The course of action accountant considered, judgments made and decisions that were taken, having
regard to reasonable and informed third party test.
• How accountant is satisfied that responsibility of public interest has been fulfilled.

NOCLAR vs. SA 250

Applicability
1. SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is
applicable on professional accountants in service, and in practice. Among those in practice, it applies to
Auditors, as well as professional services other than Audit. However, degree of responsibility of the
professional accountant varies as per the role.

Coverage of Laws
2. SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of
material amounts and disclosures in the financial statements (such as tax and labour laws); and other

CA SHUBHAM KESWANI 279

laws and regulations that do not have a direct effect on the determination of the amounts and
disclosures in the financial statements, but compliance with which may be fundamental to the
operating aspects of the business. NOCLAR, while being alike to SA 250 till this point, is further
ahead of it in that it takes into account non-compliance that causes substantial harm resulting in
serious consequences in financial or non-financial terms.

Definition of Stakeholders
3. SA 250 doesn’t define stakeholders. NOCLAR is related to effect of non-compliance on investors,
creditors, employees as also the general public.

Disclosure of Imminent Breach

4. As per NOCLAR, in exceptional circumstances, professional accountant might become aware of an
imminent breach of a law or regulation that would cause substantial harm to investors, creditors,
employees or the general public. Having first considered whether it would be appropriate to discuss
matter with mgt or TCWG, accountant shall exercise professional judgment and determine whether to
disclose the matter immediately to an appropriate authority in order to prevent or mitigate
consequences of such imminent breach. If disclosure is made, disclosure is permitted. This provision is
not existent in SA 250.

CA SHUBHAM KESWANI 280

 First Schedule
Part I Professional misconduct in relation to Chartered Accountants in practice
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he:
Clause (1) allows any person to practice in his name as a chartered accountant unless such person is also a
chartered accountant in practice and is in partnership with or employed by him.
Clause (2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional business, to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner, or a member of any other professional body or with such other persons
having such qualification as may be prescribed, for the purpose of rendering such professional
services from time to time in or outside India.
Clause (3) accepts or agrees to accept any part of the profits of the professional work of a person who is
not a member of the Institute.
Clause (4) enters into partnership, in or outside India, with any person other then Chartered Accountant
in practice or such other person who is a member of any other professional body having such
qualifications as may be prescribed, including a resident who but for his residence abroad
would be entitled to be registered as a member under close (V) of sub-section (1) of section 4
or whose qualifications are recognized by the Central Government or the Council for the
purpose of permitting such partnerships.
Clause (5) Secures either through the services of a person who is not an employee of such Chartered
Accountant or who is not his partner or by means which are not open to a Chartered
Accountant, any professional business.
Provided that nothing herein contained shall be construed as prohibiting any agreement
permitted in terms of item (2), (3) and (4) of this part.
Clause (6) Solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.

Provided that nothing herein contained shall be construed as preventing or prohibiting –

(i) Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organizations from time to time and securing professional work as a consequence.

However, as per the guideline issued by the Council of the Institute of Chartered Accountants
of India, a member of the Institute in practice shall not respond to any tender issued by an
organization or user of professional services in areas of services which are exclusively
reserved for chartered accountants, such as audit and attestation services.

However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants.
Clause (7) Advertises his professional attainments or services, or uses any designation or expressions
other than the Chartered Accountant on professional documents, visiting cards, letter heads or
sign boards unless it be a degree of a University established by law in India or recognized by
the Central Government or a title indicating membership of the Institute of Chartered
Accountants or of any other institution that has been recognized by the Central Government or
may be recognized by the Council.

Provided that a member in practice may advertise through a write up, setting out the service
provided by him or his firm and particulars of his firm subject to such guidelines as may be
issued by the Council.
Clause (8) Accepts a position as auditor previously held by another chartered accountant or a certified
auditor who has been Issued certificate under the Restricted Certificate Rules, 1932 without
first communicating with him in writing.

CA SHUBHAM KESWANI 281

Clause (9) Accepts an appointment as auditor of a company without first ascertaining from it whether the
requirements of Section 225 of the Companies Act, 1956, in respect of such appointment have
been duly complied with.
Clause (10) Clause (10) Charges or offers to charge, accepts or offers to accept In respect of any
professional employment fees which are based on a percentage of profits or which are
contingent upon the findings, or results of such employment, except as permitted under any
regulations made under this Act.
The Council of the Institute has however framed Regulation 192 which exempts members from
the operation of this clause in certain professional services.
Clause (11) Engages in any business or occupation other than the profession of chartered accountant
unless permitted by the Council so to engage.
Provided that nothing contained herein shall disentitle a chartered accountant from being a
director of a company (Not being managing director or a whole time director) unless he or any
of his partners is interested in such company as an auditor.
Clause (12) Allows a person not being a member of the institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.
Part II Professional misconduct in relation to members of the Institute in service
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:
Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments
of the employment undertaken by him.
Clause (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered
accountant or broker engaged by such company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification.
Part III Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he:
Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.
Clause (2) does not supply the information called for, or does not comply with the requirements asked for,
by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate Authority.
Clause (3) while inviting professional work from another chartered accountant or while responding to
tenders or enquiries or while advertising through a write up, or anything as provided for in
items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.
Part IV Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he:
Clause (1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment
for a term not exceeding six months.
Clause (2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of
his action whether or not related to his professional work.
Second Schedule
Part I Professional misconduct in relation to chartered Accountant in practice
Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as
required by any law for the time being in force.
Clause (2) If he certifies or submits in his name or in the name of his firm, a report of an examination of
financial statements unless the examination of such statements and the related records has
been made by him or by a partner or an employee In his firm or by another chartered
accountant in practice.
Clause (3) Permits his name or the name of his firm to be used in connection with an estimate of earnings
contingent upon future transactions in manner which may lead to the belief that he vouches for
the accuracy of the forecast.

CA SHUBHAM KESWANI 282

Clause (4) Expresses his opinion on financial statements of any business or enterprise in which he, his
firm, or a partner in his firm has a substantial interest.
Clause (5) Fails to disclose a material fact known to him which is not disclosed in a financial statement,
but disclosure of which is necessary in making such financial statement not misleading where he
is concerned with that financial statement in a professional capacity.
Clause (6) Fails to report a material misstatement known to him to appear in a financial statement with
which he is concerned in a professional capacity.
Clause (7) Does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
Clause (8) Fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.
Clause (9) Fails to invite attention to any material departure from the generally accepted procedure of
audit applicable to the circumstances.
Clause (10) Fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which th ey are
intended within a reasonable time.
Part II Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he:
Clause (1) contravenes any of the provisions of this Act or the regulations made there under or any
guidelines issued by the Council.
Clause (2) being an employee of any company, firm or person, discloses confidential information acquired
in the course of his employment except as and when required by any law for the time being in
force or except as permitted by the employer.
Clause (3) Includes in any information, statement, return or form to be submitted to the Institute,
Council or any of its Committees, Director (Discipline), Board of Discipline. Disciplinary
Committee, Quality Review Board or the Appellate Authority any particulars knowing them to
be false.
Clause (4) Defalcates or embezzles money received in his professional capacity.
Part III Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
mis - conduct, if he is held guilty by any civil or criminal court for an offence which is
punishable with imprisonment for a term exceeding six months.

CA SHUBHAM KESWANI 283

 1. “Quality Control”
PART- I DESCRIPTIVE QUESTIONS
1.1 -SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements”
Q.1. M/s. NK & Co., Chartered Accountants were appointed as Statutory Auditors of Fresh Juice
Limited for the FY 2023-24. The previous year’s audit was conducted by M/s LP &
Associates. After the audit was completed and report submitted, it was found that closing
balances of last financial year i.e., 2022-23 were incorrectly brought forward. It was found
that M/s NK & Co. did not apply any audit procedures to ensure that correct opening balances
have been brought forward to the current period.
Accordingly, a complaint was filed against NK & Co. in relation to this matter.
You are required to inform what policies are required to be implemented by NK & Co. for
dealing with such complaints and allegations as required by Standard on Quality Control
(SQC). [Jan. 21 (5 Marks), MTP-March 22]
Ans: Complaints and Allegations:
 As required by SQC-1 “Quality Control for Firms that Perform Audits & Reviews of
Historical Financial Information, and Other Assurance & Related Services Engagements”
the firm should establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with:
(a) Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
(b) Allegations of non-compliance with the firm’s system of quality control.
 Complaints and allegations (which do not include those that are clearly frivolous) may
originate from within or outside the firm. They may be made by firm personnel, clients or
other third parties. They may be received by engagement team members or other firm
personnel.
 As part of this process, the firm establishes clearly defined channels for firm personnel to
raise any concerns in a manner that enables them to come forward without fear of
reprisals.
 The firm investigates such complaints and allegations in accordance with established
policies and procedures. The investigation is supervised by a partner with sufficient and
appropriate experience and authority within the firm but who is not otherwise involved in
the engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use the services of a suitably qualified external person or another firm
to carry out the investigation. Complaints, allegations and the responses to them are
documented.
 Where the results of the investigations indicate deficiencies in the design or operation of
the firm’s quality control policies and procedures, or non-compliance with the firm’s
system of quality control by an individual or individuals, the firm shall take appropriate
action.

Q.2. AP & Associates, Chartered Accountants, are Statutory Auditors of XP Limited for the last
four years. XP Limited is engaged in the manufacture and marketing of FMCG Goods in
India. During 2023-24, the Company has diversified and commenced providing software

1
 solutions in the area of “e-commerce” in India as well as in certain European countries. AP &
Associates, while carrying out the audit for the current financial year, came to know that the
company has expanded its operations into a new segment as well as new geography. AP &
Associates does not possess necessary expertise and infrastructure to carry out the audit of
this diversified business activities and accordingly wishes to withdraw from the engagement
and client relationship. Discuss the issues that need to be addressed before deciding to
withdraw. [Nov. 22 (5 Marks)]
Ans: Issues to be addressed before withdrawing from audit engagement:
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical
Financial Information, and other Assurance and Related Services Engagements”, firm should
establish the policies w.r.t. withdrawal from engagement and communication requirements, if
circumstances warrant. Policies and procedures on withdrawal from an engagement or from
both the engagement and the client relationship address issues that include the following:
(a) Discussing with the appropriate level of mngt. & TCWG regarding the appropriate action
that the firm might take based on the relevant facts and circumstances.
(b) If the firm determines that it is appropriate to withdraw, discussing with the appropriate
level of the client’s management and TCWG withdrawal from the engagement or from
both the engagement and the client relationship, and the reasons for the withdrawal.
(c) Considering whether there is a professional, regulatory or legal requirement for the firm
to remain in place, or for the firm to report the withdrawal from the engagement, or from
both the engagement and the client relationship, together with the reasons for the
withdrawal, to regulatory authorities.
(d) Documenting significant issues, consultations, conclusions and the basis for the
conclusions.

Q.3. BSS & Associates is a partnership firm of Chartered Accountants which was established five
years back. The firm was offering only advisory services at the beginning, however, after
audit rotation and advent of GST, firm sees lot of potential in these areas also and started
looking for opportunities in these areas. These services being assurance in nature, the firm
required some internal restructuring and set up some policies and procedures for compliance
year on year.
The firm started getting new clients for these new services and is now looking to obtain such
Information as it considers necessary in the circumstances before accepting an engagement
with a new client, when deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client. Where issues have been
identified, and the firm decides to accept or continue the client relationship or a specific
engagement, it has been setting up a process to document how the issues were resolved.
The firm is now looking to work with only select clients which are in line with the policies of
the firm. The firm understands that the extent of knowledge it will have regarding the
integrity of a client will grow within the context of an ongoing relationship with that client.
With regard to the integrity of a client, you are required to give some examples of the matters
to be considered by the firm as per the requirements of SQC 1. [RTP-May 19]
Or
MB & Associates is a partnership firm of the Chartered Accountants which was established
seven years back. The firm is getting new clients and has also been offered new engagement
services with existing clients. The firm is concerned about obtaining such information as it

2
 considers necessary in the circumstances before accepting an engagement with a new client
and acceptance of a new engagement with an existing client. The firm is looking to work with
only select clients to adhere to the Quality Control Standards. Guide MB & Associates about
the matters to be considered with regard to the integrity of a client, as per the requirements of
SQC 1. [Nov. 19 (4 Marks)]
Ans: Considerations as to integrity of clients:
As per SQC-1 “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements”, a firm
should obtain such information as it considers necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new engagement with an existing client.
Where issues have been identified, and the firm decides to accept or continue the client
relationship or a specific engagement, it should document how the issues were resolved.
Considerations as to integrity of clients:
With regard to the integrity of a client, matters that the firm considers include, for example:
1. The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
2. The nature of the client’s operations, including its business practices.
3. Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible.
5. Indications of an inappropriate limitation in the scope of work.
6. Indications that the client might be involved in money laundering or other criminal
activities.
7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally
grow within the context of an ongoing relationship with that client.

Q.4. J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon
Ltd. after ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr.
Jay was the engagement partner for the aforesaid audit and prior to commencement of the
audit, Mr. Jay had called for a meeting of the engagement team in order to direct them and
assign them their responsibilities. At the end of meeting, Mr. Jay assigned review
responsibilities to two of the engagement team members who were the most experienced
amongst all, for reviewing the work performed by the less experienced team members. While
reviewing the work performed by the less experienced members of the engagement team,
what shall be the considerations of the reviewers? [MTP-March 21]
Ans: Consideration to be given while reviewing the work:
 As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements”, review
responsibilities are determined on the basis that more experienced team members,
including the engagement partner, review work performed by less experienced team
members.

3
  While reviewing the work performed by less experienced members of the engagement
team, the reviewers should consider whether:
(i) The work has been performed in accordance with professional standards and
regulatory and legal requirements.
(ii) Significant matters have been raised for further consideration.
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented.
(iv) There is a need to revise the nature, timing and extent of work performed.
(v) The work performed supports the conclusions reached and is appropriately
documented.
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.

Q.5. PQR & Associates Chartered Accountants, is partnership having 3 partners CA P, CA Q and
CA R. PQR & Associates are appointed as Statutory Auditors of ABC Limited, a listed entity
for the financial year 2023-24 and CA P is appointed as Engagement Partner for the audit of
ABC Limited. Before issuing the Audit Report of ABC Limited, CA P asked CA R to
perform Engagement Quality Control Review and is of the view that his responsibility will be
reduced after review by CA R. Whether the contention of CA P is correct? What are the
aspects that need to be considered by CA R while performing Engagement Quality Control
Review for audit of financial statements of ABC Limited? [May 22 (5 Marks)]
Ans: Engagement Quality Control Review (EQCR):
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical
Financial Information, and other Assurance and Related Services Engagements”, the review
does not reduce the responsibilities of the engagement partner. Hence, contention of CA. P
that after engagement quality control review by CA. R, his responsibility will be reduced, is
not correct.
Aspects to be considered while performing EQCR for audit of F.S.:
CA. R needs to consider the following aspect while performing EQCR for audit of F.S. of
ABC Ltd.:
(1) The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement.
(2) Significant risks identified during the engagement and the responses to those risks.
(3) Judgments made, particularly with respect to materiality and significant risks.
(4) Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters, and the conclusions arising from those
consultations.
(5) The significance and disposition of corrected and uncorrected misstatements identified
during the engagement.
(6) The matters to be communicated to management and those charged with governance and,
where applicable, other parties such as regulatory bodies.
(7) Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
(8) The appropriateness of the report to be issued.

4
Q.6. ABC & Associates, Chartered Accountants has a policy to accept the clients wherein the risk
evaluation is conducted with respect to the Company and the promoter. XYZ Limited
approached ABC & Associates. Promoter of XYZ Limited is a close associate and family
friend of Mr. A, Managing Partner of ABC & Associates. XYZ Limited is in news in the
previous year for certain inquiries from the regulatory authorities in relation to certain
matters. The existing auditor of XYZ Limited has resigned and has created a casual vacancy.
XYZ Limited is ready to offer 25% more than the existing fees and has approached ABC &
Associates for appointment as Auditor. Mr. A has strong recommendation to the Firm to
accept the audit.
What is your understanding of the functioning of the tone at the top of the Firm ABC &
Associates, Chartered Accountants.? What are the considerations one should exercise to
uphold Quality of the Firm?
Ans: Implementation of Quality Control Procedures:
 SQC 1 requires that firm should establish a system of quality control designed to provide
it with reasonable assurance that firm and its personnel comply with professional
standards and legal and regulatory requirements. It further requires that firm’s business
strategy is subject to overriding requirement of firm to achieve quality in all
engagements. However, in the given situation, commercial considerations seem to be
overriding factor. It reflects poorly regarding functioning at top of the firm as regards to
quality control.
 The managing partner of firm is close associate and family friend of promoter. The
matter should have been brought to knowledge of firm in accordance with requirements
of SQC 1 as it involves issue of independence of managing partner of the firm with
respect to proposed audit engagement. Further, matters of inquiries from regulators and
resignation of previous auditor raise question about integrity of the proposed client. SQC
1 further requires firm to consider before acceptance of an engagement that client does
not lack integrity. All these factors need to be taken into consideration before accepting
engagement.
Conclusion: Overall, such a situation reflects lack of proper establishment of quality control
framework at top of the firm.
Considerations to be taken into account while upholding quality of firm:
(i) Firm assigns its management responsibilities so that commercial considerations do not
override quality of work performed.
(ii) Firm’s policies and procedures in relation to its personnel are designed to demonstrate its
overriding commitment to quality.
(iii) Firm devotes sufficient resources for development and documentation of its quality
control policies and procedures.
(iv) Firm before accepting an engagement should acquire vital information about the client.
Such an information should help firm to decide about integrity of Client, promoters and
key managerial personnel, competence (including capabilities, time and resources) to
perform engagement and compliance with ethical requirements.

Q.7. You are an audit senior working for the firm Bohra & Company. You are currently carrying
out the audit of Wisdom Ltd., a manufacturer of waste paper bins. You are unhappy with
Wisdom Ltd.’s inventory valuation policy and have raised the issue several times with the
audit manager. He has dealt with the client for a number of years and does not see what you

5
 are making an objection about. He has refused to meet you on site to discuss those issues.
As the audit manager had dealt with Wisdom Ltd. for so many years, the other partners have
decided to leave the audit of Wisdom Ltd. in his capable hands. Comment on the situation
outlined above.
Ans: Quality Control Issues in an engagement:
 SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements” requires
a firm to establish the policies & procedures for dealing/resolving differences of opinion
with in engagement team.
 An engagement partner is usually appointed to each audit engagement undertaken by the
firm, to take responsibility for the engagement on behalf of the firm. Assigning the audit
to an experienced audit manager is not sufficient.
 SA 220 “Quality Control for an Audit of Financial Statement”, requires that the audit
engagement partner takes responsibility for settling disputes in accordance with the
firm’s policy in respect of resolution of difference of opinion required by SQC 1.
 In the present case, partners of the firm have decided to leave the audit in the hands of
Audit manager and no engagement partner has been assigned. The lack of an audit
engagement partner also means that several of the requirements of SA 220, about
ensuring that engagements in relation to independence and directing, supervising and
reviewing the audit are not in place.
 Further, the audit manager and senior have conflicting views about the valuation of
inventory. This does not appear to have been handled well, with the manager refusing to
discuss the issue with the senior.
Conclusion: Failure to resolve the difference of opinion is a breach of the firm’s policy under
SQC 1. It indicates that the firm does not have a suitable policy concerning such disputes
required by SQC 1.

Q.8. HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the last
8 financial years. CA H, partner of the firm, has been handling the audit assignment very well
since the appointment. The audit work of CA H and her team is reviewed by a senior partner
CA K to assure that audit is performed in accordance with professional standards and
regulatory and legal requirements. CA K was out of India for some personal reasons, so this
year CA G has been asked to review the audit work. In your opinion, what areas CA G should
consider at the time of review. List any four areas and also comment whether firm is
complying with Standard on Quality Control or not. [July 21 (5 Marks), MTP-Oct. 22]
Ans: Areas to be considered in review of audit work:
As per SQC 1, review responsibilities are determined on the basis that more experienced
engagement team members, including the engagement partner, review work performed by
less experienced team members.
Reviewers consider whether:
(a) The work has been performed in accordance with professional standards and regulatory
and legal requirements;
(b) Significant matters have been raised for further consideration;
(c) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
(d) There is a need to revise the nature, timing and extent of work performed;

6
 (e) The work performed supports the conclusions reached and is appropriately documented;
(f) The evidence obtained is sufficient and appropriate to support the report; and
(g) The objectives of the engagement procedures have been achieved.
Compliance with SQC:
The firm should establish policies and procedures:
(i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat
to an acceptable level when using the same senior personnel on an assurance engagement
over a long period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the
engagement partner after a specified period in compliance with the Code.
The familiarity threat is particularly relevant in the context of financial statement audits of
listed entities. For these audits, the engagement partner should be rotated after a pre-defined
period, normally not more than 7 years.
Conclusion: Firm is not complying with SQC 1 as Engagement Partner H is continuing for
more than 7 years.

1.2 - SA 220 “Quality Control for an Audit of Financial Statements”

Q.9. OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started
its operations 5 years back. The field work during the audit of the financial statements of the
company for the year ended on March 31, 2023 got completed on July 1, 2023. The auditor’s
report was dated July 12, 2023. During the documentation review of the engagement, it was
observed that the engagement quality control review was completed on July 15, 2023.
Engagement partner had completed his reviews in entirety by July 10, 2023. Comment.
[MTP-Oct. 18, March 19]
Ans: Review by Engagement Partner:
 As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement
partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures. For audits of financial statements of listed entities,
the engagement partner shall:
(a) Determine that an engagement quality control reviewer has been appointed;
(b) Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer; and
(c) Not date the auditor’s report until the completion of the engagement quality control
review.
 Further, SA 700, “Forming an Opinion and Reporting on Financial Statements”, requires
the auditor’s report to be dated not earlier than the date on which the auditor has obtained
sufficient appropriate evidence on which to base the auditor’s opinion on the financial
statements.
 In the present case, OP & Associates are the statutory auditors of a listed company which
started its operations 5 years back. The field work during the audit of the financial
statements of the company for the year ended on March 31, 2023 got completed on July
1, 2023. The auditor’s report was dated July 12, 2023. During the documentation review
of the engagement, it was observed that the engagement quality control review was
completed on July 15, 2023.

7
 Conclusion: Signing of auditor’s report i.e. on July 12, 2023 which is before the completion
of review engagement quality control review i.e. July 15, 2023, is not in order.

Q.10. M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year
2022-23. CA Suresh, one of the partners of M/s Sureshchandra & Co., completed entire
routine audit work by 29th May, 2023. Unfortunately, on the very next morning, while roving
towards office of SC Ltd. to sign final audit report, he met with a road accident and died. CA
Chandra, another partner of M/s Sureshchandra & Co., therefore, signed the accounts of SC
Ltd., without reviewing the work performed by CA Suresh.
State with reasons whether CA Chandra is right in expressing an opinion on financial
statements the audit of which is performed by another auditor. [MTP-April 18]

Ans: Review of Work performed by others:

 As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement
partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures. Review procedures consists of the considerations,
whether:
1. the work has been performed in accordance with professional standards and
regulatory and legal requirements;
2. significant matters have been raised for further consideration;
3. appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
4. the work performed supports the conclusions reached and is appropriately
documented;
5. the evidence obtained is sufficient and appropriate to support the auditor’s report;
and
6. the objectives of the engagement procedures have been achieved.
 When the auditor delegates work to assistants or uses work performed by other
auditors/experts he will continue to be responsible for forming and expressing his
opinion on the financial statements. However, he will be entitled to rely on the work
performed by others, provided he exercises adequate skill and care and is not aware of
any reason to believe that he should not have so relied.
 The auditor should carefully direct, supervise and review work delegated to assistants.
He should obtain reasonable assurance that work performed by other auditors/experts and
assistants is adequate for his purpose.
 In the instant case, Mr. Suresh, a partner of the firm had completed routine audit work
and died before signing audit report. Mr. Chandra another partner of the firm has signed
the accounts of SC Ltd, relying on the work performed by Mr. Suresh.
Conclusion: CA Chandra is allowed to sign the audit report, though, will be responsible for
expressing the opinion. He may rely on the work performed by CA Suresh provided he
further exercises adequate skill and due care and review the work performed by him.

Q.11. Ace Limited (manufacturer of textile goods) got an order of manufacturing of PPE kits in
December 2023. But there was shortage of machinery and manpower to accomplish the
ordered requirement of PPE kits. Ace Limited approached another manufacturing unit Jack
Limited for purchase of the unit. Jack Limited was interested in the sale of unit, so the deal

8
 went through and Ace Limited acquired ninety five percent shares of Jack Limited. The new
management of Jack Limited proposed and appointed NKB Associates, Chartered
Accountants, (already auditors of Ace Limited) as new auditors of Jack Limited. NKB
Associates accepted the assignment without considering information whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit
engagements are appropriate.
Comment with respect to appropriate Standard of Auditing what type of information assists
the engagement partner in determining whether the conclusions reached regarding the
acceptance and continuance of client relationships and audit engagements are appropriate or
not? [Dec. 21 (5 Marks); MTP-Sep. 22]
Ans: Information assisting auditor in accepting and continuing of relationship with the client:
 SA 220, “Quality Control for an Audit of F.S.” and SQC 1, “Quality Control for Firms
that Perform Audits and Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements”, requires the firm to obtain information
considered necessary in the circumstances before accepting an engagement with a new
client, when deciding whether to continue an existing engagement, and when considering
acceptance of a new engagement with an existing client.
 Information such as the following assists the engagement partner in determining whether
the conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements are appropriate:
(i) The integrity of the principal owners, key management and TCWG of the entity;
(ii) Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources.
(iii) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(iv) Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.

Q.12. During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his
reviews and also ensured compliance with independence requirements that apply to the audit
engagement. The engagement files were also reviewed by the Engagement Quality Control
Reviewer (EQCR) except the independence assessment documentation. Engagement Partner
was of the view that matters related to independence assessment are the responsibility of the
Engagement Partner and not Engagement Quality Control Reviewer. Engagement Quality
Control Reviewer objected to this and refused to sign off the documentation. Please advise as
per SA 220. [RTP-May 19, May 22; MTP-Oct. 19]
Ans: Responsibilities of EP and EQCR in relation to assessment of independence:
 As per SA 220 “Quality control for an Audit of Financial Statements” the engagement
partner shall form a conclusion on compliance with independence requirements that
apply to the audit engagement. In doing so, the engagement partner shall:
(a) Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence;
(b) Evaluate information on identified breaches, if any, of the firm’s independence
policies and procedures to determine whether they create a threat to independence
for the audit engagement; and

9
 (c) Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the
audit engagement, where withdrawal is permitted by law or regulation. The
engagement partner shall promptly report to the firm any inability to resolve the
matter for appropriate action.
 For audits of financial statements of listed entities, the engagement quality control
reviewer, on performing an engagement quality control review, shall also consider
among other things, the engagement team’s evaluation of the firm’s independence in
relation to the audit engagement.
Conclusion: View of EP that matters related to independence assessment are the
responsibility of the EP and not EQCR is not correct. The independence assessment
documentation should also be given to EQCR for his review.

PART- II MULTIPLE CHOICE QUESTIONS

1. PMP Ltd. is an associate of PMP Inc., a company based in Kuwait. PMP Ltd is listed in India
having its corporate office at Assam. The company’s operations have remained stable over
the years and the management is looking to expand the operations for which the management
is considering different business ventures.
The company’s auditors issued clean audit report on the audit of the financial statements for
the year ended 31 March 2022.
For the financial year ended 31 March 2023, the auditors made some changes in their audit
team. While the audit partner remained the same, the field in charge has been replaced, as the
field incharge who was engaged in the audit of the financial statements for the year ended 31
March 2022 has left the firm. The audit team has a new person as External Quality Control
Reviewer (EQCR) who has specialized knowledge of the industry in which the company is
operating. EQCR has been employed with the firm for over 2.5 years and is yet to clear his
CA (Chartered Accountancy) final exams. The changes were made on the basis of the
consideration that the firm has enough experience of engagement with this client.
The audit team commenced the work for audit of the year ended 31 March 2023 after detailed
planning and it was observed that EQCR had various comments on certain matters which
were not accepted by the audit partner. Audit partner had better understanding of the client
and after assessing the comments of the EQCR did not find those relevant.
The audit partner without concurrence of the EQCR finalized the audit and issued the audit
report. In the given situation, please advise which one of the following is correct?
(a) The changes in the audit team were not appropriate except for the field in charge who
had left the firm. EQCR should have been a member of the Institute of Chartered
Accountants of India (ICAI).
(b) The audit partner did the right thing by ignoring the comments of EQCR as he is the final
authority to decide on any matter and take decisions. Further EQCR was junior to the
audit partner.
(c) The audit partner must discuss each and every comment of EQCR with the client and
ensure that a proper disclosure in respect of those points should be made either in the
financial statements or the audit report.
(d) EQCR had sufficient and appropriate experience. He should have been given the
authority to objectively evaluate various matters, before the report is issued, the

10
 significant judgments the engagement team made and the conclusions they reached in
formulating the report. By ignoring the comments of the EQCR, audit partner took
additional professional responsibility on himself. By considering the comments of
EQCR, he could have passed the responsibility to EQCR.

2. Ram & Associates, a firm of Chartered Accountants, have been operating for the last 10 years
having Its office in Delhi with staff of around 30 persons with 4 Partners.
The firm has been offering statutory audit, risk advisory and tax services to its various clients.
The major work of the firm is for taxation services. The audit partners also discussed that the
firm needs to work significantly to improve the quality of the services they offer and that
would also help the firm to grown its business. Considering this objective, the firm started
training programmes for the staff which were made mandatory to be attended.
During one of the training programmes on quality, a topic was discussed regarding the
information that should be obtained by the firm before accepting an engagement with a new
client, when deciding whether to continue an existing engagement, and when considering
acceptance of a new engagement with an existing client. It was explained that the following
points may assist the engagement partner in determining whether the conclusions reached
regarding the acceptance and continuance of client relationships and audit engagements are
appropriate (as per SA 220):
(i) The integrity of the principal owners, key management and those charged with
governance of the entity;
(ii) The qualification of all the employees of the entity;
(iii) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;
(iv) The remuneration offered by the entity to its various consultants;
(v) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(vi) Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.
Which of the above-mentioned points are relevant for the topic under discussion?
(a) (i), (ii), (iv) and (v)
(b) (ii), (iv), (v) and (vi)
(c) (iii), (iv), (v) and (vi)
(d) (i), (iii), (v) and (vi) [RTP-Nov.19]

Answer Key

1. (a) The changes in the audit team were not appropriate except for the field incharge who had
left the firm. EQCR should have been a member of the Institute of Chartered
Accountants of India (ICAI).

2. (d) (i), (iii), (v) and (vi)

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 PART- III INTEGRATED CASE SCENARIO

CA Mritunjay in statutory auditor of a listed company engaged in providing services relating to

“tourism sector”, he is practicing in sole-proprietorship capacity. The audit of abovesaid listed
company was conducted by his proprietary firm and report was issued for year 2021-22.
Subsequently, audit report was selected by NIRA to oversee quality of service and compliance with
Standards. Necessary information was called from auditor towards above objective.
It was required of him to produce audit working papers to show that audit was carried out in
accordance with Standards on auditing. Details of the audit plan and details of risk assessment
procedures carried out to identify and assess risk of material misstatement in financial statements
were called. It was also required to show how response to assessed risks was designed and
implemented and communicated with those charged with governance.
Audit working papers sent by him through email included procedures on how some balances in
financial statements were verified. Also included in working papers were procedures performed by
him relating to verification of inventories, trade receivables and trade payables.
The working papers sent by him to the authority did not include details on audit plan and manner of
identifying and assessing risks of material misstatement. On being asked to respond, it was reasoned
by him that audit was properly planned and required procedures were carried out in relation to
material items on test check basis.
It has been further clarified by him to the authority that audit was carried out in accordance with
Standards and it was practically not feasible for a firm of small size to make a detailed audit plan. It
was also put on record with authority that he had assessed risk of material misstatement to be low
based upon his understanding of the company. He has further reasoned that assessing risks is a matter
of professional judgment. Representation has also been made by him stating that communications as
necessary were made orally with those charged with governance.
It was also pointed out to him that engagement quality control review was not carried out. He has
answered that no contentious matter arose during the course of audit and therefore, no need was felt
to carry out this exercise.
Attention was also drawn to the fact that financial statements of company were required to be
prepared on basis of Ind-AS. However, at some places in notes to accounts, reference is made to
accounting standards which are not applicable to the company. These errors have been attributed to
data feeding entry errors by Junior staff.
Based upon above, answer the following questions:
Q.1. It has been contended by auditor that audit was properly planned. He has further stated that it
was practically not feasible for fires of small size to prepare a detailed audit plan. Which of
the following views is most appropriate in this regard?
(a) Audit was, in fact, planned as evidenced by auditor’s submissions.
(b) Although auditor has no record of audit plan, it does not affect compliance with SA 220.
(c) Since auditor has no record of audit plan, it goes on to show non-compliance with SA
220.
(d) Audit was, in fact, planned as evidenced by auditor’s submissions. However, there is an
exemption for small CA firms doing away with cumbersome documentation in relation to
audit plan.

Q.2. The auditor has reasoned that risk of material misstatement has been assessed to be low based
upon his understanding of the company and it is a matter of professional judgment. Identify

12
 the most appropriate statement from below in this regard.
(a) Assessing risks of material statement is a matter of professional judgment. It cannot be
demanded from him how his judgment was arrived at.
(b) Although auditor has not submitted record of how risk of material misstatement was
arrived at, it does not affect compliance with SA 220.
(c) Since auditor has no record of how risk of material misstatement was arrived at, it goes
on to show non-compliance with SA 220.
(d) Such a query, itself, is outside the mandate of authority.

Q.3. Considering auditor’s point of view regarding engagement quality control review, identify the
most appropriate statement from below:
(a) Engagement quality control review is mandatory in such type of engagement. It was not
proper for auditor to bypass such review. He has violated mandatory requirement of
SA 220.
(b) Engagement quality control review is optional in such type of engagement. Therefore,
question of not following SA 220 does not arise.
(c) No contentious matter arose during the course of engagement. Therefore, question of not
following SA 220 does not arise in respect of engagement quality control review.
(d) Engagement quality control review is dependent upon benchmarks established under
SQC 1. If those bench marks are satisfied, such a review is necessary.

Q.4. Considering auditor’s reply regarding errors in data feeding entry by junior staff in relation to
accounting standards, which of the following statements is proper?
(a) Such are examples of clerical errors encountered during preparation of reports. There is
no question of non-compliance with SA 220.
(b) Such are examples of clerical errors encountered during preparation of reports. There is
no effect on auditor’s opinion and consequently question of non-compliance with SA 220
does not arise.
(c) Such are examples of serious lapses on part of auditor showing non-compliance with
SA 220.
(d) Such are examples of serious lapses on part of auditor. However, these are not related to
compliance with SA 220.

Q.5. On your overall reading of the case study, which of the following statements appears to
be true?
(a) The firm has an effective system of quality control described in SQC 1. Audit
engagement has also been performed in accordance with SA-220.
(b) The firm does not have effective system of quality control described in SQC 1. Audit
engagement has as not been performed in accordance with SA 220.
(c) SQC 1 is not applicable in the case. Audit engagement has not been performed in
accordance with SA 220.
(d) SQC 1 is not applicable in the case. Audit engagement has been performed in accordance
with SA 220.

Answer Key
1. (c) Since auditor has no record of audit plan, it goes on to show non-compliance with SA
220.

13
2. (c) Since auditor has no record of how risk of material misstatement was arrived at it goes on
to show non-compliance with SA 220.

3. (a) Engagement quality control review is mandatory in such type of engagement. It was not
proper for auditor to bypass such review. He has violated mandatory requirement of
SA 220.

4. (c) Such are examples of serious lapses on part of auditor showing non-compliance with
SA 220.

5. (b) The firm does not have effective system of quality control described in SQC 1. Audit
engagement has also not been performed in accordance with SA 220.

14
 2. “General Auditing Principles &
Auditor Responsibilities”
PART- I DESCRIPTIVE QUESTIONS
2.1 - SA 240 “The Auditor’s Responsibilities relating to Fraud in an Audit of F.S.”
Q.1. CA. Ridhima, internal auditor of Track Store Limited, has pointed out following deficiencies
in internal control of the company, in her reports:
(i) Receivables are not reconciled at stipulated intervals.
(ii) Customers are provided a credit limit based upon their track record. However, no review
of customer credit limits is undertaken at required intervals.
The statutory auditor of the company finds that no action has been taken by the company on
the said deficiencies pointed out in reports of internal auditor. What does above situation
allude to statutory auditor of company?
Ans: Risk of material misstatement due to fraudulent financial reporting:
 Management failing to remedy known significant deficiencies in internal control on a
timely basis is a fraud risk factor for misstatements arising from fraudulent financial
reporting.
 When management does not correct significant deficiencies in internal control on a
timely basis, it reflects an attitude, character or set of ethical values that allow them
knowingly and intentionally to commit a dishonest act.
 Failure to rectify known control deficiencies pertaining to reconciliation of receivables
and review of customer credit limits has the potential to fraud. Lack of timely
reconciliation of receivables may lead to intentional misstatements. Further, non-
reviewing customer limit may lead to grant of credit beyond creditworthiness of
customers. It may result in intentional tying up of company‟s funds with risky customers
due to collusion.
 The above situation is a fraud risk factor for fraudulent financial reporting.

Q.2. M/s Honest Ltd. has entered into a transaction on 5th March, 2024, near year-end, whereby it
has agreed to pay ` 5 lakhs per month to Mr. Y as annual retainership fee for “engineering
consultation”. No amount was actually paid, but ` 60 lakhs are provided in books of account
as on March 31, 2024. Your inquiry elicits a response that need-based consultation was
obtained round the year, but there is no documentary or other evidence of receipt of the
service. As the auditor of M/s Honest Limited, what would be your approach? [RTP-Nov. 18]
Ans: Auditor’s duties in case of suspected fraud:
 As per SA 240 on “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, fraud can be committed by management by various means
including therein recording of fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other objectives.
 In the given case, Honest Ltd. has entered into an agreement with Mr. Y at year-end, for
engineering consultation. It also provides ` 60 lakhs in the books of account, however, no
documentary or other evidence of receipt of such service is available. It appears that
company has passed fictitious journal entries, near year-end, to manipulate the operating
results.

1
  SA 240 further provides that if, as a result of a misstatement resulting from fraud or
suspected fraud, the auditor encounters exceptional circumstances that bring into
question the auditor‟s ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
 Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies
(Audit & Auditor‟s) Rules, 2014 requires that if an auditor of a company, in the course of
the performance of his duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by officers or employees of
the company, he shall immediately report the matter to the audit committee within 2 days
of his knowledge (as amount involved is less than ` 1 Cr.) mentioning the following:
(i) Nature of Fraud with description:
(ii) Approximate amount involved; and
(iii) Parties involved etc.
 Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud
by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year, If yes, the nature and the amount involved is to be
indicated.

Q.3. In the course of audit of Quick Ltd, you suspect that the management has made misstatements
in the financial statements intentionally to deceive the users and to succumb to pressures to
meet market expectations.
Elucidate how the fraudulent financial reporting may be accomplished and also discuss
the techniques of committing fraud by management overriding controls.
[Nov. 20 (5 Marks), MTP-Oct. 21]
Ans: Ways to accomplish Fraudulent Financial Reporting:
SA 240, “The Auditor‟s responsibilities relating to Fraud in an Audit of Financial
Statements”, discusses how fraudulent financial reporting may be accomplished and also
discusses techniques of committing fraud by management overriding controls. Accordingly,
fraudulent financial reporting may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of events,
transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that otherwise
may appear to be operating effectively. Fraud can be committed by management overriding
controls using such techniques as:
(i) Recording fictitious journal entries, particularly close to the end of an accounting period,
to manipulate operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.

2
 (iii) Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
(iv) Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements.
(v) Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(vi) Altering records and terms related to significant and unusual transactions.

Q.4. Arihant Limited was engaged in the business of owning and managing hotels & resorts,
selling tourism packages and performing airline bookings for corporate and individuals. It
appointed Upadhyay & Co. as its statutory auditor for the financial year 2023-24. While
planning the audit, the audit team decided that the risk of improper revenue recognition from
hotel business should not be treated as a fraud risk. This conclusion was based on the
assessment of earlier years, wherein no fraud was identified in revenue recorded from such
business. While testing the internal financial controls over the process of revenue
recognition, it was identified that the controls are not properly designed to mitigate the risk of
fraud & risk of improper revenue recognition. As a result, the audit team decided to
perform additional substantive testing. However, the audit team still were to the conclusion
that there is no risk of fraud in revenue recognition. During the course of substantive testing,
it was identified that the management did not account for revenue received from
corporate hotel bookings amounting to ` 35 crore. These amounts were partially received in
the company‟s bank accounts and partially received in the CFO‟s personal account. The
amounts received in the bank account of the company were disclosed as advances received
against the future bookings.
In the light of above scenario, kindly guide the statutory auditors with respect to their
responsibility relating to fraud in an audit of a financial statement. [RTP-Nov. 22]
Ans: Auditor’s responsibility relating to fraud in an audit of F.S.:
 As per SA 240, “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements” and SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment”, auditor
shall identify and assess the risks of material misstatement (RMM) due to fraud at the
financial statement level, and at the assertion level for classes of transactions, account
balances and disclosures.
 When identifying and assessing the RMM due to fraud, the auditor shall, based on a
presumption that there are risks of fraud in revenue recognition, evaluate which types of
revenue, revenue transactions or assertions give rise to such risks.
 In accordance with SA 240 and SA 330, auditor shall determine overall responses to
address the assessed RMM due to fraud at the F.S. level and assertion level. The
presumption that there are risks of fraud in revenue recognition may be rebutted. For
example, the auditor may conclude that there is no RMM due to fraud relating to revenue
recognition in the case where there is a single type of simple revenue transaction, for
example, leasehold revenue from a single unit rental property. However, when there is a
complex revenue structure or when there is lack of controls on revenue recognition, then
there is a high probability of fraud risk in revenue recognition.
 Obtaining an understanding of the entity and its environment, including the entity‟s
internal control is a continuous, dynamic process of gathering, updating and analysing

3
 information throughout the audit. In the current scenario, the company was earning
revenue from multiple streams. Also, it was identified that the controls are not properly
designed to mitigate the risk of fraud and risk of improper revenue recognition. During
the year it was identified that the management did not account for revenue from
corporate hotel bookings amounting to ` 35 crore. These amounts were partially received
in the company‟s bank accounts and partially received in the CFO‟s personal account.
The amounts received in the bank account of the company were disclosed as advances
received against future bookings.
 Therefore, the auditor while performing the risk assessment procedures should consider
the complexity and nature of the revenue for determining the fraud risks in revenue
recognition. Also, there were no adequate controls addressing the risk of improper
revenue recognition or fraud risk, the audit team rebutted the fraud risk. Moreover, the
audit team should have recognised fraud risk by identifying the deficiencies of internal
control over the revenue recognition process and should have treated the risk of improper
revenue recognition as a significant risk.
 Also, as per Sec. 143(12) of the Companies Act, 2013, the auditor is required to report all
the frauds identified during the course of the audit involving amounts above 1 crore
within the prescribed time frame to the C.G.

Q.5. M/s Kumar & Co, Chartered Accountants were appointed as statutory auditors of PC limited
for the financial year 2023-24. During the course of audit, one of the partners CA Kumar
observed that there is misappropriation of assets in the form of theft of entity‟s inventory and
is perpetrated by employees in relatively small and immaterial amounts. CA Kumar is
concerned with the existence of certain circumstances for increasing the susceptibility of
assets to misappropriation.
Guide CA Kumar with respect to Risk factors related to misstatements arising from
misappropriation of assets with reference to relevant Standard on Auditing
[Dec. 21 (5 Marks), MTP-March 23]
Ans: Risk Factors relating to misstatements arising from misappropriation of Assets:
As per SA 240, “The Auditor‟s Responsibilities Relating to Fraud in an audit of Financial
Statements”, misappropriation of assets involves the theft of entity‟s assets and is often
perpetrated by employees in relatively small and immaterial amounts. However, it can also
involve management who are usually more able to disguise or conceal misappropriations in
ways that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including stealing
physical assets or intellectual property (for example, stealing inventory for personal use or for
sale, stealing scrap for resale, colluding with a competitor by disclosing technological data in
return for payment).
Risk factors that relate to misstatements arising from misappropriation of assets are also
classified according to the three conditions generally present when fraud exists:
incentives/pressures, opportunities, and attitudes/rationalization.
(a) Incentives/Pressures
Personal financial obligations may create pressure on management or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other
assets susceptible to theft may motivate those employees to misappropriate those assets.

4
 For example, adverse relationships may be created by the following:
(i) Known or anticipated future employee layoffs.
(ii) Recent or anticipated changes to employee compensation or benefit plans.
(iii) Promotions, compensation, or other rewards inconsistent with expectations.
(b) Opportunities:
Certain circumstances may increase susceptibility of assets to misappropriation. For
example, opportunities to misappropriate assets increase when there are the following:
(i) Large amounts of cash on hand or processed.
(ii) Inventory items that are small in size, of high value, or in high demand.
(iii) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
(iv) Fixed assets which are small in size, marketable, or lacking observable identification
of ownership.
Inadequate internal control over assets may increase the susceptibility of
misappropriation of those assets. For example, misappropriation of assets may occur
because there is the following:
(1) Inadequate segregation of duties or independent checks.
(2) Inadequate oversight of senior management expenditures, such as travel and other
reimbursements.
(3) Inadequate management oversight of employees responsible for assets, for example,
Inadequate supervision or monitoring of remote locations.
(4) Inadequate job applicant screening of employees with access to assets.
(5) Inadequate record keeping with respect to assets.
(6) Inadequate system of authorization & approval of transactions (for example, in
purchasing).
(7) Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
(8) Lack of complete and timely reconciliations of assets.
(9) Lack of timely and appropriate documentation of transactions, for example, credits
for merchandise returns.
(10) Lack of mandatory vacations for employees performing key control functions.
(11) Inadequate management understanding of information technology, which enables
information technology employees to perpetrate a misappropriation.
(12) Inadequate access controls over automated records, including controls over and
review of computer systems event logs.
(c) Attitudes/Rationalizations:
(i) Disregard for need for monitoring or reducing risks related to misappropriations of
assets.
(ii) Disregard for internal control over misappropriation of assets by overriding existing
controls or by failing to take appropriate remedial action on known deficiencies in
internal control.
(iii) Behaviour indicating displeasure or dissatisfaction with entity or its treatment of
employee.
(iv) Changes in behaviour or lifestyle that may indicate assets have been
misappropriated.
(v) Tolerance of petty theft.

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Q.6. Comment on the following: On 15th March, 2024, the directors of Phony Ltd. instructed
their accountant to enter purchases amounting ` 1.02 Crores from a company incorporated
dated 11th March, 2024. However, no amount was actually paid and ` 1.02 Crores was
provided in the books of account as purchases for the year ending on 31st March, 2024.
On inspection, no documentary or other evidence of such purchases was found. As the auditor
of Phony Ltd., what would be your approach regarding reporting of such bogus purchases?
[MTP-May 20]
Ans: Auditor’s duties in case of suspected fraud:
 As per SA 240 on “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, fraud can be committed by management by various means
including therein recording of fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other objectives.
 In the given case, directors of Phony Ltd. instructed their accountant to enter purchases
amounting ` 1.02 Crores from a company incorporated dated 11th March, 2024.
However, no amount was actually paid and ` 1.02 Crores was provided in the books of
account as purchases for the year ending on 31st March, 2024. On inspection, no
documentary or other evidence of such purchases was found. It appears that company has
passed fictitious journal entries, near year-end, to manipulate the operating results.
 SA 240 further provides that if, as a result of a misstatement resulting from fraud or
suspected fraud, the auditor encounters exceptional circumstances that bring into
question the auditor‟s ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
 Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies
(Audit & Auditor‟s) Rules, 2014 requires that if an auditor of a company, in the course of
the performance of his duties as statutory auditor, has reason to believe that an offence of
fraud, which involves or is expected to involve individually an amount of 1 Cr. or above,
is being or has been committed against the company by its officers or employees, the
auditor shall report the matter to the C.G.
 Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud
by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year; If yes, the nature and the amount involved is to be
indicated.

Q.7. MN & Associates are the statutory auditors of ABC Ltd. for the FY 2021-22. During the
course of audit, the engagement partner, Mr. Manohar notices a misstatement resulting from a
suspected fraud that brings into question the audit team‟s ability to continue performing the
audit. How should the audit team deal with the situation?
Ans: Auditor Unable to Complete the Engagement:
As per SA 240 “Auditor‟s Responsibilities relating to fraud in an audit of financial
statements”, if the auditor concludes that it is not possible to continue performing the audit as
a result of a misstatement resulting from fraud or suspected fraud, the auditor should:
(i) consider the professional and legal responsibilities applicable in the circumstances,

6
 including whether there is a requirement for the auditor to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities;
(ii) consider the possibility of withdrawing from the engagement; and
(iii) If the auditor withdraws:
 discuss with the appropriate level of management and TCWG, the auditor‟s
withdrawal from the engagement and the reasons for the withdrawal; and
 consider whether there is a professional or legal requirement to report to the person
or persons who made the audit appointment or, in some cases, to regulatory
authorities, the auditor‟s withdrawal from the engagement and the reasons for the
withdrawal.

Q.8. My Décor Limited, presently engaged in manufacturing of fabrics, wants to set up a new
plant for manufacturing of special kind of fabric providing an altogether different texture and
feel. This kind of fabric has become a hit with retail customers. The company needs to set up
plant for manufacturing the above kind of fabric involving huge capital outlays to stay
competitive in the market. You are auditor of the company and find that company‟s revenue
has increased in financial year 2023-24 to ` 1000 crore from ` 750 crore in last year. By the
time, you started the audit, there was no change in plant capacity and information regarding
need to set up new plant has become known to you during inquiry of company‟s personnel.
Discuss, how you should proceed to deal with above situation, as auditor of the company,
paying special attention to risk of material misstatement due to fraudulent financial reporting?
Ans: Risk of material misstatement due to fraudulent financial reporting:
 Given situation highlights need for the company to set up new plant for manufacturing of
special kind of fabric to stay competitive in the market. Setting up of such plant involves
huge capital outlays which could entail financing arrangements. Therefore, excessive
pressure exists for management to be involved in fraudulent financial reporting. In such a
situation, management may be tempted to inflate its revenues to show rosy picture. It is a
fraud risk factor and needs to be evaluated by the auditor.
 Revenues of company have jumped from ` 750 crore in last year to ` 1000 crore in year
2023-24 without any change in plant capacity. The auditor may consider above said fraud
risk factor for assessing risk of material misstatement due to fraud.
 In case of auditor assessing risk of material misstatement due to fraudulent financial
reporting, audit procedures to address such risk like performing SAP relating to revenue,
use of CAATs to identify unusual revenue transactions and testing controls pertaining to
revenue transactions need to be performed.

2.2-SA 250 “Considerations of Laws & Regulations in an Audit of Financial Statements”

Q.9. You are auditor of a social media company. Of late, government has tightened noose around
companies operating in this segment by bringing in a maze of regulatory legislations to
protect interests of users. How you can proceed to verify that company is compliant with new
regulatory requirements? Besides, what does above situation underscore to you as an auditor?
Ans: Aspects to be considered to ensure compliance of laws and regulations:
 SA 250 “Consideration of laws and regulations in an Audit of Financial statements”
requires auditor to obtain SAAE regarding the compliance with the provisions of those
laws and regulations generally recognized to have a direct impact on the determination of
material amounts and disclosures in the financial statements including tax and labour

7
 laws. For other laws, auditor‟s responsibility is limited to undertake specified audit
procedures to help identify non-compliance with those laws and regulations that may
have a material effect on the financial statements.
 In the present case, auditor needs to verify whether the company has put in place systems
and procedures to meet with new regulatory requirements. It can be verified by
examining policies and procedures developed by company in this regard like-
(a) devising appropriate system of internal control,
(b) sensitizing employees regarding new rules,
(c) engaging legal advisors etc.
 Further, financial stability of company may be threatened due to new regulatory
requirements. The management may be under pressure. It is also a fraud risk factor and
may need to be evaluated by auditor.

Q.10. CA Anand is the engagement partner for the audit assignment of NHT Ltd. engaged in
manufacture of Iron and Steel bars. The company has its plants in the state of Sikkim. While
verifying the wages record of the company, CA Anand found that maximum of the labour
employed in the plants of the company was child labour. He questioned the management of
the company about the same to which the management replied that looking into the
compliance of such law is outside his scope of financial audit. Give your comments with
respect to such situation.
Or
As a statutory auditor of a company, comment on the following: While verifying the
employee records in a company, it was found that a major portion of the labour employed was
child labour. On questioning the management, the auditor was told that it was outside his
scope of the financial audit to look into the compliance with other laws.
[RTP-May 18, MTP-May 20, April 21, March 23]
Ans: Auditor’s Responsibility for consideration of other Laws:
 As per SA 250 “Considerations of Laws and Regulations in an Audit of Financial
Statements”, auditor is not responsible for preventing non-compliance and cannot be
expected to detect non- compliance with all laws and regulations. For compliance with
provisions of those laws and regulations generally recognised to have a direct effect on
the determination of material amounts and disclosures in the F.S., auditor‟s responsibility
is to obtain SAAE about compliance with the provisions of those laws and regulations.
 For other laws and regulations, auditor‟s responsibility is limited to undertaking specified
audit procedures to help identify non-compliance with those laws and regulations that
may have a material effect on the financial statements.
 In the instant case, maximum of the labour employed was child labour. When auditor
questioned the management about the same, management replied that looking into the
compliance of such law is outside his scope of financial audit. Such reply by the
management is not acceptable as such situation may have a material effect on the
financial statements.
Conclusion: Auditor should ensure as to whether any penal provisions will be there for non-
compliance of such law and also whether the same has been duly disclosed by the company.
If he concludes that such non compliance has a material effect on the F.S. and the same
has not been adequately reflected in F.S., he shall express an adverse or a qualified opinion
on the F.S.

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Q.11. As an Auditor of TRP Ltd., you are suspicious that there might be non-compliance with laws
and regulations to which the company is subject to. Indicate the possible areas or aspects
where you may have to look out for forming an opinion as to whether your suspicion has
some based to further inquire. [May 18 (4 Marks), MTP-Oct. 21]
Or
During the course of Audit of POP Ltd., you as an auditor while performing the audit
procedures become aware of the existence of certain instances which seem to be an indication
of non- compliance with Laws and Regulations. List out any five such instances identified by
you as an auditor, suggestive of non-compliance with Laws and Regulations.
[Jan. 21 (5 Marks)]
Ог
You are appointed as an auditor of BHK Ltd., a company engaged in export of
agricultural equipment. During the course of audit, your audit team informed you regarding
non-deduction of TDS on huge payments made to legal counsel of BHK Ltd. You want
to alert your team on the possibility of non-compliance with Laws and Regulations by BHK
Ltd. Help your audit team in identifying any other indications of non-compliance with
Laws and Regulations particularly related to payments made by the company.
[Dec. 21 (5 Marks)]
Ans: Indicators to be considered for verifying compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” deals
with the auditor‟s responsibilities to consider laws and regulations when performing an audit.
To verify compliance of laws and regulations, auditor is required to consider the following
indicators:
1. Investigation by regulatory organisations, Government departments or payment of fines,
additional taxes or penalties.
2. Payments for unspecified services or loans to consultants related parties or employees.
3. Sales commission or agent‟s fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
4. Purchases at prices significantly above or below market price.
5. Unusual payments in cash.
6. Unusual payments towards legal and retainership fees.
7. Unusual transactions with companies registered in tax havens.
8. Payments for goods or services made other than to the country from which the goods or
services originated.
9. Payments without proper exchange control documentation.
10. Existence of an information system which fails to provide an adequate audit trail.
11. Unauthorised transactions or improperly recorded transactions.
12. Adverse media comment.

Q.12. CA Abhinanadan is an auditor of KM Private Limited. During the course of audit, CA

Abhinanadan becomes aware of information concerning an instance of non-compliance or
suspected non- compliance with laws and regulations. Being a senior partner of CA.
Abhinanadan, guide him regarding audit procedures to be followed when non-compliance is
identified or suspected.
Ans: Audit Procedures When Non-Compliance is Identified or Suspected:
 As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial

9
 Statements”, if the auditor becomes aware of information concerning an instance of non-
compliance or suspected non-compliance with laws and regulations, the auditor shall
obtain:
(i) An understanding of the nature of the act and the circumstances in which it has
occurred; and
(ii) Further information to evaluate the possible effect on the financial statements.
 If the auditor suspects there may be non-compliance, the auditor shall discuss the matter
with management and, where appropriate, those charged with governance. If
management or, as appropriate, those charged with governance do not provide sufficient
information that supports that the entity is in compliance with laws and regulations and,
in the auditor‟s judgment, the effect of the suspected non-compliance may be material to
the financial statements, the auditor shall consider the need to obtain legal advice.
 If sufficient information about suspected non-compliance cannot be obtained, the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the
auditor‟s opinion.
 The auditor shall evaluate the implications of non-compliance in relation to other aspects
of the audit, including the auditor‟s risk assessment and the reliability of written
representations, and take appropriate action.

Q.13. PQ Limited, a listed entity, is in the business of manufacturing of specialty chemicals. The
company has appointed CA Jazz as CFO of the company. CA Jazz is concerned about
compliance with the provisions of laws and regulations that determine the reported amounts
and disclosure in financial statements of PQ Limited. Accordingly, CA Jazz wants to
implement such policies and procedures that can assist him in the prevention and detection of
non-compliance with laws and regulations. Help CA Jazz by citing examples of such policies
and procedures. [Nov. 20 (5 Marks)]
Ans: Management Responsibility for compliance with laws and regulation:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” states
that it is the responsibility of management, with the oversight of TCWG, to ensure that the
entity‟s operations are conducted in accordance with the provisions of laws and regulations.
For this purpose, management may apply the following procedures:
1. Monitoring legal requirements and ensuring that operating procedures are designed to
meet these requirements.
2. Instituting and operating appropriate systems of internal control.
3. Developing, publicising and following a code of conduct.
4. Ensuring employees are properly trained and understand the code of conduct.
5. Monitoring compliance with the code of conduct and acting appropriately to discipline
employees who fail to comply with it.
6. Engaging legal advisors to assist in monitoring legal requirements.
7. Maintaining a register of significant laws and regulations with which the entity has to
comply within its particular industry and a record of complaints.

Q.14. Discuss why the potential effects of inherent limitations of an auditor‟s ability to detect
material misstatements described in SA 200 are far greater in respect of non-compliance with
laws and regulations?

10
Ans: Potential effects of inherent limitations on the auditor’s ability to detect material
misstatements in respect of non-compliance with laws and regulations:
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements in the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the SAs.
In the context of laws and regulations, the potential effects of inherent limitations on the
auditor‟s ability to detect material misstatements are greater for such reasons as the following:
 There are many laws and regulations, relating principally to the operating aspects of an
entity that typically do not affect the financial statements and are not captured by the
entity‟s information systems relevant to financial reporting.
 Non-compliance may involve conduct designed to conceal it, such as collusion, forgery,
deliberate failure to record transactions, management override of controls or intentional
misrepresentations being made to the auditor.
 Whether an act constitutes non-compliance is ultimately a matter for legal determination
by a court of law.

Q.15. FAS Insurance Brokers Limited is a leading online insurance intermediary. During the year,
Director General of GST Intelligence (DGGI) has issued notice to the company for allegedly
creating fictitious invoices for “marketing and sales services” amounting to ` 50 crores in
favour of non-life insurance companies. The premises of company were also searched during
the year by DGGI officials. The matter was also informed to IRDAI by DGGI for violation of
norms and regulations in this regard. Does above situation has any bearing on your
responsibilities as statutory auditor of the company? Outline briefly in context of possible
non-compliance with laws by the company.
Ans: Audit Procedures When Non-Compliance is Identified or Suspected:
 When the auditor becomes aware of the existence of or has information about
investigations by government departments and regulatory organizations, it may be an
indication of noncompliance with laws and regulations.
 In the instant case, notice has been served upon the company by DGGI for allegedly
creating fictitious invoices in guise of providing “marketing and sales services” for
` 50 crores. Issuing an invoice without supply of services is a serious offence under GST
laws and it could involve penalties and imprisonment. Such suspected non-compliance
may have a direct effect on financial statements. The matter has also been informed to
regulator i.e. IRDAI. Violation of IRDAI regulations may result in fines, litigation or
other consequences for the entity that may have a material effect on the financial
statements.
 If the auditor becomes aware of information concerning an instance of non-compliance
or suspected non-compliance with laws and regulations, the auditor shall obtain:
(a) An understanding of the nature of the act;
(b) Circumstances in which it has occurred; and
(c) Further information to evaluate the possible effect on the financial statements.
 If auditor suspects there may be non-compliance, he shall discuss the matter with
management and, where appropriate, TCWG. If management or TCWG do not provide
sufficient information that supports that the entity is in compliance with laws and
regulations and in the auditor‟s judgment, the effect of the suspected non-compliance
may be material to the financial statements, the auditor shall consider the need to obtain
legal advice.

11
  If sufficient information about suspected non-compliance cannot be obtained, the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the
auditor‟s opinion.

2.3 - SA 260 “Communication with Those Charged with Governance”

Q.16. CA. Shivani Behl is offered appointment as auditor of RUTE Limited, a listed company. The
audit committee of the company wants her to justify independence in relation to company
through proper communication. Although she has ensured that there are no threats to her
independence, she feels requirement of audit committee to be beyond its purview. What is
your opinion in this regard?
Ans: Communicating Independence with TCWG:
 SA 260 “Communication with Those charged with Governance”, requires that in the case
of listed entities, auditor shall communicate with TCWG, a statement that the
engagement team and others in the firm as appropriate, the firm and, when applicable,
network firms have complied with relevant ethical requirements regarding independence
and
(i) All relationships and other matters between firm, network firms and the entity that,
in the auditor‟s professional judgment, may reasonably be thought to bear on
independence.
This shall include total fees charged during the period covered by the financial
statements for audit and non-audit services provided by the firm and network firms
to the entity and components controlled by the entity. These fees shall be allocated to
categories that are appropriate to assist TCWG in assessing the effect of services on
the independence of the auditor and;
(ii) Related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
 Further, as per the Companies Act, 2013 requires audit committee to review and monitor
auditor‟s independence.
Conclusion: Audit committee requiring auditor to justify her independence is well within its
purview.

Q.17. Whilst the Audit team has identified few matters, they need your advice to conclude on the
same. Engagement Partner have asked them to review the Board minutes and other
secretarial/ regulatory records based on which the following additional matters were brought
to the attention of the Partner:
(i) The long-term borrowings from the parent company has no written terms and neither the
interest nor the principal has been repaid so far.
(ii) Certain computers were received from the parent company free of cost, the value of
which is ` 0.23 lakhs & no accounting or disclosure of the same has been made in the
notes to accounts.
(iii) An amount of ` 3.25 Lakhs per month is paid to M/s WE CARE Associates, a
partnership firm, which is a „related party‟ in accordance with the provisions of
the Companies Act, 2013 for the marketing services rendered by them. Based on an
independent assessment, the consideration paid is higher than the arm‟s length
pricing by ` 0.25 lakh per month. Whilst the transaction was accounted in the financial
statements based on the amounts‟ paid, no separate disclosure of this related

12
 party transaction has been made in the notes to accounts forming part of the
financial statements highlighting the same as a „related party‟ transaction.
Audit Manager has reported that she had asked certain information relating to another „related
party‟ transaction (amounting to approx. ` 47 lakhs) but the CFO refused to provide the same
since the same is perceived to be confidential and cannot be shared with the Auditors.
You are required to advise about items to be reported to those charged with governance,
where applicable, based on your audit findings in the given situation. [MTP-Oct. 20]
Ans: Reporting to TCWG:
 SA 260 “Communication with Those charged with Governance” deals with auditor‟s
responsibilities to communicate with TCWG in an audit of financial statements. As per
SA 550, Related Parties, communicating significant matters arising during the audit in
connection with the entity‟s related parties helps the auditor to establish a common
understanding with those charged with governance of the nature and resolution of these
matters. The auditor is also required to ensure the compliance of Ind AS 24/AS 18
Related Party Disclosures.
 In view of above in the given scenario, the auditor is required to prepare a brief summary
of various items to be reported to TCWG in accordance with SA 260:
(i) Receipt of long-term borrowing (on no agreed terms and repayment of interest and
principal) and free of cost computers from the Parent Company need separate
disclosure in financial statements as per Ind AS 24/AS 18.
(ii) In respect of one of related party transaction amounting ` 3.25 lakhs per month, it is
noticed that ` 0.25 lakh per month exceeds the arm‟s length price, which has not
been disclosed highlighting the same as related party transactions as per Ind- AS 24/
AS 18.
(iii) Refusal by CFO of the company to provide the details of related party transaction
amounting to ` 47 lakhs on the ground that same is perceived to be confidential and
cannot be shared with auditors, is not in order, as denying for the related party
details of ` 47 lakhs is imposing limitation of scope of auditor in view of SA 705.
 The auditor would also need to assess his reporting requirements under clause (xiii) of
Paragraph 3 of CARO, 2020 with respect to related party transactions that whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the
Financial Statements etc, as required by the applicable Accounting Standards.

Q.18. UVW & Associates are the statutory auditors of Moon Ltd., a listed company, for the
financial year 2023-24. CA Udhav is the engagement partner for the audit assignment. He
was of the understanding that as per the requirement of one of the SAs he has a responsibility
to communicate following matters to those charged with governance:
(a) The auditor‟s responsibilities in relation to the financial statement audit.
(b) Planned scope and timing of the audit.
(c) Auditor independence Which of the matters is not included in the list prepared by
CA Udhav.
Discuss such matter in detail.
Ans: Matters to be communicated with TCWG:
SA 260 “Communication with Those Charged with Governance” deals with auditor‟s
responsibility to communicate with TCWG in relation to an audit of financial statements.

13
 Among various matters as included in the list, one of the matters that is not mentioned in the
list is Significant findings from the audit. With respect to such matter, the auditor shall
communicate with TCWG:
(a) Auditor‟s views about significant qualitative aspects of entity‟s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
When applicable, the auditor shall explain to TCWG why the auditor considers a
significant accounting practice, that is acceptable under the applicable FRF, not to be
most appropriate to the particular circumstances of the entity;
(b) Significant difficulties, if any, encountered during the audit;
(c) Unless all of TCWG are involved in managing the entity:
(i) Significant matters arising during the audit that were discussed, or subject to
correspondence, with management;
(ii) Written representations the auditor is requesting
(d) Circumstances that affect the form and content of the auditor‟s report, if any and
(e) Any other significant matters arising during the audit that, in the auditor‟s professional
judgment, are relevant to the oversight of the financial reporting process.
The communication of findings from the audit may include requesting further information
from TCGW in order to complete the audit evidence obtained. For example, the auditor may
confirm that TCWG have the same understanding of the facts and circumstances relevant to
specific transactions or events.

Q.19. M/s Manidhari & Associates have been appointed as an auditor of JIN Limited, a
multinational company dealing in spare parts. During the course of audit, CA Manidhari is
facing many problems including the problem of not getting the desired information from the
management. Accordingly, he decided to communicate with TCWG about significant
difficulties encountered during the audit. CA Manidhari seeks your guidance on matters
which can be considered as significant difficulties as per SA 260. [RTP-May 22]
Ans: Significant Difficulties encountered during audit:
As per SA 260, “Communication with Those Charged with Governance”, significant
difficulties encountered during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an
unwillingness by management to provide information necessary for the auditor to
perform the auditor‟s procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Management‟s unwillingness to make or extend its assessment of the entity‟s ability to
continue as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a
modification of the auditor‟s opinion as per SA 705 (Revised), Modifications to the Opinion
in the Independent Auditor‟s Report.

Q.20. CA. Vallabh Sundar is auditor of a leading private sector bank. “IT Systems and controls” is
under his consideration to be reported as “Key audit matter” in audit report of the bank due to
high level of automation and complexity of the IT architecture and its impact on the financial
reporting system.

14
 At what time he should communicate such identified “Key audit matter”? What are relevant
considerations in this regard and their usefulness?
Ans: Communication with TCWG and KEY Audit Matters (KAM):
 SA 260 requires the auditor to communicate with TCWG on a timely basis.
 SA 701 states that the appropriate timing for communications about KAM will vary with
the circumstances of the engagement. However, auditor may communicate preliminary
views about KAM when discussing the planned scope and timing of the audit, and may
further discuss such matters when communicating about audit findings. Doing so may
help to alleviate the practical challenges of attempting to have a robust two way dialogue
about key audit matters at the time the financial statements are being finalized
for issuance.
 Communication with TCWG enables them to be made aware of the KAM that the auditor
intends to communicate in the auditor‟s report, and provides them with an opportunity to
obtain further clarification where necessary. The auditor may consider it useful to
provide TCWG with a draft of the auditor‟s report to facilitate this discussion.
 Communication with TCWG recognizes their important role in overseeing the financial
reporting process, and provides the opportunity for TCWG to understand the basis for the
auditor‟s decisions in relation to KAM and how these matters will be described in the
auditor‟s report.
 It also enables TCWG to consider whether new or enhanced disclosures may be useful in
light of the fact that these matters will be communicated in the auditor‟s report.

2.4 - SA 299 “Joint Audit of Financial Statements”

Q.21. Four audit firms viz. GPR & Co., MKS & Co., CY & Associates and DES & Associates have
been appointed for conducting statutory audit of KNB Bank, a public sector bank in
accordance with regulatory guidelines. The professional work was divided by audit firms on
the basis of zones of bank. However, work relating to “IT Systems and controls” was not
allocated by them due to its very nature.
While planning for the above common work area, it was decided to test IT general controls,
application controls and IT dependent manual controls. Planned key audit procedures relating
to this common area also included testing design and operating effectiveness of controls over
“computer operations including back-up, batch-processing and data centre security”.
The actual audit procedures pertaining to “testing controls over batch processing” were
performed by team of DES & Associates. In case work in relation to above audit procedures
is not performed professionally by DES & Associates, discuss where responsibility for such
lapses would lie in line with SA 299?
Ans: Responsibilities of Joint Auditors w.r.t. Common Areas of working:
 As per SA 299 “Joint Audit of Financial Statements”, in respect of common areas, joint
auditors are only responsible for appropriateness of NTE of planned audit procedures
agreed among them. The responsibility of individual execution lies with concerned joint
auditor.
 In the instant case, audit procedures relating to testing design and operating effectiveness
of controls over computer operations including back-up, batch-processing and data center
security have been planned jointly as it is a common area. However, audit procedures
relating to testing controls over batch processing were actually performed by team of
DES & Associates although these were planned jointly.

15
 Conclusion: In case of any lapses in performing such procedures, DES & Associates would
be responsible.

Q.22. Magnet Interiors Ltd. is a listed company engaged in the manufacture of office furniture. The
company has its activities divided into four geographic regions. The company has appointed
two joint auditors, namely, AB & Co. and CD & Co. to conduct the joint audit of the financial
statements of the company for the year ending 31.03.2024. The engagement partners from
both the firms, CA Amar and CA Chetanya along with their audit teams had a meeting to
discuss the areas of the work to be divided and their respective responsibilities. Explain the
responsibilities of the joint auditors with respect to such joint audit.
Ans: Responsibilities of Joint Auditors:
 As per SA 299 “Joint Audit of Financial Statements”, in respect of audit work divided
among the joint auditors, each joint auditor shall be responsible only for the work
allocated to such joint auditor including proper execution of the audit procedures. In
cases where specific divisions, zones or units are allocated to different joint auditors, it is
the separate and specific responsibility of each joint auditor to obtain information and
explanations from the management in respect of such divisions/zones/units and to
evaluate the information and explanations so obtained by said Joint auditor.
 All the joint auditors shall be jointly and severally responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all
joint auditors.
(b) decisions taken by all the joint auditors under audit planning in respect of common
audit areas concerning the NTE of the audit procedures to be performed by each of
the joint auditors.
(c) matters which are brought to the notice of the joint auditors by any one of them and
on which there is an agreement among the joint auditors.
(d) examining that the F.S. of the entity comply with the requirements of the relevant
statutes.
(e) presentation & disclosure of the financial statements as required by the applicable
FRF.
(f) ensuring that the audit report complies with the requirements of the relevant statutes,
the applicable Standards on Auditing and the other relevant pronouncements issued
by ICAI.
 Where, in the course of the audit, a joint auditor comes across matters which are relevant
to the areas of responsibility of other joint auditors and which deserve their attention, or
which require disclosure or require discussion with, or application of judgment by other
joint auditors, the said joint auditor shall communicate the same to all the other joint
auditors in writing prior to the completion of the audit.
 It shall be the responsibility of each joint auditor to determine the NTE of audit
procedures to be applied in relation to the areas of work allocated to said joint auditor. It
is the individual responsibility of each joint auditor to study and evaluate the prevailing
system of internal control and assessment of risk relating to the areas of work allocated to
said joint auditor.
 As regards decisions taken by all the joint auditors under audit planning in respect of
common audit areas concerning the NTE of the audit procedures to be performed by each
of the joint auditors, all joint auditors are responsible only in respect of the

16
 appropriateness of the decisions concerning the NTE of the audit procedures agreed upon
among them, proper execution of these audit procedures is the individual responsibility
of the joint auditor concerned.

Q.23. KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors
to conduct auditing for the financial year 2023-24. For the valuation of gratuity scheme of the
company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to
difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently,
major difference was found in the actuary reports. However, Mr. X agreed to Mr. Y‟s actuary
report, though, Mr. Z did not. Mr. X contends that Mr. Y‟s actuary report shall be considered
in audit report due to majority of votes. Now, Mr. Z is in dilemma.
You are required to briefly explain the responsibilities of auditors when they are jointly and
severally responsible in respect of audit conducted by them and also guide Mr. Z in such
situation. [RTP- Nov. 18]
Ans: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct
of joint audit to achieve the overall objectives of the auditor as laid down in SA 200.
Accordingly, in respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including proper
execution of the audit procedures. All the joint auditors shall be jointly and severally
responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(b) decisions taken by all the joint auditors under audit planning in respect of common audit
areas concerning the NTE of the audit procedures to be performed by each of the joint
auditors;
(c) matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors;
(d) examining that the F.S. of the entity comply with the requirements of the relevant
statutes;
(e) presentation and disclosure of the F.S. as required by the applicable FRF;
(f) ensuring that the audit report complies with the requirements of the relevant statutes, the
applicable Standards on Auditing and the other relevant pronouncements issued by ICAI.
It shall be the responsibility of each joint auditor to determine the NTE of audit procedures to
be applied in relation to the areas of work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate the prevailing
system of internal control & assessment of risk relating to the areas of work allocated to said
joint auditor.
Reporting Responsibilities in case of differences of opinion:
 Joint auditors are required to issue common audit report.
 However, in case of any disagreement among joint auditors with regard to the opinion or
any matters to be covered by the audit report, they shall express their opinion in a
separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.

17
  In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, Mr. Z does not agree with the opinion of Mr. X and Mr. Y, therefore he
needs to issue a separate report.

Q.24. Your firm is one of the Joint Auditors of FMP Ltd. Under what circumstances joint auditors
are jointly liable for the work in relation to audit of financial statements? Is there any
restriction on a joint auditor to communicate a dissenting note differing from the majority
opinion of the other joint auditors in the audit report issued under section 143 of the
Companies Act, 2013? [Nov. 18 (5 Marks)]
Ans: Circumstance in which joint auditors are jointly liable: Refer Answer of Q. No. 23
Restrictions as to communication of dissenting note:
 SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.
 In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.

Q.25. Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for
conducting audit for the year ended on 31st March, 2024. In the course of audit, it has been
observed that there is a major understatement in the value of inventory. The inventory
valuation work was looked after by MN & Associates but there was no documentation for the
division of the work between the joint auditors. Comment on the above situation with regard
to responsibilities among joint auditors. [May 19 (5 Marks)]
Ans: Responsibilities of Joint Auditor:
 As per SA 299 “Joint Audit of Financial Statements” where joint auditors are appointed,
they should, by mutual discussion, divide the work among themselves.
 After identification & allocation of work among the joint auditors, the work allocation
document shall be signed by all the joint auditors and the same shall be communicated
to TCWG of the entity. Documentation of allocation of work helps in avoiding
any dispute or confusion which may arise among the joint auditors regarding the scope of
work to be carried out by them. Further, the communication of allocation of work to
the entity helps in avoiding any dispute or confusion which may arise between the entity
& the joint auditors.
 In respect of audit work divided among the joint auditors, each joint auditor is
responsible only for the work allocated to him, whether or not he has prepared a separate
report on the work performed by him.
 However, for the work not divided, all the joint auditors are jointly and severally
responsible.
 In the present case, though the revenue aspects (inventory valuation work) were looked
after by MN & Associates, but as there is no documentation for division of the work

18
 between them, both the joint auditors will be held responsible for it.
Conclusion: Both Joint auditors are jointly and severally responsible.
Note: Conclusion given in suggested answer of ICAI is different stating that MN &
Associates will be held responsible as inventory valuation work was looked after by them.
Further, there is a violation of SA 299 as the division of work has not been documented.
Author’s view: As the work is not documented, responsibility will be joint and several.

Q.26. Excellent Bank Ltd. is a Public Limited Company. The said Bank has various branches all
over India. The Bank appoints 3 Joint Auditors for the financial year ending on 31/03/2024.
All the 3 Joint Auditors divide the work with mutual consent. Verification of Consolidation,
however, remained undivided. All branches and zones were divided amongst the 3 Joint
Auditors. During audit of zones, CA Z, one of the joint auditors expressed a concern about
internal control in one of the large corporate branches situated in his zone. The irregularity
was not reported in the final accounts as the other 2 Joint Auditors were not in favour of
reporting and decision of not reporting the same was taken on the basis of majority.
Subsequently, fraud has been detected in the said branch which was audited by CA Z.
The Bank seeks your advice about the responsibility of the 3 Joint Auditors in the above
situation. [Nov. 19 (5 Marks)]
Ans: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct
of joint audit to achieve the overall objectives of the auditor as laid down in SA 200. As per
SA 299, where joint auditors are appointed, they should, by mutual discussion, divide the
work among themselves.
Accordingly, in respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including proper
execution of the audit procedures. On the other hand, all the joint auditors shall be jointly and
severally responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(b) matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors.
In the present case, all the 3 Joint Auditors divide the work with mutual consent , except for
the verification of consolidation, which remained undivided. Hence, in accordance with SA
299, all the joint auditors are responsible for the same.
Reporting Responsibilities in case of differences of opinion:
 Joint auditors are required to issue common audit report.
 However, in case of any disagreement among joint auditors with regard to the opinion or
any matters to be covered by the audit report, they shall express their opinion in a
separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.
 In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, CA Z, one of the joint auditors expressed a concern about internal control

19
 in one of the large corporate branches situated in his zone. The irregularity was not reported
in the final accounts as the other 2 Joint Auditors were not in favour of reporting and decision
of not reporting the same was taken on the basis of majority. Subsequently, fraud has been
detected in the said branch which was audited by CA Z.
Conclusion: Mr. Z was required to issue a separate report. He was not bound by the views of
other joint auditors. Mr. Z will be held responsible for non-reporting of the matter.
Note: Alternatively, it may be concluded that all the 3 joint auditors will be held
responsible for the fraud detected in the branch audited by CA Z, as decision for not
reporting the irregularity observed was taken on majority basis.

Q.27. A, B and C are joint auditors of a company. B is of the opinion that there are material
misstatements in financial statements of a company which, if accounted for, would turn profit
reflected in financial statements for ` 25 crore to a loss of ` 5 crore. He, therefore, wants an
adverse opinion to be expressed in audit report. However, A and B do not concur with his
views and are inclined to accept management‟s version. Is B required to go by majority
opinion of 2-1?
Ans: Disagreement among joint Auditors:
 As per SA 299 “Joint Audit of Financial Statements”, where the joint auditors are in
disagreement with regard to the opinion or any matters to be covered by the audit report,
they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement. Therefore, B is
not required to go by majority opinion of 2-1.
 In the given situation, audit report issued by the joint auditors shall make a reference to
the separate audit report issued by the other joint auditor. Further, separate audit report
shall also make reference to the audit report issued by other joint auditors. Such reference
shall be mad under the heading “Other Matter Paragraph” as per SA 706.

Q.28. NMN & Co., LLP and ABC & Associates, LLP are the joint statutory auditors of BHS Ltd.
BHS Ltd. is a listed company and has been in existence for the last 50 years. Since beginning
this company was audited by MQS & Associates but due to audit rotation, the company had
to bring in new auditors. Considering the size of the company, two auditors were appointed as
joint auditors. Since the company is new to these auditors and the concept of joint auditors to
whom audit work has been divided, management had a discussion and understood that each
joint auditor is responsible only for the work allocated to him, whether or not he has prepared
a separate report on the work performed by him. Advise. [MTP-April 19]
Ans: Reporting in case of Joint Auditors:
 SA 299 “Joint Audit of Financial Statements” lays down the principles for effective
conduct of joint audit to achieve the overall objectives of the auditor as laid down in
SA 200.
 SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.

20
  In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
Review of work by other joint auditor:
 Each joint auditor is entitled to assume that the other joint auditors have carried out their
part of the audit work & the work has actually been performed in accordance with
the SAs.
 It is not necessary for a joint auditor to review the work performed by other joint auditors
or perform any tests in order to ascertain whether the work has actually been performed
in such a manner.
 Each joint auditor is entitled to assume that the other joint auditors have brought to said
joint auditor‟s notice any departure from applicable FRF or significant observations that
are relevant to their responsibilities noticed in the course of the audit.
 Before finalizing audit report, the joint auditors shall discuss and communicate with each
other their respective conclusions that would form the content of the audit report.

2.5 - SA 402 “Audit Considerations in an Entity using Service Organisation”

Q.29. Durafone Mobile Co. Ltd. have pan India presence and market leader in mobile operation. It
has outsourced all its revenue operation including accounting functions to Set Solutions (P.)
Ltd. As an Auditor of the mobile company, enumerate the factors to be taken into
consideration related to its financial reporting. [May 18 (5 Marks)]
Ans: Factors to be taken into consideration related to financial reporting in case of user
entities using services of Service Organisation:
 SA 402 “Audit Considerations relating to an Entity Using a Service Organisation” deals
with the user auditor‟s responsibility to obtain sufficient appropriate audit evidence when
a user entity uses the services of one or more service organisations.
 Services provided by a service organisation are relevant to the audit of a user entity‟s
financial statements when those services, and the controls over them, are part of the user
entity‟s Information system, including related business processes, relevant to financial
reporting.
 Although most controls at the service organisation are likely to relate to financial
reporting, there may be other controls that may also be relevant to the audit, such as
controls over the safeguarding of assets.
 A service organisation‟s services are part of a user entity‟s information system, including
related business processes, relevant to financial reporting if these services affect any of
the following:
(a) The classes of transactions in the user entity‟s operations that are significant to the
user entity‟s financial statements;
(b) The procedures, within both information technology (IT) and manual systems, by
which the user entity‟s transactions are initiated, recorded, processed, corrected as
necessary, transferred to the general ledger and reported in the financial statements;
(c) The related accounting records, either in electronic or manual form, supporting
information and specific accounts in the user entity‟s financial statements that are
used to initiate, record, process and report the user entity‟s transactions; this includes
the correction of incorrect Information and how information is transferred to the
general ledger,

21
 (d) How the user entity‟s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
(e) The financial reporting process used to prepare the user entity‟s financial statements,
including significant accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-standard journal entries used to
record non-recurring, unusual transactions or adjustments.

Q.30. ENN Limited is availing the services of APP Private Limited for its payroll operations.
Payroll cost accounts for 65% of total cost for ENN Limited. APP Limited has provided the
type 2 report as specified under SA 402 for its description, design and operating effectiveness
of control.
APP Private Limited has also outsourced a material part of payroll operation M/s SMP &
Associates in such a way that M/s SMP & Associates is sub-service organisation to ENN
Limited. The Type 2 report which was provided by APP Private Limited was based on carve-
out method as specified under SA 402.
CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a
reference has been made to the work done by the service auditor. CA Raman hence asked his
assistant to remove such reference and modify report accordingly.
Comment whether CA Raman is correct in removing the reference of the work done by
service auditor? [RTP-Nov. 20; MTP-April 21, Sep. 22]
Ans: Reporting by the User Auditor:
 As per SA 402, “Audit Considerations Relating to an Entity Using a Service
Organisation”, the user auditor shall modify the opinion in the user auditor‟s report in
accordance with SA 705, “Modifications to the Opinion in the Independent Auditor‟s
Report”, if he is unable to obtain sufficient appropriate audit evidence regarding the
services provided by the service organisation relevant to the audit of the user entity‟s
financial statements.
 The User Auditor shall not refer to report of Service auditor unless required by Laws &
Regulations.
 If such reference is required by laws or regulations, the user auditor‟s report shall
indicate that the reference does not diminish the user auditor‟s responsibility for the audit
opinion.
 In the given case, CA Raman while reviewing the unmodified audit report drafted by his
assistant found that, a reference has been made to the work done by the service auditor.
CA Raman hence asked his assistant to remove such reference and modify report
accordingly.
Conclusion: Contention of CA Raman in removing reference of the work done by service
auditor is in order as in case of unmodified audit report, user auditor cannot refer to the work
done by service auditor.

Q.31. In the course of audit of Tech Limited you observed that processing of accounting data was
given to a third party on account of certain considerations like cost reduction, own computer
working to full capacity. Tech Limited used a service organisation to record transactions and
process related data. As an auditor, what would be your considerations regarding the nature
and extent of activities undertaken by service organisation so as to determine whether those
activities are relevant to the audit and, if so, to assess their effect on audit risk.

22
 Discuss with reference to relevant Standard on Auditing. [Dec. 21 (5 Marks); MTP-March 23]
Ans: Considerations regarding the nature and extent of activities undertaken by service
organisation:
As per SA 402 “Audit Considerations relating to an Entity using a Service Organisation”,
when obtaining an understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service
organisation in the user entity‟s operations, including:
(i) The nature of the services provided by the service organisation and the significance of
those services to the user entity, including the effect thereof on the user entity‟s internal
control;
(ii) The nature and materiality of the transactions processed or accounts or financial
reporting processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of
the user entity; and
(iv) The nature of the relationship between the user entity and the service organisation,
including the relevant contractual terms for the activities undertaken by the service
organisation.
Based on above, the auditor will assess the effect on the audit risk and take necessary steps
while conducting the audit.

Q.32. MNO Ltd. gets its accounting data processed by a service organisation. CA Riya is the
statutory auditor of MNO Ltd. CA Riya wants to obtain an understanding as to how MNO
Ltd. is using the services of the service organisation. What all understanding should she
obtain?
Or
G Ltd. is a mobile phone operating company. Barring the marketing function, it had
outsourced the entire operations like maintenance of mobile infrastructure, customer billing,
payroll, accounting functions, etc. Assist the auditor of G Ltd. as to how he can obtain an
understanding of how G Ltd. uses the services of the outsourced agency in its operations.
[MTP-Oct. 18, RTP-Nov. 18, MTP-Oct. 19]
Ans: Matters of which understanding is required by user auditor w.r.t. services of a services
organisation:
SA 402 on “Audit Considerations relating to an Entity Using a Service Organisation” deals
with the user auditor‟s responsibility to obtain SAAE when a user entity uses the services of
one or more service organisations. Accordingly, when obtaining an understanding of user
entity in accordance with SA 315, auditor shall obtain an understanding of how user entity
uses the services of a service organisation in its operations, including:
(a) Nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity‟s internal
control. Information on nature of services may be available from sources such as user
manuals, contract between the user entity and service organization, reports by service
auditors etc.
(b) Nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation.
(c) Degree of interaction between the activities of the service organisation and those of the
user entity. The degree of interaction refers to the extent to which a user entity is able to

23
 and elects to implement effective controls over the processing performed by the service
organisation.
(d) Nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organisation.

PART- II MULTIPLE CHOICE QUESTIONS

1. Ms. Kee, the engagement partner of Best Hospitality Limited‟s audit team did not perform the
necessary communication with those charged with governance over some critical issues
identified during the course of the audit. Moreover, when management identified that the
engagement partner has not communicated to those charged with governance of the Best
Hospitality Limited, they also chose not to communicate. Upon identification of this issue, the
personnel charged with governance Inquired with management and auditors as to why there
was no communication of the critical matters to them.
Upon such inquiry, Engagement Partner contended that it was the responsibility of
Management to communicate first, then only the audit team should communicate. However,
Management was of the view that they are not liable to communicate to those charged with
governance. As an Engagement Quality Control Reviewer, what will be your opinion?
(a) The auditor is responsible for communicating matters required by SA 260 to those
charged with governance. Also, management has a responsibility to communicate matters
of governance interest to those charged with governance. Communication by the auditor
does not relieve management of its responsibility.
(b) SAs are not applicable to the management and hence the management was not
responsible for communicating the same to those charged with governance. Also, as per
SA 260, Auditor can only communicate when management has already informed those
charged with governance about the matters. Auditors cannot communicate first without
management‟s communication.
(c) Communication by management with those charged with governance of matters that the
auditor is required to communicate does relieve the auditor of the responsibility to also
communicate them if the management has already communicated. Hence, in the current
case Management should have communicated as it was their responsibility.
(d) SA 260 requires the auditor to perform procedures specifically to identify any other
matters to communicate with those charged with governance which includes matters
already communicated by the management of non-material nature. Hence, It was the
responsibility of the Auditor to communicate.

2. A significant deficiency exists in the process of flow of approval of travel reimbursements of

the officials. This was communicated in the previous year to those charged with Governance
and no remedial action was taken on the same so far. The auditors are of the opinion that it
need not be communicated again. Is the opinion of the auditors on not to communicate the
deficiency in internal control reported in the previous year correct?
(a) Yes, the auditor is not required to communicate the same again as it is the duty of the
management and those charged with governance to maintain the internal control system.
(b) No, the current year‟s communication may repeat the description from previous
communication or simply reference the previous communication.
(c) Yes, the auditor is not required to communicate the same again as written representation

24
 is being obtained from management and those charged with governance that they are
responsible for maintaining internal control.
(d) No, it needs to be communicated again but an oral reminder to those charged with
governance on the matter may suffice. [MTP-May 20]

3. A small concern has approached CA. Ajeet Nath for audit of accounts for year 2022-23. It
later on transpired that preparation of accounts of the concern was outsourced to a third party
which was engaged in preparation of books of this concern on a cloud server and was also
preparing financial statements. The discussion amongst partners regarding agreeing to audit
engagement remained inconclusive. Which of the following statements is MOST
APPROPRIATE regarding agreeing to audit engagement of small concern?
(a) The management is responsible for preparation of books and financial statements. If
management is not willing to acknowledge it, audit engagement should not be accepted.
(b) The third party has prepared the books and financial statements. It should be
acknowledged by third party and then audit engagement should be accepted.
(c) It is implied that management is responsible for preparation of books and financial
statements. No express acknowledgment from management is necessary. Hence, audit
engagement should be accepted.
(d) The management as well as third party should acknowledge joint responsibility for
preparation of books and financial statements. Only then, audit engagement should be
accepted. [MTP-Oct. 22]

4. You are the audit senior in charge of the audit of Swadhyay Co. and have been informed by
your audit manager that during the current year a fraud occurred at the client. A payroll clerk
sets up fictitious employees and the wages were paid into the clerk‟s own bank account. This
clerk has subsequently left the company, but the audit manager is concerned that additional
frauds have taken place in the wages department. Which of the following audit procedures
would be undertaken during the audit of wages as a result of the manager‟s assessment of the
increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the
financial impact of amounts incorrectly paid into the payroll clerk‟s bank account.
(2) Review the supporting documentation to confirm the total of the fraudulent payments
made and assess the materiality of this misstatement.
(3) Review and test the internal controls surrounding setting up of and payments to new
joiners to assess whether further frauds may have occurred.
(4) Review the legal action taken by the management against the payroll clerk who was
involved in the fraud and see whether he is punished for his actions.
(a) Audit procedures 1,2,3.
(b) Audit procedures 2,3,4.
(c) Audit procedures 1,3,4.
(d) Audit procedures 1,2,4. [MTP-April 23]

5. Shripal Company got a show cause notice from State Pollution Control Board for the
contravention of the provisions of Hazardous and waste Management Rule. As per SA 250,
the auditor shall perform the audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial statements. As

25
 the audit team of the company became aware of information concerning an instance of non-
compliance with law, what would NOT be the audit procedure to be performed?
(a) Understand the nature of the act and circumstances in which it has occurred and obtain
further information to evaluate the possible effect on the financial statement.
(b) Discuss the matter with management and if they do not provide sufficient information;
and if the effect of non-compliance seems to be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that
operating procedures are designed to assist in the prevention of non-compliance with law
and regulation and report accordingly.
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including
risk assessment and reliability of written representation and take appropriate action.
[MTP-Apr. 22]

6. M/s ABC & Associates are the statutory auditors of PQR Ltd. for the FY 2022-23. While
conducting the audit, CA Aman, the engagement partner noticed the following:
 Payments of various fines and penalties
 Payments to various government employees not supported by any document
 Unusual cash payments
 Notices received from various regulatory authorities.
 Heavy payments to legal counsels.
CA Aman should consider the above as indicative of:
(a) Doubt on Internal Controls of PQR Ltd.
(b) Doubt of non-compliance to laws by PQR Ltd.
(c) Doubt on the accounting system of PQR Ltd.
(d) Doubt on the going concern assumption of PQR Ltd.

Answer Key

1. (a) The auditor is responsible for communicating matters required by SA 260 to those
charged with governance. Also, management has a responsibility to communicate matters
of governance interest to those charged with governance. Communication by the auditor
does not relieve management of its responsibility.

2. (b) No, the current year‟s communication may repeat the description from previous
communication or simply reference the previous communication.

3. (a) The management is responsible for preparation of books and financial statements. If
management is not willing to acknowledge it, audit engagement should not be accepted.

4. (a) Audit procedures 1,2,3.

5. (c) Monitoring legal requirement and compliance with code of conduct and ensuring that
operating procedures are designed to assist in the prevention of non-compliance with law
and regulation and report accordingly.

6. (b) Doubt of non-compliance to laws by PQR Ltd.

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 PART- III INTEGRATED CASE SCENARIO

CA. Biswajit is conducting audit of “Have More Limited”. He is auditor of the company since last
three years and has found nothing unusual in operations and financial statements of the company. The
company has many locations where substantial inventories are stored and lying. During his fourth
year stint, he finds that inventory quantities have risen disproportionately as compared to past few
years trends. He has assessed existence of risk of material misstatement due to fraud. The company
has revenue of 750 crore during the year. He has deeply verified all aspects pertaining to revenue
recognition of the company and has concluded that there is no risk of material misstatement due to
fraud related to revenue recognition.
During the course of audit, it has come to his knowledge that company is also required to install
online air pollution control monitoring systems in its plant as mandated in state pollution control
legislation and regulations. Non-installation of such online air pollution control monitoring systems
may lead to fines and even sealing of plant.
While verifying pay roll data of the company, it has come to notice that provisions of law preventing
employment of child labour are not being adhered to and company is employing child labour in
flagrant violation of rules in this regard. The company also exports part of its turnover and matter has
gone unnoticed in compliance audits carried out by agencies of overseas buyers.
On the basis of above, answer the following questions:
Q.1. Considering description of disproportionate rise in inventory quantities, which of the
following is not likely to be an appropriate response to outlined assessed risk of material
misstatement due to fraud?
(a) Observing inventory counts at all locations at same date by employing necessary
resources.
(b) Observing inventory counts at certain locations after prior intimation.
(c) More rigorous examination of packed items during observing inventory count process.
(d) Observing inventory count at end of reporting period to minimize risk of manipulation.

Q.2. It has been concluded by auditor that there is no risk of material misstatement due to fraud
related to revenue recognition. Which of the following statements is most appropriate in this
respect?
(a) The auditor needs to document reasons for arriving at conclusion that there is no risk of
material misstatement due to fraud related to revenue recognition.
(b) Identified and assessed risks of material misstatement due to fraud need to be
documented. Since no risk of material misstatement due to fraud pertaining to revenue
recognition was identified, separate documentation in this respect is not needed.
(c) The auditor needs only to document that no risk of material misstatement due to fraud
relating to revenue recognition was identified.
(d) The auditor needs to give reference to discussion among engagement team members to
document that no risk of material misstatement due to fraud relating to revenue
recognition was identified.

Q.3. Which of the following statements most appropriately describes responsibilities of auditor in
relation to compliance with state pollution control legislation and regulations?

27
 (a) Sufficient appropriate evidence needs to be obtained by auditor to verify compliance.
(b) Physical verification of workability of such systems is required from an auditor.
(c) Only inquiry of company management personnel and review of correspondence with
regulatory authorities are suffice to verify compliance.
(d) Only physical verification of workability of such systems and review of correspondence
with regulatory authorities are suffice to verify compliance.

Q.4. The auditor has observed non-compliance of law prohibiting employment of child labour.
Which is the most appropriate course of action for him to proceed in this matter?
(a) He should obtain further information to evaluate the possible effect on financial
statements.
(b) He must report the matter to concerned government department.
(c) He should obtain further information to evaluate the possible effect on financial
statements. Besides, he should evaluate implications of non-compliance for audit risk
assessment.
(d) He should express a modified opinion in audit report.

Q.5. Which of the following statements is most appropriate about documentation of

noncompliance with laws and regulations by an auditor in context of SA 250?
(a) Instances of identified non-compliance with laws and regulations need to be documented.
(b) Instances of suspected non-compliance with laws and regulations need to be documented.
(c) Instances of non–compliance with laws and regulations finally determined by Courts of
law need to be documented.
(d) Instances of identified as well as suspected non-compliance with laws and regulations
need to be documented.

Answer Key
1. (b) Observing inventory counts at certain locations after prior intimation.

2. (a) The auditor needs to document reasons for arriving at conclusion that there is no risk of
material misstatement due to fraud related to revenue recognition.

3. (c) Only inquiry of company management personnel and review of correspondence with
regulatory authorities are suffice to verify compliance.

4. (c) He should obtain further information to evaluate the possible effect on financial
statements. Besides, he should evaluate implications of non-compliance for audit risk
assessment.

5. (d) Instances of identified as well as suspected non-compliance with laws and regulations
need to be documented.

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 5. “Audit Evidence”
PART- I DESCRIPTIVE QUESTIONS
5.1 – SA 500 “Audit Evidence”
Q.1. During the course of the audit of TK Home Pvt. Ltd., a recognized export house engaged in
manufacturing of T-shirts under brand name of “TK”. CA Tripti is verifying export revenues
of the company for the year 2023-24. She has verified transactions entered in “Export Sales”
account maintained in accounting software from relevant export invoices. The export sales
are being made on payment of IGST, for which a refund is automatically credited in the
account of the company after the goods are shipped.
On enquiring from internal audit staff regarding the recognition of export revenues, she is told
that export sales are recognized for the year on the basis of “Bills of Lading”. However, she is
not convinced with such a response and feels that the same does not appear to be proper.
She finds that three export invoices bearing dates in the month of March 2024 having a value
of ` 75 lacs have not been recognized in export revenue on the ground that bills of lading for
these invoices were issued in the month of April 2024.
Discuss from what sources she can obtain reliable audit evidence in this regard. How can she
challenge management’s assertion regarding the completeness of export revenues for the year
2023-24?
Ans: Sources for obtaining Audit Evidences:
 In the given case, audit evidences can be obtained by going through GST returns filed on
GST portal and correlating same with e-way bills. Audit evidences can be obtained as to
how company has reflected its export sales in GST returns and whether export sales
pertaining to three invoices having value of ` 75.00 lacs are reflected in such returns.
 Further, e-way bills generated on the portal would provide evidence that goods have
moved out of the company’s premises. The export revenue should have been booked at
the time the goods moved out of the company’s premises. The company is claiming an
IGST refund. The refund is linked to the monthly sales return. This aspect can also be
verified.
 “Bill of Lading” is only a document issued by the carrier to the shipper of goods that
goods have been taken on board. She should challenge and counter management’s
assertion on the above grounds and point out violations of relevant accounting standards
and principles. In this way, she can obtain reliable audit evidence.
 Highlighting such digital and other evidence, she can challenge management’s assertion
regarding the completeness of export revenues and point out that export revenues are
understated.

Q.2. The auditor of SS Ltd. accepted the gratuity liability valuation based on the certificate issued
by a qualified actuary. However, the auditor noticed that the retirement age adopted is 65
years a against the existing retirement age of 60 years. The company is considering a proposal
to increase the retirement age. Comment.
Ans: Using the work of Management Expert as an audit evidence:
 SA 500 (Revised), “Audit Evidence” states that the auditor has to evaluate the work of
management expert, say, actuary, before adopting the same.
 The work of management expert is required to be evaluated in terms of following:

1
 (i) Relevance and reasonableness of that expert findings and conclusion:
(ii) Relevance and reasonableness of assumptions and methods used; and
(iii) Relevance, completeness and accuracy of source data.
 There is no doubt that appropriateness, reasonableness of assumptions and methods used
are the responsibility of the expert, but the auditor has to determine whether they are
reasonable based on the auditor’s knowledge of the client’s business and result of his
audit procedures.
 In the instant case, a qualified actuary has issued a certificate for gratuity liability
valuation, for which retirement age adopted is 65 years against the existing retirement
age of 60 years; however, the company is considering a proposal to increase the
retirement age.
Conclusion: In view of provisions of SA 500 as discussed above, the assumption made by
actuary has no relevance and reasonableness as presently retiring age is of 60 years. Hence
the auditor is required to bring out the facts to the notice of management and advice the
modification accordingly. In case of failure of compliance of the same the auditor may
qualify the report.

Q.3. CA Needle had been appointed as an auditor of M/s Fabric Ltd. In the course of audit, it had
been observed that inventory including work-in-process had been valued by management by
using experts hired by them. Analyse relevant factors to decide as to whether or not to accept
the findings from the work of management expert in valuation of inventories.
OR
PDJ Ltd. has engaged an actuary to ascertain actuarial valuation of defined benefit obligations
viz. Gratuity and Leave Encashment liabilities. As an auditor of PDJ Ltd. you would like to
use the report of the actuary as audit evidence. How would you evaluate the work of the
actuary?
Ans: Evaluating the work of Management Expert:
As per SA 500 “Audit Evidence” when information to be used as audit evidence has been
prepared using the work of a management’s expert, the auditor shall perform the following:
(i) Evaluate the competence, capabilities and objectivity of that expert: For this purpose,
auditor may consider his qualification, membership of a professional body or industrial
association license to practice etc.
(ii) Obtain an understanding of the work of that expert: It may include areas of specialty,
applicable professional standards and other legal requirements
(iii) Evaluate the appropriateness of that expert’s work: With respect to following:
(a) Relevance and reasonableness of that expert findings and conclusion;
(b) Relevance and reasonableness of assumptions and methods used; and
(c) Relevance, completeness and accuracy of source data.

5.2 SA 501 “Audit Evidence – Specific Considerations for Selected Items”

Q.4. CA Prabhjot has planned observing the physical count of inventories at the plant of a
company located in remote area in the state of Uttarakhand as part of a statutory audit
exercise as at close of year ending 31st March 2024. He has already informed the management
of his intention to reach the plant site by evening of 29th March 2024. He plans to inspect
inventories, observe the counting process and perform test counts among other matters.
The management has made necessary arrangements to facilitate the above exercise. However,

2
 an agitation in Himalayan hills has started on 28th March 2024 for the promulgation of a strict
law relating to the conversion of agricultural land for commercial use. Many civil society
groups are participating in the agitation. NH-7 leading to the plant site is blocked by
protestors. The plant is not accessible through any other mode. The blockade is lifted after
one month when state government announced the formation of a committee to look into
protestors’ demands.
Does the above case highlight to a situation of “Impracticability of attendance” at inventory
counting in terms of requirements of SA 501?
How should the auditor proceed in above situation?
Ans: Auditor’s procedures in case of inability to attend inventory count:
 Situation as given in questions does not highlight the impracticability of attendance at
inventory counting it only shows that auditor is unable to attend physical inventory
counting due to unforeseen circumstances arising out of agitation by protestors. It has led
to the inaccessibility of the plant site for a month. The blockade is lifted after a month.
 SA 501 states that if the auditor is unable to attend physical inventory counting due to
unforeseen circumstances, the auditor shall make or observe some physical counts on an
alternative date and perform audit procedures on intervening transactions.
Conclusion: Auditor should attend to the physical inventory count after the blockade is lifted
and perform audit procedures on intervening transactions.

Q.5. On reviewing legal expenses account of Zed Ltd. CA. Sunitha, auditor of company, finds
those legal fees amounting to ` 10 lacs was paid to B. George, a reputed lawyer, during the
year 2023-24. On inquiry with management regarding the purpose of such expenditure,
evasive reply was received from management stating that a lot of work is performed by the
said lawyer on behalf of the , no specific details were provided.
She finds it proper to correspond directly with the lawyer. She obtains the address and mail id
of the lawyer from his professional services bill. She shoots off an inquiry letter asking for the
nature and status of litigation claims against the company on her letterhead. Is her approach
proper? Irrespective of the merits of the approach followed by her, what she is trying to
achieve by corresponding with lawyer of the company?
Ans: Obtaining audit Evidences directly from company Lawyer:
 SA 501 states that when audit procedures performed indicate that material litigation or
claims may exist, auditor shall seek direct communication with the entity’s external legal
counsel.
 Auditor shall do so through a letter of inquiry prepared by management and sent by the
auditor, requesting the entity’s external legal counsel to communicate directly with the
auditor.
 Therefore, her approach in communicating with an external lawyer is wrong. She has to
make management aware of her intention to communicate directly with the lawyer. The
letter of enquiry has to be prepared by management and sent by her.
 Her purpose in corresponding with the lawyer of the company is to identify litigation and
claims involving the entity which may give rise to a risk of material misstatement. It is
due to the reason that litigation and claims involving the entity may have a material effect
on the financial statements and thus may be required to be disclosed or accounted for in
the financial statements.

3
Q.6. On going through financial statements and records of “TS Ltd” during the of statutory CA
Tanmaya finds that substantial inventories of the company consisting of mast lighting poles
remain with “Super Industries” for certain finishing works. While planning audit procedures,
planned about seeking confirmation from “Super Industries” regarding existence and
condition such mast lighting poles belonging to TS Ltd. lying with them as on 31.03.2024
However, the premises of “Super Industries were raided by DGGI officials (Director General
of Intelligence) in connection with the busting of a fake billing scam. The proprietor of the
firm was arrested on November 22 and came out on ball in the month of March 2024. The
details proprietor and his firm were flashed prominently in local newspapers of the city where
company located. CA. Tanmaya also belongs to the same place. Discuss how he should
proceed in the above matter as auditor of TS Ltd. –
Ans: Obtaining Evidences as to Existence & Condition of Inventory lying with third parties:
 SA 501 states that when inventory under the custody and control of a third party is
material to the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of that inventory by performing one or
both of the following:
(a) Request confirmation from the third party as to the quantities and condition of
inventory held on behalf of the entity.
(b) Perform inspection or other audit procedures appropriate in the circumstances
 It further states that where information is obtained that raises doubt about the integrity
and objectivity of the third party, auditor may consider it appropriate to perform other
audit procedures instead of or in addition to confirmation with the third party.
 Examples of other audit procedures include:
(a) Attending or arranging for another auditor to attend the third party’s physical
counting of Inventory, if practicable
(b) Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of
the third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded
(c) Inspecting documentation regarding inventory held by third parties.
 In the given case, integrity of the third party appears to be doubtful in view of DGGI
raids and his possible involvement in a fake billing scam.
Conclusion: Keeping in view above, besides obtaining confirmation from such party, he may
attend a third party’s physical counting or ask some other auditor to attend physical counting
as en reporting date, depending upon practical considerations.
He can also inspect the record of goods sent and received back from such party by tracing it
to challans, e-ways hills etc. and correlate the above information.

Q.7. LMN Ltd. supplies navy uniforms across the country. The company has 4 warehouses at
different one throughout the India and 5 warehouses at the borders. The major stocks are
generally Supplied from the borders. LMN Ltd. appointed M/s OPQ & Co. to conduct its
audit for the financial year 2023-24. Mr. C. partner of M/s OPQ & Co. attended all the
physical inventory counting conducted throughout the India but could not attend the same at
borders due to some unavoidable reason.
You are required to advise M/s OFQ & Co:
(a) How sufficient appropriate audit evidence regarding the existence and condition of
inventory may be obtained?

4
 (b) How an auditor is supposed to deal when attendance at physical inventory counting is
impracticable?
OR
Crush Ltd. is a dealer in fast moving consumer goods. The Company has warehouses
throughout the country where the stocks are stored The Auditor of the Company normally
conduct physical verification of stocks along with the Management at the end of the financial
year. However, the Auditor could not be physically present during stock-tacking at two places
on account of certain disturbances in the region.
in light of the above facts
(i) How sufficient appropriate audit evidence regarding the condition and existence of
inventory may be obtained?
(ii) How an Auditor is supposed to deal when attendance at physical inventory counting is
impracticable?
Ans: (i) Auditor’s duties to obtain evidences regarding existence and condition of inventory:
SA-501 “Audit Evidence-Specific Considerations for Specific Items”, requires from the
auditor that when inventory is material to the financial statements, he shall obtain
sufficient appropriate audit evidence regarding the existence and condition of inventory
by:
(a) Attendance at physical inventory counting, unless impracticable, to
(i) Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting
(ii) Observe the performance of management’s count procedures:
(iii) Inspect the inventory, and
(iv) Perform test counts
(b) Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.
Auditor’s procedures in case of impractical situations
 In some cases, attendance at physical Inventory counting may be impracticable. This
may be due to factors such as the nature and location of the inventory, for example,
where inventory is held in a location that may pose threats to the safety of the auditor.
 Where attendance is impracticable, alternative audit procedures, for example,
inspection of documentation of the subsequent sale of specific inventory items
acquired or purchased prior to the physical inventory counting, may provide SAAE
about the existence and condition of inventory.
 In some cases, though, it may not be possible to obtain SAAE regarding the existence
and condition of inventory by performing alternative audit procedures. In such cases,
SA 705 requires auditor to modify the opinion in the auditor’s report as a result of the
scope limitation.

Q.8. Your firm has been appointed as the statutory auditors of GBM Private Limited for the
Financial year 2023-24. While verification of company’s inventories as on 31st March 2024,
you found that the significant amount of inventories belonging to the company are held by
other parties. However, the company has kept all the records of the inventories maintained by
other parties. What is your duty, as an auditor in order to ensure that third parties are not such
with whom the stock should not be held and the stock as disclosed in company’s records
actually belongs to them?

5
Ans: Inventory under the Custody and Control of a Third Party:
As per SA 501, “Audit Evidence - Specific Considerations for Selected Items” when
inventory under the custody and control of a third party is material to the financial statements,
the auditor shall obtain sufficient appropriate audit evidence regarding the existence and
condition of that inventory by performing one or both of the following:
(i) Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
(ii) Perform inspection or other audit procedures appropriate in the circumstances, for
example where information is obtained that raises doubt about the integrity and
objectivity of the third party, the auditor may consider it appropriate to perform other
audit procedures instead of, or in addition to, confirmation with the third party. Examples
of other audit procedures include:
 Attending, or arranging for another auditor to attend, the third party’s physical
counting of inventory, if practicable.
 Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of
the third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded.
 Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
 Requesting confirmation from other parties when inventory has been pledged as
collateral.

Q.9. You are the auditor of Easy Communications Ltd. for the year 2023-24. The inventory as at
the end of the year i.e. 31.03.24 was ` 2.25 Crores. Due to unavoidable circumstances, you
could not be present at the time of annual physical verification. Under the above
circumstances how would you ensure that the physical verification conducted by the
management was in order?
Ans: Auditor’s procedures w.r.t. inventory count procedures:
 SA 501 “Audit Evidence - Specific Considerations for Specific Items”, requires from the
auditor that when inventory is material to the financial statements, he shall obtain
sufficient appropriate audit evidence regarding the existence and condition of inventory
by attendance at physical inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling
the results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts
 SA 501 further provides that if the auditor is unable to be present at the physical
inventory count on the date planned due to unforeseen circumstances, the auditor should
take or observe some physical counts on an alternative date and perform audit procedures
on intervening transactions to assess whether the changes in inventory between the date
of physical count and the period end date are correctly recorded.
 The auditor would also verify the procedure adopted and treatment given for the
discrepancies noticed during the physical count. The auditor would also ensure that
appropriate cut off procedures were followed by the management.
 The auditor may also seek management’s written representation on (a) the completeness

6
 of information provided regarding the inventory, and (b) assurance with regard to
adherence to laid down procedures for physical inventory count.

Q.10. Moon Ltd. is a dealer in electronic appliances. The Company has a centralised warehouse at
the outskirts of Mumbai. The Auditors of the company M/s JK Associates normally attend the
physical verification of stocks carried out by the Management at the end of the financial year.
However, on account of certain disturbances in the region, the physical inventory counting
could not be carried out at the year end. The stock taking is decided to be done by
management at some other date subsequently, after a month.
In light of the above facts: Enumerate the audit procedures to be considered by M/s JK
Associates, if physical inventory counting is conducted at a date other than the date of the
financial statements with reference to the relevant Standard on Auditing.
Ans: Audit Procedures to be carried out if physical inventory counting is conducting at a date
other than the date of financial statements:
SA 501 “Audit Evidence - Specific Considerations for Specific Items”, requires from the
auditor that when inventory is material to the financial statements, he shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by attendance
at physical inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
If physical inventory counting is conducted at a date other than the date of the financial
statements, the auditor shall, in addition to the procedures as specified above, perform audit
procedures to obtain audit evidence about whether changes in inventory between the count
date and the date of the financial statements are properly recorded.
Relevant matters for consideration when designing audit procedures to obtain audit evidence
about whether changes in inventory amounts between the count date and the final inventory
records are properly recorded include:
1. Whether the perpetual inventory records are properly adjusted.
2. Reliability of the entity’s perpetual inventory records.
3. Reasons for significant differences between the information obtained during the physical
count and the perpetual inventory records.

Q.11. GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company
for the year ended on 31.03.2024 is concerned with the presentation and disclosure of
segment information included in Company’s Annual Report. GHK Associates want to ensure
that methods adopted by management for determining segment information have resulted in
disclosure in accordance with the applicable financial reporting framework. Guide GHK
Associates with ‘Examples of Matters’ that may be relevant when obtaining an understanding
of the methods used by the management with reference to the relevant SA.
Ans: Examples of Matters relevant in obtaining an understanding of the methods used by
management for determining segment information:
As per SA 501, “Audit Evidence - Specific Consideration for Selected Items”, the auditor
determining obtain SAAE regarding the presentation and disclosure of segment information

7
 in accordance applicable FRF by obtaining an understanding of methods used by management
in segment information, and evaluating whether such methods are likely to result in disclosure
in accordance with the applicable FRF.
Example of matters that may be relevant when obtaining an understanding of the methods
used by management in determining segment information and whether such methods are
likely to result in disclosure in accordance with the applicable financial reporting framework
include:
1. Sales, transfers & charges between segments, & elimination of intersegment amounts.
2. Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
3. The allocation of assets and costs among segments.
4. Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies.

Q.12. The Engagement Partner of the audit team of High Inventory Limited assessed that the
inventory is material with respect to the audit of the financial statement for the current period.
Upon inquiring with the management, the Engagement Partner identified that the
management will be performing an annual physical inventory count at all the warehouses
where the entity stores and maintains its inventory. Moreover, management confirmed in its
written representation that they will be performing a 100% physical count of inventory for the
current period.
As a result, the engagement Partner decided not to perform any physical count of inventory as
it will be a duplication of the work. Moreover, he decided that the written representation from
management stating “the inventory exists and is in appropriate physical condition” will be
sufficient and appropriate with respect to audit evidence to conclude that the inventory
balance in the financial statement is free from any material misstatement.
In the light of SA 501, evaluate whether the decision taken by the Engagement Partner is
appropriate or not.
Ans: Auditor’s duties to obtain evidences regarding existence & condition of inventory:
SA 501 “Audit Evidence - Specific Considerations for Specific Items”, requires from the
auditor that when inventory is material to the financial statements, he shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by attendance
at physical inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.
Attendance at physical inventory counting involves:
(1) Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;
(2) Observing compliance with management’s instructions and the performance of
procedures for recording and controlling the results of the physical inventory count; and
(3) Obtaining audit evidence as to the reliability of management’s count procedures.
Hence in the given case, the approach of Engagement Partner is not appropriate as when
inventory is material to the financial statements, the auditor shall obtain sufficient appropriate

8
 audit evidence regarding the existence and condition of inventory. This should be done by
performing various audit procedures which also includes attending physical count, observing
the count, inspecting the inventory and reperforming physical counts.

5.2 SA 505 “External Confirmation”

Q.13. As auditor of Groom Limited, you have sent positive confirmation requests to 30 creditors of
the company in March 2024. All of the creditors in informal sector are small concerns. You
choose to send positive confirmation requests to all the above parties at their business
addresses stated on respective bills after discussing the matter with CFO of the company. The
CFO is cooperative and does not raise any hassles in the matter.
Responses to confirmation requests are received within a week’s time. Your articled clerk
informs you that out of above 30 creditors, GST registrations of 25 concerns have been
cancelled during financial year 2023-24 itself by collating information from GST portal. He
further informs you that there are no fresh registrations pertaining to PANs of these parties.
How you would proceed to deal with the situation as auditor of the company?
Ans: Reponses to Confirmation Requests:
 SA 505 states that if auditor determines that a response to a confirmation request is not
reliable, auditor shall evaluate implications on the assessment of the relevant RMM,
including risk of fraud, and on the related NTE of other audit procedures.
 In the instant case, GST registrations of 25 concerns have been cancelled in the year
2023-24. It indicates that businesses on those addresses were closed. Further, there are no
fresh registrations pertaining to PANs of these parties. However, auditor sent external
confirmation requests in March 2024, which were duly responded. It raises questions on
the reliability of responses received.
 SA 500 indicates that even when audit evidence is obtained from sources external to the
entity, circumstances may exist that affect its reliability. All responses carry some risk of
interception, alteration or fraud. Such risk exists regardless of whether a response is
obtained in paper form or by electronic or other medium.
 Factors that may indicate doubts about the reliability of a response include:
(a) was received by the auditor indirectly or
(b) appeared not to come from the originally intended confirming party.
Conclusion: Keeping in view circumstances as described, there is a risk that the response has
not come from the originally intended confirming party. Unreliable responses may indicate a
fraud risk factor that requires evaluation.

Q.14. Never Permit Limited refused to allow you to get direct confirmation of the outstanding
balances of trade receivables. You want to ensure on grounds of materiality that at least
outstanding above a threshold limit needs to be confirmed and reconciliation is to be carried
out before finalising the audit. If the company does not relent, how will you respond?
Ans: Management refusal to allow auditor to send confirmation request:
 SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence. It requires that the auditor should
employ external confirmation procedures in consultation with the management.
 The auditor may come across certain situations in which the management may request
him not to seek external confirmation from certain parties because of some reasons, for
example, due to a dispute with the particular creditor or debtor.

9
  If the management refuses to allow the auditor to send a confirmation request, the auditor
shall:
(a) Inquire as to Management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures, and
(c) Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.
 If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall communicate
with TCWG and also determine its implication for the audit and his opinion.

Q.15. M/s ABC & Co., LLP are appointed auditors of Sharp Company Ltd. for the year ended on
31st March, 2023. As part of the audit process, they want to use confirmation procedures as
audit evidence during the course of audit. In view of the fact that positive confirmations are
not responded favourably, the firm also intends to use negative confirmation requests. What
are the factors to be considered for the same?
Ans: Use of Negative confirmations:
 As per SA 505, “External Confirmation”, Negative Confirmation is a request that the
confirming party respond directly to the auditor only if the confirming party disagrees
with the information provided in the request.
 Negative confirmations provide less persuasive audit evidence than positive
confirmations. Accordingly, the auditor shall use negative confirmation requests as the
sole substantive audit procedure only when all of the following conditions are present:
(a) Low Risk of material misstatement and auditor has obtained sufficient appropriate
audit evidence regarding the operating effectiveness of controls.
(b) The population comprises a large number of small, homogeneous, account balances
or transactions.
(c) A very low exception rate is expected.
(d) The auditor is not aware of circumstances or conditions that would cause recipients
of negative confirmation requests to disregard such requests.
Factors to be considered while designing confirmation requests:
As per SA 505 “External Confirmations” factors to consider when designing confirmation
requests include:
(i) Assertion being addressed.
(ii) Specific identified RMM.
(iii) Layout & Presentation of request.
(iv) Prior experience on the audit of similar engagements.
(v) Method of communication.
(vi) Management authorisation/encouragement to Confirming Party to respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested information.

Q.16. Your firm has been appointed as the statutory auditors of AGM Private Ltd. for the financial
year 2023-24. While verification of company’s trade receivables as on 31st March 2024,

10
 accountant of AGM Ltd. has requested you, not to send balance confirmations to a particular
group of trade receivables since the said balances are under dispute and the matter is pending
in the Court. As a Statutory Auditor, how would you deal In this situation?
Ans: Management refusal to allow auditor to send confirmation request:
 SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence. It requires that the auditor should
employ external confirmation procedures in consultation with the management.
 The auditor may come across certain situations in which the management may request
him not to seek external confirmation from certain parties because of some reasons, for
example, due to a dispute with the particular creditor or debtor.
 If the management refuses to allow the auditor to send a confirmation request, the auditor
shall:
(a) Inquire as to Management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s assessment of the
relevant risks of material misstatement, including the risk of fraud, and on the nature,
timing and extent of other audit procedures; and
(c) Perform alternative audit procedures designed to obtain relevant & reliable audit
evidence.
 If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall communicate
with TCWG and also determine its implication for the audit and his opinion.

Q.17. During the audit of Star Ltd., a company engaged in the production of paper, the auditor
received certain confirmation for the balances of trade payables outstanding in the balance
sheet through external confirmation by ‘Negative Confirmation Request”. In the list of trade
payables, there are number of small balances except one which is an old outstanding of ` 20
lakhs for which no confirmation was received. Comment with respect to Standards of
Auditing relating to the confirmation process and how to deal the non-receipt of confirmation.
Ans: Response to Negative Confirmation Request:
 As per SA 505, “External Confirmation”, Negative Confirmation is a request that the
confirming party respond directly to the auditor only if the confirming party disagrees
with the information provided in the request.
 Negative confirmations provide less persuasive audit evidence than positive
confirmations. In case of negative confirmation request, confirming parties may be more
likely to respond indicating their disagreement with a confirmation request when the
information in the request is not in their favour, and less likely to respond otherwise.
 Failure of confirming party to respond to a negative confirmation request provides
significantly less persuasive audit evidence than does a response to a positive
confirmation request.
 In the instant case, the auditor sent the negative confirmation re-questing the trade
payable having outstanding balances in the ‘balance sheet while doing audit of Star Ltd.
One of the mid outstanding of ` 20 lakhs has not sent the confirmation on the credit
balance.
 Non-response for negative confirmation request does not means that there is some

11
 misstatement as negative confirmation request itself is to respond to the auditor only if
the confirming party disagrees with the information provided In the request
 In the present case, considering the materiality of the account balance, the auditor may
examine subsequent cash disbursements or correspondence from third parties, and other
records, such as goods received notes.

5.4 - SA 510 Initial Audit Engagements — Opening Balance?

Q.18. CA M. ‘Hussain is appointed auditor of a firm for year 2023.24 on 31st July, 2023. The
accounts of firm were unaudited in year 2022-23. The firm had material inventories reflected
in Its financial statements even as on close of 31st March, 2023.
He is performing audit procedures, including attending physical Inventory count as on 31st
March, 2024. However, there is a lingering doubt in his mind regarding opening inventories
reflected in Financial statements.
Does there exist any responsibility on his part in such a situation?
Ans: Auditor’s responsibilities regarding unaudited Opening Balances:
 SA 510 states that in conducting an Initial audit engagement. one of the objectives of the
auditor with respect to opening balances is to obtain SAAE about whether opening
balances contain misstatements that materially affect the current period’s F.S. Auditor
has to evaluate whether audit procedures performed in the current period provide
evidence relevant to the opening balances or specific audit procedures are required to be
performed to obtain evidence regarding the opening balances.
 In the case of Inventories, however, the current period’s audit procedures on the closing
inventory balance provide little audit evidence regarding inventory on hand at the
beginning of the period. Therefore, additional audit procedures may be necessary, and
one or more of the following may provide MAE:
(a) Observing a current physical inventory count and reconciling it to the opening
inventory quantities.
(b) Performing audit procedures on the valuation of the opening inventory items
(c) Performing audit procedures on gross profit and cut-off

Q.19. In an Initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening balances’ to ensure that they are free from misstatements, which
may materially affect the current financial statements. Lay down the audit procedure, you will
follow, when financial statements are audited for the first time.
If, after performing the procedure, you are not satisfied about the correctness of ‘Opening
Balances’, what approach you will adopt In drafting your audit report?
Ans: Audit procedures for verification of opening balances in case of initial audit
engagement:
As per SA 510 “Initial Audit Engagements-Opening Balances”, the objective of the Auditor
while conducting an initial audit engagement with respect to opening balances is to obtain
sufficient appropriate audit evidences° that the:
(i) opening balances of the preceding period have been correctly brought forward to the
current period;
(ii) opening balances do not contain any misstatement that materially affect the current
period’s financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently

12
 applied in the current period’s financial statements, or changes thereto are properly
accounted for and adequately presented and disclosed in accordance with the applicable
financial reporting framework.
When the audit of financial statements is being conducted for the first time, the auditor has to
perform auditing procedures to obtain sufficient appropriate audit evidence. Since opening
balances represent effect of transaction and events of the preceding period and accounting
policies applied in the preceding period, the auditor need to obtain evidence having regard to
nature of opening balances, materiality of the opening balances and accounting policies.
Since it will not be possible for auditor to perform certain procedures, e.g., observing physical
verification of inventories, etc. the auditor nay obtain confirmation, etc, and perform suitable
procedures in respect of fixed assets, investments, etc. The auditor can also obtain
management representation with regards to the opening balances.
Considerations while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate. Further, If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements and the effect of
the misstatement is not properly accounted for or not adequately presented or disclosed, the
auditor shall express a qualified opinion or an adverse opinion In accordance with SA 705.

Q.20. CA lack, a recently qualified practicing Chartered Accountant got his first audit assignment of
Futura (P.) Ltd, for the financial year 2023-21, He obtained all the relevant appropriate audit
evidence for the Items related to Statement of Profit and Loss. However, while auditing the
Balance Sheet items. CA Jack left out obtaining appropriate audit evidence, say,
confirmations, from the outstanding Accounts Receivable amounting ` 100 lakhs, continued
as it is from the last year, an the affirmation of the management that there is no receipts and
further credits during the year. CA lack, therefore, excluded from the audit programme, the
audit of accounts receivable on the understanding that it pertains to the preceding year which
was already audited by predecessor auditor. Comment
Ans: Audit procedures for verification of opening balances in case of initial audit
engagement:
As per SA 510 ‘Initial Audit Engagements - Opening Balances’, the objective of the Auditor
while conducting an initial audit engagement with respect to opening balances is to obtain
sufficient appropriate audit evidence so that the:
(i) opening balances of the preceding period have been correctly brought forward to the
current period;
(ii) opening balances do not contain any misstatement that materially affect the current
period’s financial statements; and
(iii) appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or charges thereto are properly
accounted for and adequately presented and disclosed in accordance with the applicable
financial reporting framework.
If the prior period’s financial statements were audited by a predecessor auditor, the auditor
may be able to obtain sufficient appropriate audit evidence regarding the opening balances by
perusing the copies of the audited financial statements including the other relevant documents
relating to the prior period financial statements such as supporting schedules to the audited

13
 financial statements, Ordinarily, the current auditor can place reliance on the dosing balances
contained in the financial statements for the preceding period, except when during the
performance of audit procedures for the current period the possibility of-misstatements in
opening balances Is indicated.
In the given case, the management of Future (P.) Ltd has restrained CA Jack, its auditor, from
obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is
from the preceding year. CA lack, on believing that the preceding year balances have already
been audited and on the statement of the management that there are no receipts and credits
during the current year, therefore excluded the verification of Accounts Receivable from his
audit programme.
Conclusion: CA Jack was required to obtain from the management a written representation
(as covered by SA 500) for their views and expressions; and to perform appropriate
procedures on closing balances of Accounts Receivable to ensure its appropriateness. In the
present case, CA lack will be held guilty For professional misconduct for not exercising due
diligence in the conduct of his professional duties as per the Code of Ethics.

Q.21. You have been appointed as statutory auditor’ of M/s Moon Ltd, for the financial year 2023-
24. As the auditor of the company, you want to ensure that closing balances of previous year
have been correctly brought forward as opening balances in the current year. State the audit
procedures for the same to ensure that there is no misstatement.
OR
Mr. X has been appointed as an auditor of Mis ABC Ltd„ Mr. X wants to he satisfied about
the sufficiency and appropriateness of ‘Opening Balances’ to ensure that they are free from
misstatements. Lay down the audit procedure, Mr. X should follow, in the initial audit
engagement of Mis ABC Ltd. Also suggest the approach to he followed regarding mention in
the audit report if Mr. X is not satisfied about the correctness of ‘Opening Balances’?
Ans: Audit procedures for verification of opening balances in case of initial audit
engagement:
SA 510 “Initial Audit Engagements - Opening Balances”, deals with the auditor’s
responsibilities relating to verification of opening balances in case of initial audit
engagements. Accordingly, auditor shall obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect the current period’s
F.S. by;
(a) Determining whether the prior period’s closing balances have been correctly brought
forward to the current period or, when appropriate, any adjustments have been disclosed
as prior period items in the current year’s Statement of Profit and Loss
(b) Determining whether the opening balances reflect the application of appropriate
accounting
(c) Performing one or more of the following:
(i) Where the prior years F.S. were audited, perusing the copies of the audited F.S.
including the other relevant documents relating to the prior period FS.;
(ii) Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening
balances.

14
 Approach to be followed while drafting Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate. Further, If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements and the effect of
the misstatement is not properly accounted for or not adequately presented or disclosed, the
auditor shall express a qualified opinion or an adverse opinion in accordance with SA 705.

Q.22. In an Initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements, which
may materially affect the current financial statements, Lay down the audit procedure, you will
follow In cases (i) when the financial statements are audited for the preceding period by
another auditor; and (ii) when financial statements are audited for the first time.
If, after performing the procedure, you are not satisfied about the correctness of ‘Opening
Balance’’; what approach you will adopt in drafting your audit report in two situations
mentioned in (i) above?
Ans: Audit Procedure for verification of opening balances in case of initial audit
engagements:
SA 510 ‘Initial Audit Engagements - Opening Balances” deals with the auditor’s
responsibilities relating to the opening balances in case of initial audit engagements,
(I) Audit procedure if F,5, Audited by another Auditor:
 If the prior period’s F.S. were audited by a predecessor auditor, the auditor may be
able to obtain sufficient appropriate audit evidence regarding the opening balances by
perusing the copies of the audited financial statements including the other relevant
documents relating to the prior period F.S such as supporting schedules to the audited
financial statements.
 Ordinarily, the current auditor can place reliance on the closing balances contained in
the financial statements for the preceding period, except when during the
performance of audit procedures for the current period the possibility of
misstatements in opening balances is indicated.
(II) Audit procedures if F.S. are audited for the First Time:
 When the audit of F.S. is being conducted for the first time, the auditor has to
perform auditing procedures to obtain sufficient appropriate audit evidence.
 Opening balances represent effect of transaction and events of the preceding period
and accounting policies applied in the preceding period, the auditor need to obtain
evidence having regard to nature of opening balances, materiality of the opening
balances and accounting policies.
 Since it will not be possible for auditor to perform certain procedures, e.g., observing
physical verification of inventories, etc. the auditor may obtain confirmation, etc. and
perform suitable procedures in respect of fixed assets, investments, etc. The auditor
can also obtain management representation with regards to the opening balances.
Considerations while Drafting Audit Report:
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate. Further, If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements, and the effect of

15
 the misstatement is not properly accounted for or not adequately presented or disclosed, the
auditor shall express a qualified opinion or an adverse opinion.

5.5 - SA 530 “Audit Sampling”

Q.23. CA. Ritesh Deshpande has drawn some samples during the course of audit of a manufacturing
company for testing controls as well as for tests of details. On the basis of the samples
selected, he reaches an erroneous conclusion that access controls on applications are less
effective.
Further, on the basis of samples selected, he concludes erroneously that work-in progress
inventories amounting to ` 5 crore in financial statements are materially misstated.
Outlining the above risk involved, discuss how it is going to affect his audit of the company
Ans: Sampling Risk:
 Risk described in the question is sampling risk. It is a risk that the auditor’s conclusion
based on a sample may be different from the conclusion if the entire population were
subjected to the same audit procedure.
 In the given case, the auditor has arrived at erroneous conclusions on the basis of the
samples selected. In the case of a test of controls, he has concluded that access controls
are less effective than they actually are. In the case of a test of details, he has concluded
erroneously that a material misstatement exists when in fact, it does not.
 This type of erroneous conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect

Q.24. Chintamani Ltd. appoints Chintan & Mani as statutory auditors for the financial year 2022-
23. Chintan & Mani seem to have different opinions on Audit approach to be adopted for
audit of Chintamani Ltd. Mani is of the opinion that 100% checking is not required and they
can rely on Audit Sampling techniques in order to provide them a reasonable basis on which
they can draw conclusions about the entire population.
Chintan is concerned that whether the use of audit sampling has provided a reasonable basis
for conclusions about the population that has been tested.
You are required to guide Chintan about his role if audit sampling has not provided a
reasonable basis for conclusions about the population that has been tested in accordance with
SA 530.
Ans: Evaluating Results of Audit Sampling:
As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about
the population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the
potential for further misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the
required assurance. For example, in the case of tests of controls, the auditor might extend
the sample size, test an alternative control or modify related substantive procedures.

16
Q.25. While conducting audit of PC Ltd., CA. T decided to use sampling technique to test the trade
receivables at the planning stage. He directed his team members to divide the whole
population of trade receivables balances to be tested in a few separate groups called ‘strata’.
He directed to treat each stratum as if it was a separate population and divided the trade
receivables balances of PC Ltd. for the Financial Year 2023-24 into groups on the basis of
personal judgment as follows:
SI No. Particulars
1 (a) Balances in excess of ` 50,00,000;
2 (b) Balances in the range of ` 40,00,001 to ` 50,00,000;
3 (c) Balances in the range of ` 30,00,001 to ` 40,00,000;
4 (d) Balances in the range of ` 20,00,001 to ` 30,00,000;
5 (e) Balances in the range of ` 10,00,001 to ` 20,00,000;
(f) Balances ` 10,00,000 and below
From the above mentioned groups, CA. T directed to pick up different percentage of items for
examination from each of the group. One of the team members, Mr. Neel, wants to use some
other technique of sampling for the above purpose as the concept of stratification is not clear
to him. You are required to explain the concept of stratification and its uses to Mr. Neel.
Ans: Concept of Stratification:
 As per SA 530 “Audit Sampling”, the objective of the auditor when using audit sampling
is to provide a reasonable basis for the auditor to draw conclusions about the population
from which the sample is selected. Accordingly, in considering the characteristics of the
population from which the sample will be drawn, the auditor may determine that
stratification or value-weighted selection is appropriate.
 SA 530 “Audit Sampling” defines the term stratification as “the process of dividing a
population into sub-populations, each of which is a group of sampling units which have
similar characteristics (often monetary value)”. Every such group so divided is called
strata. Each stratum is treated as if it were a separate population and proportionate items
are selected from each of the stratum.
Various uses of stratification in accordance with SA 530 are:
(i) Audit efficiency may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an identifying characteristic. The objective of
stratification is to reduce the variability of items within each stratum and therefore allow
sample size to be reduced without increasing sampling risk.
(ii) When performing tests of details, the population is often stratified by monetary value.
This allows greater audit effort to be directed to the larger value items, as these items
may contain the greatest potential misstatement in terms of overstatement.
(iii) The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire
population, the auditor will need to consider the risk of material misstatement in relation
to whatever other strata make up the entire population.
(iv) If a class of transactions or account balance has been divided into strata, the
misstatement is projected for each stratum separately. Projected misstatements for each
stratum are then combined when considering the possible effect of misstatements on the
total class of transactions or account balance.

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5.6 - SA 550 “Related Parties”
Q.26. “Living Well Private Limited” is engaged in the manufacturing and export of floor coverings.
Such products are labour intensive and do not require much of capital investment in
machinery. The company has no plans to diversify in other product lines. Its directors are also
holding significant interest in another company “My Living Private Limited” engaged in
manufacturing of blankets using capital intensive machinery.
During the course of the audit of “My Living Private Limited”, it was noticed by you that the
company has sold machinery of ` 1 crore to “Living Well Private Limited” during the year.
The transaction has been done at normal market rates applicable to such used machinery.
How do you view the above transaction as auditor of “My Living Private Limited”?
Ans: Related Party Transactions outside the Normal Course of Business:
 In respect of significantly related party transactions outside the normal course of business
of an entity, it is the responsibility of the auditor, in accordance with SA 550, to evaluate
the business rationale or lack thereof of transactions that may have been entered to
indulge in fraudulent financial reporting or conceal misappropriation of assets.
 The auditor has to seek to understand the business rationale of such a transaction from a
related party’s perspective. It would help him understand the economic reality of such a
transaction and why it was carried out.
 In the given situation, there is no primary rationale for such a transaction. Living Well
Private Limited does not manufacture blankets, and the purchase of part of old machinery
pertaining to blanket manufacturing has no rationale for it primarily.
Conclusion: A business rationale from the related party’s perspective that appears
inconsistent with the nature of its business may represent a fraud risk factor.

Q.27. JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your guidance for reviewing
the records and documentation of the company regarding ‘related party transactions in the
normal course of business’. Describe the steps to be followed.
OR
The financial statements of Beta Ltd. have been prepared by the Management with due
disclosures for related parties and transactions with them. However, as the auditor of the
company, you are not sure of the reliability of the said disclosures. Mention the documents
and records that may be helpful in gathering information about related party relationships and
transactions.
Ans: Possible sources of related Party Information:
 As per SA 550 “Related Parties” the auditor shall remain alert, when inspecting records
or documents with respect to arrangements or information indicating the existence of
related party relationships or transactions, not previously identified or disclosed to the
auditor.
 During the audit, the auditor may inspect records or documents that may provide
information about related party relationships and transactions, for example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.
4. Statements of conflicts of interest from management and TCWG.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or TCWG.

18
 7. Significant contracts and agreements not in the entity’s ordinary course of business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a securities regulator.
 Auditor should also obtain further information on significant transactions outside entity’s
normal course of business. It enables him to evaluate whether fraud risk factors, if any,
are present.
 In addition, auditor needs to be alert for transactions which appear unusual in the
circumstances and which may indicate the existence of previously unidentified related
parties. For example: Complex equity transactions such as corporate restructurings or
acquisitions, transactions with offshore entities in jurisdictions with weak corporate laws,
the leasing of premises etc.
 Finally, the auditor should also obtain a written representation from the management
concerning the completeness of information provided regarding the identification of
related parties.

Q.28. Mr. X, while conducting audit of PQR Ltd., comes across certain transactions which
according to him are significant transactions with related parties and identified to be outside
the entity’s normal course of business. Guide Mr. X with examples of such transactions and
to understand the nature of significant transactions outside the entity’s normal course of
business.
Ans: Examples of transactions outside the entity’s normal course of business:
 SA 550 “Related Parties” deals with the auditor’s responsibilities regarding related party
relationships and transactions when performing an audit of financial statements.
 Accordingly, if the auditor identifies significant transactions outside the entity’s normal
course of business when performing the audit procedures, the auditor shall inquire of
management about:
1. The nature of these transactions; and
2. Whether related parties could be involved.
 Obtaining further information on significant transactions outside the entity’s normal
course of business enables the auditor to evaluate whether fraud risk factors, if any, are
present and, where the applicable FRF establishes related party requirements, to identify
the RMM.
 Examples of transactions outside the entity’s normal course of business, include the
following:
1. Complex equity transactions, such as corporate restructurings or acquisitions.
2. Transactions with offshore entities in jurisdictions with weak corporate laws.
3. The leasing of premises or the rendering of management services by the entity to
another party if no consideration is exchanged.
4. Sales transactions with unusually large discounts or returns.
5. Transactions with circular arrangements, for example, sales with a commitment to
repurchase.
6. Transactions under contracts whose terms are changed before expiry.

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Q.29. JKL Limited is engaged in the business of Construction and real estate having various
projects across states. Mis YT & Co. Chartered Accountants have been appointed as Statutory
Auditors. Audit Team from M/s yr & Co for audit of JKL Limited comprises of CA Z
Engagement Partner, CA Q, a paid assistant and 3 Articled Assistants. During preliminary
verification, CA Z observed that huge amount of sub-contract payments were made to M/s JB
Associates, a partnership firm in which Director of JKL Limited is a managing partner. The
engagement team discussed that SA 315 and SA 240 shall include specific consideration of
the susceptibility of the financial statements to material misstatement due to fraud or error
that could result from the JKL Limited’s related party relationships and transaction. Highlight
the matters that are to be addressed in the discussion by CA Z with engagement team
members with reference to the relevant Standard on Auditing.
Ans: Matters to be addressed in the Engagement Team Discussion:
As per SA 550 “Related Parties”, the engagement team discussion that SA 315 and SA 240
require shall include specific consideration of the susceptibility of the financial statements to
material misstatement due to fraud or error that could result from the entity’s related party
relationships and transactions.
Accordingly matters that are to be addressed in the discussion by CA Z among the
engagement team include:
(1) Nature and extent of the entity’s relationships and transactions with related parties.
(2) Emphasis on the importance of maintaining professional skepticism throughout the audit
regarding the potential for material misstatement associated with related party
relationships and transactions.
(3) Circumstances or conditions of the entity that may indicate the existence of related party
relationships or transactions that management has not identified or disclosed to the
auditor.
(4) Records or documents that may indicate the existence of related party relationships or
transactions.
(5) Importance that management and TCWG attach to the identification, appropriate
accounting for and disclosure of related party relationships and transactions and the
related risk of management override of relevant controls.
In addition, the discussion in the context of fraud may include specific consideration of how
related parties may be involved in fraud. For example:
(1) How special-purpose entities controlled by management might be used to facilitate
earnings management.
(2) How transactions between the entity and a known business partner of a key member of
management could be arranged to facilitate misappropriation of the entity’s assets.

PART- II COMPREHENSIVE CASE STUDY

Comprehensive Case Study - 1

Honest Specialty Chemicals Private Limited is a ` 1,000 crore turnover company having plants in
Khopoli, Mahad, and Ankleshwar for manufacturing various products for fertilizer units, cosmetics &
Paint industry, etc. The company has built up a good reputation, & apart from the domestic market.
It exports to the European market and the Middle East. The company Is a closely held company
owned by three friends and their family members. The types of materials handled and produced are
hazardous.

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Following further latest information relating to the company is as under:
(1) The company needs to Import the key raw materials and Is exposed to high risk of price
fluctuations and currency risks.
(2) The company carries high inventory due to the long import cycle and seasonal sales pattern.
(3) The working capital is almost 60% blocked in inventory and rest in receivables.
(4) The company has huge investments in plant and machinery financed through term loans from
financial institutions.
(5) Since the company has large imports, It buys import licenses from the open market.
(6) The company has received customs notices about using fake licenses for importing materials
without paying duty. The company has filed an appeal against the said notice and the same is
pending with the Appellate Tribunal. The amount involved is material and, along with interest
and penalty, could he more than 10% of turnover.
(7) The company has liquid chemicals stored in huge tanks.
(8) The powdered tom of chemicals is stored in standard-sized drums.
(9) Few items of storks like coal, sulphur are lying in the open area.
(10) The company has huge domestic sales on a consignment basis, and vast quantities of finished
inventories are lying with the consignees across India.
(11) The company has received an order from NGT to pay a fine of INTI 1.5 crores for the emission
of toxic chemicals in the air and water. The company has filed au appeal against the said order.
(12) The type of plant is such that it has to be a continuous process, and at any time, huge quantities
of materials are in process.
(13) Raw Materials are stored in huge tanks located 2 kilometres from the plant, and to transport the
chemicals (liquid), there is a network of pipes connecting them, and at any point in time, there
are huge quantities of materials lying in the pipeline.
(14) The company has prepared its inventory details by involving a management expert.
(15) During the year, the previous auditor resigned, and a new auditor got appointed.
Theoretical Questions:
Based on the case study, please advise the auditor on the important aspects of carrying out the audit
procedures to obtain sufficient appropriate audit evidence in respect of the knowing:
Q.1. Which audit procedures are required for verifying existence and condition of company’s
Inventories with specific reference to its nature of operations?

Q.2. The company has prepared inventory details by involving a management’s expert.
Elaborating upon its rationale, discuss responsibilities of auditor In regard to Information
prepared by company involving such an expert.

Q.3. What additional procedures does the auditor need to carry out In respect of stacks lying with
consignees all over the country?

Q.4. What procedures should the auditor need to undertake for litigation matters?

Multiple Choice Questions

Q.1. The objectivity of the management’s expert Is likely to be lesser
(a) The expert is competent.
(b) The expert is capable.
(c) The expert has relevant experience.
(d) The expert is employed by the entity

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Q.2. Which of the following matters is Irrelevant for auditor In planning attendance at physical
inventory counts?
(a) Nature of inventory
(b) The timing of physical inventory counting
(c) The nature of the Internal control related to inventory
(d) Whether 100% of Inventory is covered in the count

Q.3. External confirmations for receivables are not reliable in which of the following situations:
(a) The response directly received by the auditor
(b) The confirmation has come From the address of the confirming party
(c) The confirmation is signed by the plant manager
(d) The confirmation is positive confirmation

Q.4. The new auditor planned certain procedures with respect to opening balances. Which of the
following procedures is not in accordance with SA 510?
(a) Reading the most recent financial statements and audit report
(b) Where the prior period report is modified, the impact on the current period
(c) Correctly bringing forward of prior period closing balances
(d) Ascertaining whether predecessor auditor had attended physical inventory count

Answer - Comprehensive Case Study 1

Part A - Theoretical Questions
1. Audit procedures required for verifying existence and condition of inventories:
Auditor needs to obtain sufficient appropriate audit evidence regarding existence and
condition of inventory. For this purpose, auditor it required to:
(A) Attend physical inventory count to;
(i) Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting like:
 Existence of appropriate control activities: collection of used physical inventory
count records, accounting for unused physical Inventory count records, count
and recount procedures.
 The accurate identification of the stage of completion of work-in-progress, of
slow moving, obsolete, or damaged items and of inventory lying in tanks, In
pipes and in open areas.
 The procedures used to estimate physical quantities, for liquid chemicals ‘lying
in process, tanks, pipelines in open areas like coal pile, sulphur pile, etc.
 Control over the moment of inventory between areas and the shipping and
receipt of inventory before and after the cutoff date.
(ii) Observe the performance of Management’s count procedure by observing the control
over the movement of inventory before, during and after the count to determine
adequacy and effectiveness of count procedure.
(iii) Inspect the inventory to assist in identifying obsolete, damaged or ageing of
inventory.
(iv) Perform the test counts to obtain the sufficient appropriate audit evidence by (i)
tracing items selected from the physical inventory to management’s count records,
(ii) obtaining topics of Management’s completed physical inventory count records
(B) Cross matching the final inventory records with the actual Inventory count results.

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2. Auditor’s Responsibilities w.r.t. Information prepared using Management Expert;
 The company deals with speciality chemicals which are in liquid condition, powdered
condition, lying In the huge tanks or in plants under process, lying in pipelines or lying in
open areas like coal and sulphur. The unit of measurement For each of the above
categories may be different and could involve technical and mathematical principles
involving technical and scientific expertise. Keeping these matters in view, inventory
details have been prepared by involving management’s expert.
 When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, having regard to the significance of that expert’s
work for the auditor’s purposes:
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.

3. Additional Procedures to verify the inventory lying with third party:

(a) Apart from obtaining the confirmation from the third party as to the quantities and
condition of the Inventory held on behalf of the entity, the auditor may perform the
following other audit procedures;
(b) Attending, or arranging for another auditor to attend, the third party’s physical counting
of inventory,
(c) Obtaining another auditor’s report or a service auditor’s report on the adequacy of the
third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded.
(d) Inspecting documentation regarding inventory held by third parties

4. Procedures for Verification of Litigation Matters:

 Auditor shall design and perform audit procedures in order to identify litigation and
claims involving the entity by:
(a) Inquiry of management and, where applicable, others within the entity including
inhume legal counsel.
(b) Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel.
(c) Reviewing legal expense account
 The legal claims involving customs and fine of NGT are material. in such circumstances
if auditor assesses risk of material misstatements regarding litigation. he can seek letter
of specific inquiry from the external legal counsel including:
(a) A list of litigation and claims
(b) Where applicable, management’s assessment of the outcome of each of the identified
litigation and claims and its estimate oldie financial implications, including cost
involved and
(c) A request that the entity’s external legal counsel confirm the reasonableness of
management’s assessments and provide the auditor with further information if the
list is considered incomplete or incorrect-
(d) The auditor may seek meeting with the external legal counsel lithe matter is having
significant risk, it is complex or there is disagreement between management
assertion and legal counsel’s views.

23
 (e) Obtaining written representation from the management and where appropriate
TCWG that all the known actual or possible litigation and claims whose effects
should be considered when preparing the financial statement have been disclosed to
the auditor and appropriately accounted for and disclosed in accordance with the
applicable FRF.

Part B - Multiple Choice Questions

1. (d) The expert is employed by the entity

2. (d) Whether 100% of inventory is covered in the count

3. (c) The confirmation is signed by the plant manager

4. (d) Ascertaining whether predecessor auditor had attended physical inventory count

Comprehensive Case Study - 2

‘Trustworthy Real Estate Private Limited” with Mr. Bharose Lal as MD along with his wife, Maya,
owned the company.
The company had floated one SPV “Real Trust Developers Private Limited” in which a foreign entity
became a joint Venture partner with a 50% stake.
The venture was formed with its Head Office in Mumbai to invest in SRA projects (Slum
rehabilitation authority) and develop them into commercial units for sale.
Mr. Bharose Lai was going through a rough patch in his life. He was in financial difficulty and had
mounting dues and huge outstanding exposure to banks and suppliers in his companies. Mrs. Maya
was from a very wealthy family and had fallen in love with Mr. Bharose Lai, who was from a
middleclass family. Mrs. Maya had an expensive lifestyle and was always short of funds to maintain
her lifestyle. Mr. Bharose Lal sensed a golden opportunity in the new venture because the foreign
partner had no knowledge of Indian regulations and how the SRA projects worked and was solely
dependent on the local partner to get all the permissions, scouting for the projects, getting consents
from the slum dwellers for the project, giving contracts for the construction of projects and such
matters.
M/s ABC and Company, Chartered Accountants were appointed as the auditor of the joint venture,
and the engagement team was headed try CA Sceptic, who had, in his stint with the firm, was
instrumental in unearthing two major frauds and had the ability to sniff out any such scenarios.
Mr. Bharose Lal has a dominant personality and a powerful influence on functioning, and everybody
looks to him for guidance. The governance structure was very, poor in the organization, and Mr.
Morose Lal used to dictate the decisions. Even though as part of the Paint Venture, there were a
detailed governance structure and policies and procedures in place for the decision making process at
the joint venture. However, the representative on the board of the joint Venture of the foreign partner
who had shifted to India to supervise the SRA project had grown friendly with Mr. Bharose Lal, and
Mr. Bharose Lal had even gone out of the way to help him get good accommodation and second-
hand Mercedes. Often, they both go to a club in the evening for a drink.
The dealings in the SRA project are not very transparent and above board but are very opaque. Given
the above situation, CA Sceptic wants to discuss with the audit team areas and situations where risk
of material misstatement is possible and there are chances of having an undisclosed related party
relationship to misappropriate the funds.

24
 Theoretical Questions:
Q.1. Please guide the engagement team on the further course of action as per SA 550.

Q.2. What are fraud risk factors in given case?

Q.3. Given the situation that each partner in the joint venture has to bring into the entity a
contribution of 5 crores each and given the situation that Mr Bharose Lal had appointed one
agency, the name Useless & Sons Private Limited, to get consent from the slum dwellers, for
which the agency was paid 20 crores as Kitty to get the job done.
CA Sceptic Inclines that there is some connection between the 20 crores paid and,
simultaneously, within a short span, the infusion of INR 5 crores as equity contribution by
Mr. Bharose Lal.
Please guide CA Sceptic in establishing this link based on the guidance available in SA 550
and SA 240.
What additional audit procedures does his team need to undertake for the conclusion?

Q.4. If, based on additional audit procedures undertaken by CA Sceptic, it is established that there
is a likelihood of misappropriation of funds and the financial statements as a whole may be
materially misstated, how CA Sceptic needs to plan the future course of action?

Multiple Choice Questions

Q.1. Which of the following best describes the method that Mr. Bharose Lal can indulge to commit
fraud?
(a) Concealing and not disclosing facts that could affect the amounts recorded in financial
statements.
(b) Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(c) Causing an entity to pay for goods or services not received.
(d) Using undisclosed business partners to misappropriate funds in the garb of making a
business transaction and thus siphoning off the funds.

Q.2. In the given case scenario, the main Factor giving rise to risk of material misstatement is:
(a) The expensive lifestyle of owners
(b) Appointment of an auditor having experience in unearthing of frauds
(c) The deteriorating financial condition of the owner’s business.
(d) The vulnerability and dependence of the foreign partner on the local partner

Q.3. In the given case scenario, which is the most important red flag for auditor:
(a) Expensive lifestyle
(b) Undisclosed related party relationships to siphon off the funds.
(c) Financial crunch
(d) The dominant influence of the owners

Q.4. Which of the following is not a fraud risk factor?

(a) Dominant influence of the owners
(b) Expensive lifestyle
(c) Fraud risk due to the nature of the industry
(d) Floating of a new SPV itself

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 Answer - Comprehensive Case Study 2
Part A - Theoretical Questions
1. Course of Action as per SA 550:
The engagement team shall include specific consideration of the susceptibility of the financial
statements to material misstatement due to fraud or error that could result from the entity’s
related party relationships and transactions.
(a) The nature and extent of the entity’s relationships and transactions with related parties as
identified independently by the Auditor by verification of MBP-1 data and data available
on MCA website relating to directors and companies, etc.
(b) An emphasis on the importance of maintaining Professional Skepticism throughout the
audit regarding the potential for material misstatement associated with related party
relationships and transactions.
(c) The circumstances or conditions of the entity that may indicate the existence of related
party relationships or transactions that management has not identified or disclosed to the
auditor (e.g., a complex organisational structure, use of special purpose entities off-
balance sheet transactions, or an inadequate information system).
(d) The records or documents that may indicate the existence of related party relationships or
transactions.
(e) The importance of management and those charged with governance attached to the
identification, appropriate accounting for, and disclosure of related party relationships
and transactions (if the applicable financial reporting framework establishes related party
requirement), and the related risk of Management override of relevant controls.
(f) In addition, the discussion in the context of fraud may include specific consideration of
how related parties may be involved in fraud. For example:
(i) How special-purpose entities controlled by management might be used to facilitate
earnings management.
(ii) How transaction between the entity and known business partner of a key member of
management could be arranged to facilitate misappropriation of the entity’s assets.

2. Fraud Risk Factors:

 The fraud risk factors are the events or conditions that indicate an incentive or pressure to
commit fraud or provide an opportunity to commit fraud.
 The fraud risk factors are classified based on the three conditions that are generally
present when fraud exists:
(i) An incentive or pressure to commit fraud
(ii) A perceived opportunity to commit fraud
(iii) An ability to rationalize the fraudulent action.
In the given case scenario following fraud risk factors can be segregated in the 2 conditions of
incentive or pressure to commit fraud in a perceived opportunity to commit fraud.
(A) An incentive or pressure to commit fraud:
 Financial difficulty with huge outstanding dues towards vendors and Financial
Institutions.
 Expensive lifestyle.
 Requirement to fund ` 5 crore as equity contribution in the SPV.
(B) A perceived opportunity to commit fraud:
 Dependency of the foreign partner and no knowledge of the foreign partner of local

26
 laws and the SRA business model in India.
 The risk is due to the way the real estate industry functions and particularly risk due
to the SRA business model.
 Dominant personality of MD, which can lead to management override of controls for
undisclosed business relationships with M/s. Useless and Sons (P) Ltd.

3. Additional Audit Procedures in case of any doubt as to existence of Related Party

Relationships or transactions:
 If the auditor identifies arrangements or information that suggests the existence of related
party relationships or transactions that management has not previously identified or
disclosed to the auditors, the auditor shall determine whether the underlying
circumstances confirm the existence of those relationships or transactions.
 In such situations, the auditor shall:
(a) Promptly communicate the relevant information to the other members of the
engagement team in order to assist them in determining whether this information
affects the results of and conclusions drawn from risk assessment procedures already
performed, including whether the risk of material misstatement needs to be
reassessed.
(b) Where the applicable FRF establishes related party requirements:
(i) Request management to identify all transactions with the newly identified
related parties for the auditor’s further evaluation; and
(ii) Inquire as to why the entity’s controls over related party relationships and
transactions failed to enable the identification or disclosure of the related party
relationships or transactions;
(c) Perform appropriate substantive audit procedures relating to such newly identified
related parties or significant related party transactions.
(d) Reconsider the risk that other related parties or significant related party transactions
may exist that management has not previously identified or disclose to the auditor,
and perform additional audit procedures as necessary; and
(e) If the non-disclosure by management appears intentional (and therefore indicative of
a risk of material misstatement due to fraud), evaluate the implications for the audit.
 In such cases, the requirements and guidance in SA-240 regarding the auditor’s
responsibilities relating to fraud in an audit of financial statements are relevant where
management appears to have intentionally failed to disclose related parties or significant
related party transactions to the auditor. The auditor may also consider whether it is
necessary to re-evaluate the reliability of management’s responses to the auditor’s
inquiries and management’s representations to the auditor.
 Auditor needs to carry out verification and inspection of the ownership structure and the
review of the financial statements of the M/s. Useless and Sons (P) Ltd through the MCA
website and establish the nexus between the two.
 Auditor needs to carry out an inspection of the data filed by Mr, Bharose Lal for his
group companies to establish any past transactions/relationships between the two entities.
 Auditor needs to ask for all the documents for the utilization of INR 20 crore and can
investigate by visiting the parties involved and asking for confirmation directly.

4. Auditor Duties in case of likelihood of misappropriation of funds:

The Auditor needs to reassess the reliability of evidence previously obtained as there are

27
 doubts about the completeness and truthfulness of representations made and about the
genuineness of accounting records and documentation.
(a) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is the requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal
from the engagement is legally permitted; and
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and TCWG the auditor’s
withdrawal from the engagement and the reasons for the withdrawal; and
(ii) Determine whether there is a professional or legal requirement to report to the person
or persons who made the audit appointment or, in some cases, to regulatory
authorities, the auditor’s withdrawal from the engagement and the reasons for the
withdrawal.

Part B - Multiple Choice Questions

1. (d) Using undisclosed business partners to misappropriate funds in the garb of making a
business transaction and thus siphoning off the funds.

2. (d) The vulnerability and dependence of the foreign partner on the local partner.

3. (b) Undisclosed related party relationships to siphon off the funds.

4. (d) Floating of a new SPV itself

PART- III MULTIPLE CHOICE QUESTIONS

1. BDJ Private Ltd, was established in 2001 and since then the company’s operations have
grown significantly. The company is based in Kanpur and has branch offices outside Kanpur.
The company is engaged in tours and travels business and because of the nature of the
business, it has voluminous transactions. The annual turnover of the company is INR 700
crore.
During the audit of the financial statements of the company for the year ended 31 March
2024, the auditors observed wide variation in various details of sales and various expenses as
compared to last year. Various balances of trade receivables, loans and advances, statutory
liabilities showed significant increase and many balances were found to be non-moving which
were aged for more than 3 years.
On the basis of the materiality and planned procedures, the audit team requested the client for
testing of various samples for sales, expenses etc. The client observed that the number of
samples that the team has requested increased as compared to last year and asked the team to
cut down on the number of samples so that it is the same number of samples which were
tested in the previous years.
The audit team did not agree with this and explained various factors which the team had
considered for sample selection and the reasons for changes in the samples and also explained
the requirements of SA 530 to the client but the client still did not agree.
Now there is a situation of deadlock and you are requested to provide your guidance to
resolve this matter.

28
 (a) The argument of the client is not valid. Sample selection is based on certain principles as
per SA 530 and that is on the assessment of the audit team. It may change year on year
and hence the client should provide the required information to the audit team.
(b) The explanation of the audit team is not valid. Referring SA 530 was not correct in this
case. The audit team should have explained their entire approach around risk assessment
to the client before starting the fieldwork and should have formally shared that with the
client in writing.
(c) In the given situation, the audit team instead of getting into any arguments should cut
down the number of samples and should increase their procedures around analytical
work. That would resolve the problem.
(d) The audit team should make a formal request in writing for these details from the client
and if the client still refuses then they should report this matter to the audit partner. In that
case, the auditing standards require audit partner to check some of the documents which
may not be provided by the client to the audit team.

2. MNO Ltd. is a company engaged in the manufacture of Kids toys. The company sells its
goods on credit basis. M/s. Ajay Vijay & Associates have been appointed as statutory auditors
of MNO Ltd. for the FY 2023-24. During the Course of audit CA Ajay, the engagement
partner asks the management about the email addresses of trade receivables of the company
for the purpose of obtaining balance confirmation from the trade receivables. The
management of the company asked its sales supervisor to send confirmation request to the
trade receivables and collect all the responses and provide all such responses to the auditor.
The management of MNO Ltd. also informed CA Ajay that confirmation with respect to two
of its trade receivables namely Sports Star Ltd. and Kids Zone Ltd, won’t be available as a
dispute between MNO La and both the trade receivables is going on With respect to other
trade receivables, the sales supervisor provided CA Ajay with all the balance confirmation.
With respect to the balance confirmation request, which of the following is warranted as per
the requirement of the relevant SA?
(a) CA Ajay should not have relied on the explanation provided by the management with
respect to the trade receivables namely Sports Star Ltd. and Kids Zone Ltd. and he should
perform alternative procedures with respect to such trade receivables.
(b) CA Ajay should have obtained direct response from all other trade receivables instead of
sales supervisor receiving direct responses from trade receivables and providing them to
the auditor.
(c) Both (a) and (b).
(d) CA Ajay should give a qualified opinion as balance confirmation with respect to two
trade receivables is not available.

3. Auditors do not normally examine all the information available to them as it would be
impractical to do so and using audit sampling will produce valid conclusions. Random
selection ensures that all items in the population have an equal chance of selection, e.g. by use
of random number tables or random number generators. Block sampling method includes
selection of a block or blocks of continuous items from within the organisation. Which of the
following selection can be considered as block sampling method?
(a) Auditor Mr. A divided the trade receivables into 2 groups as: balances above 20 lakh and
balances between 10 lakh to t 20 lakh and selected different percentage of items from
each group.

29
 (b) Auditor Mr. A determined the starting point as 10 for the list of receivables and selected
every 10th balance for receivables thereafter as samples to perform the tests.
(c) Auditor Mr. A selected sample size as all the high-value balances from the list of trade
receivables to ensure that these balances shown are correctly recorded.
(d) Auditor Mr. A uses a sample of 50 consecutive cheques to test whether cheques are
signed by authorised signatories rather than picking 50 single cheques throughout the
year.

4. SKJ Private Ltd. is engaged in the business of construction. The company has also got some
real estate projects few years back on which it started the work in the last 2 years. The annual
turnover of the company is INR 600 crores and profits of INR 40 crores.
The statutory auditors of the company got rotated by another audit firm due to mandatory
audit rotation requirements as per the Companies Act, 2013.
The new statutory auditors of the company started audit of the financial statements for the
year ended 31st March 2023 in May 2023. The audit team also requested the client to provide
certain information on the opening balances to perform their audit procedures. Initially the
management did not provide any information to the auditors on the opening balances thinking
that this is not within the scope of their work, however, after going through the auditing
standards, the management agreed and provided the required information.
Later on, the audit team also started requesting information for the period from 1st April 2023
to 31st May 2023. With this requirement, CFO of the company got very upset and angry and
set up a meeting with the senior members of the audit team. CFO raised a concern that the
audit team has not been doing the work properly and has been asking for unnecessary
information like information on opening balances and then the information for the period
after 31st March 2023. The audit partner explained to the CFO that everything requested by
the audit team has been as per the auditing standards, however, CFO said that in the earlier
years, the previous auditors never asked for such information.
You are requested to give your view in respect of this matter.
(a) The requirement of the auditors for opening balances was valid but for the period after
31st March 2023 is completely wrong as that is out of their scope for the current year’s
audit. They can ask for those
(b) The concern of the CFO was valid. He has seen the previous auditors not performing such
audit procedures and hence the new audit team should also follow the same approach
which was followed by previous auditors as that would lead to efficient in audit.
(c) The requirement of the auditors for opening balances as well as for the period after 31st
March 2023 is valid. After the requirements of SA 510 and SA 560, audit team is
required to perform these procedures.
(d) The audit team should set up a meeting with previous auditors wherein it should be
assessed why different approach was followed by the previous auditors. On the basis of
that discussion with the previous auditors, next course of action should be decided.

5. M/s Ram Raj & Associates have been appointed as statutory auditors of Venus Ltd. for the
FY 2022-23. During the year, the company has entered into some related party transactions.
CA Ram, the engagement partner has taken a management representation letter regarding the
proper accounting, presentation and disclosure of such related party transactions. Is there any
further responsibility of CA Ram with respect to the other procedures to be performed for
related party transactions?

30
 (a) No, there is no further responsibility of CA Ram as the best audit evidence for the related
party transaction is the management representation letter.
(b) No, there is no further responsibility of CA Ram as the audit firm is responsible for
verifying the balances and disclosure of related party transactions. The identification of
related party transactions is the responsibility of the management of Venus Ltd.
(c) Yes, the audit firm has the responsibility to perform the audit procedures to identify,
assess and respond to the risk of material misstatement arising from the entity’s failure to
appropriately account for related party relationships, transactions and balances, and
obtaining merely management representation letter can be considered to be sufficient
appropriate audit evidence.
(d) Yes, the auditor has the responsibility to detect fraud and error with respect to the related
party transactions.

6. While auditing Veer Ltd., CA. Vardhman divided the whole population of trade receivables
balances to be tested in a few separate groups called ‘strata’ and started taking a sample from
each of them. He treated each stratum as if it was a separate population. He divided the trade
receivables balances of Veer Ltd. for the Financial Year 2023-24 into groups on the basis of
personal judgment as follows:
S. No. Particulars
1 Balances in excess of ` 10,00,000;
2 Balances in the range of ` 7,75,001 to ` 10,00,000;
3 Balances in the range of ` 5,50,001 to ` 7,75,000;
4 Balances in the range of ` 2,25,001 to ` 15,50,000;
5 Balances ` 2,25,000 and below
From the abovementioned groups, CA. Vardhman picked up different percentage of items for
examination from each of the groups, for example, from the top group i.e. balances in excess
of ` 10,00,000, he selected all the items to be examined; from the second group, he opted for
25 % of the items to be examined; from the lowest group, he selected 2% of the items for
examination; and so on from rest of the groups. Which one of the following methods of
sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling.

7. As per SA 550 on Related Parties, existence of which relationship indicate the presence of
control or significant influence?
(a) Friend of a family member of a person who has the authority and responsibility for
planning.
(b) Holding debentures in the entity.
(c) The entity’s holding of debentures in other entities.
(d) The entity’s holding of equity in other entities

8. XYZ & Associate Chartered Accountants were appointed auditors for Weknow LLP. The
engagement manager of the audit team, while designing the auditor response to assessed risk,
concluded that there are no requirements of the applicable financial reporting framework for

31
 disclosing the related party transaction in the Firm’s Financial Statement and hence the audit
team is not required to perform any audit procedures with respect to identification and
disclosure of related party relationship and transaction in financial statement. You as an
engagement partner guide the engagement manager by selecting the appropriate response
from below:
(a) Even if the applicable FRF establishes minimal or no related party requirements, auditor
nevertheless needs to obtain an understanding of the entity’s related party relationships
and transactions and should sufficiently be able to conclude whether the financial
statements, insofar as they are affected by those relationships and transactions achieve a
true and fair presentation and are not misleading.
(b) If the applicable FRF establishes minimal or no related party requirements, then the
auditor is not required to obtain an understanding of the entity’s related party
relationships and transactions.
(c) Even if the applicable FRF establishes minimal or no related party requirements, the
auditor nevertheless needs to obtain an understanding of the entity’s related party
relationships and transactions and should sufficiently be able to conclude whether the
financial statements, as a whole, are free from all the material related party transactions.
(d) Because related parties are not independent of each other, hence auditor can obtain the
written representation from the Related Party’s auditor regarding the accuracy and
completeness of the related party transactions disclosed in Firm’s Financial Statement.
This should only be carried where the applicable financial reporting framework
establishes minimal or no related party requirements.

9. …….. approach to sampling has the following characteristics:

I. Random selection of the sample items; and
II. The use of probability theory to evaluate sample results, including measurement of
sampling risk
(a) Statistical sampling
(b) Non-statistical sampling
(c) Stratified sampling
(d) Haphazard sampling

Answer Key

1. (a) The argument of the client is not valid. Sample selection is based on certain principles as
per SA 530 and that is on the assessment of the audit team. It may change year on year
and hence the client should provide the required information to the audit team.

2. (c) Both (a) and (b).

3. (d) Auditor Mr. A uses a sample of 50 consecutive cheques to test whether cheques are
signed by authorised signatories rather than picking 50 single cheques throughout the
year.

4. (c) The requirement of the auditors for opening balances as well as for the period after 31st
March 2023 is valid. After the requirements of SA 510 and SA 560, audit team is
required to perform these procedures.

32
5. (c) Yes, the audit firm has the responsibility to perform the audit procedures to identify,
assess and respond to the risk of material misstatement arising from the entity’s failure to
appropriately account for related party relationships, transactions and balances, and
obtaining merely management representation letter can be considered to be sufficient
appropriate audit evidence.

6. (b) Stratified sampling

7. (d) The entity’s holding of equity in other entities

8. (a) Even if the applicable FRF establishes minimal or no related party requirements, auditor
nevertheless needs to obtain understanding of entity’s related party relationships &
transactions and should sufficiently be able to conclude whether the F.S., insofar as they
are affected by those relationships and transactions achieve a true and fair presentation
and are not misleading

9. (a) Statistical sampling.

PART- IV INTEGRATED CASE SCENARIO

Black & White Ltd. is into the business of manufacturing readymade garments in Amritsar. It
procures all the raw material required for its production from Punjab, Himachal Pradesh & J&K. Its
sales market, however, covers almost all the northern parts of the country. CA Anu is the engagement
partner of Maheshwari & Co appointed as the statutory auditor of the company. She calls for a
meeting of the engagement team to delegate work and responsibilities. During the audit. the
engagement team comes across the following facts:
 Woolen Private Limited is one of the vendors of the company from which the company has been
purchasing wool for many years on a current account basis, but no single purchase has been
made in the last nine months, and the outstanding balance stands as it is in the books of accounts.
CA Ann wants to confirm the balance and requests the CFO of the company for sending a
balance confirmation request to Woolen Private Ltd., to which he refuses and is not willing.
 The Fashion Jingo Ltd. is one of the customers of the company and hasn’t replied to CA Anu’s
positive balance confirmation request sent.
 Mr. X, one of the fashion designers, had sold his designs to the company but owing to a dispute,
the contract got cancelled, and now both the parties are under litigation in the local court of law.
The engagement team is guided as to the procedures to be designed and performed to identify
this matter.
 CA Anu simultaneously seeks direct communication with the company’s external legal counsel
sensing the risk of material misstatement. However, it ends up in vain as the external legal
counsel, Mr. Chadha, refuses to comment She is unable to obtain sufficient appropriate audit
evidence in this regard through alternative audit procedures either.
The team documents all the relevant information w.r.t. the above facts, and CA Ann issues the audit
report accordingly.
Q.1. Fashion Jingo Ltd. has not responded to CA Ann’s request What should be proper course of
action for her in such a situation?
(a) Perform alternative audit procedures
(b) Consider it as a negative confirmation

33
 (c) Give a Qualified opinion
(d) Should visit the customer company premises herself and confirm the balance on the spot.

Q.2. With respect to advocate Chadha’s cold shoulder to CA Anu’s request, what she should do?
(a) Modify her audit opinion
(b) Give an unqualified opinion
(c) Give a disclaimer of opinion
(d) Withdraw from this engagement

Q.3. What should be CA Anu’s first and foremost response in the case of request made relating to
balance confirmation from Woolen Pvt. Ltd.?
(a) Perform alternate audit procedures.
(b) Withdraw from the engagement.
(c) Communicate with those charged with Governance telling the effects on his audit
opinion.
(d) Inquire as to the reasons behind the management’s response and seek audit evidence as to
its validity and reasonableness.

Q.4. Which of the following procedures will not be performed by the engagement team as audit
procedures while dealing with the case of Mr. X?
(a) Inquiry of Management.
(b) Inquiry of Mr. X
(c) Reviewing Minutes of Meetings
(d) Reviewing Legal expenses account

Answer Key - Integrated Case Scenario

1. (a) Perform alternative audit procedures

2. (a) Modify her audit opinion

3. (d) Inquire as to the reasons behind the management’s response and seek audit evidence as to
its validity and reasonableness.

4. (b) Inquiry of Mr. X

34
 6. “Completion and Review”
PART- I DESCRIPTIVE QUESTIONS
6.1 – SA 560 “Subsequent Events”
Q.1. “Move Fast Limited” is engaged in the manufacturing of shoes and slippers located in
Bahadurgarh in Haryana. Due to unprecedented rains in the area in the month of September
2022, many areas of the town got inundated due to the choking of sewer systems. As a result
of the above, the company’s premises located in town were also affected, resulting in damage
of stocksThe company has lodged a claim with the insurance company for ` 1 crore, and the
same is shown as a claim receivable as of 31st March 2023, as the claim was not settled at
year end.
The insurance surveyor appointed in the case submitted a report to the insurance company
recommending a claim of ` 45 lacs in the month of April 2023. The company has also given
its consent for the same, and the settled amount of ` 45 lacs were transferred to the bank
account of the company on 15th May 2023.
You have just finished performing substantive procedures of the company by the end of May
2023. Is there any responsibility cast upon you as auditor of the company in the above
situation?
Ans: Events occurring after Balance Sheet Date:
 The given situation provides evidence of conditions that existed at the date of financial
statements. Initially, the company had lodged claim of ` 1 crore and the same is reflected
as claim receivable in financial statements as on 31st March, 2023.
 However, subsequent events occurring have provided evidence claim was settled for ` 45
lacs only. Such settled amount has already been accepted by the company by providing
its consent. Therefore, such events have provided fresh information about items included
in financial statements.
 Further, performance of substantive procedures has been finished implying that audit
report is not yet issued.
Conclusion: Financial statements as on 31st March, 2023 should be adjusted to reflect fresh
information emanating from described events and management should be asked to take
appropriate action in this regard so that adjustment pertaining to above is properly reflected in
financial statements in accordance with applicable financial reporting framework.

Q.2. CA Anuj is the auditor of a listed company, and he is in the midst of conducting an audit of
the said company for the financial year ending 31st March 2023. At a meeting of the Board of
Directors held on 17th April 2023, a dividend of ` 1 crore is proposed to equity shareholders
@ ` 10/- per share, and such a proposal has a good chance of being approved in the AGM of
the company to be held after few months.
His audit procedures are near completion. He is contemplating finalizing the audit report by
31st July 2023. Is there any responsibility thrust upon him as auditor of the company?
Ans: Disclosure Requirements w.r.t. proposed dividend:
 In the given situation, dividend has been proposed by Board of Director on 17th April,
2023. It is an example of condition that arose after reporting period. No liability exists for
company on the reporting date because there is no obligation to pay at the reporting date
in accordance with Ind AS 1.

1
  Therefore, above situation does not require recognition of above proposed dividend in
financial statements. It is an example of events which does not require adjustments.
However it should be disclosed in financial statements in notes to accounts
Conclusion: It should be ensured that dividend proposed is disclosed in notes to accounts in
financial statements. Auditor should verify in accordance with SA 560 that dividend
proposed is disclosed in notes to accounts.

Q.3. Ramadhan & Co. are the Auditors of XYZ Company Ltd., for the year ended on 31.03.2023.
The Audit Report for that year was signed by the Auditors on 04.05.2023. The Annual
General Meeting was decided to be held during the month of August 2023. On 06.05.2023,
the Company had received a communication from the Central Government that an amount of
` 5,800 Crore kept pending on account of incentives pertaining to Financial Year 2022-23
had been approved and the amount would be paid to the Company before the end of May
2023. To a query to Chief Financial officer of the company by the board, it was informed that
this amount had not been recognised in the Audited Financial Statements in view of the same
not being released before the close of the financial year and due to uncertainty of receipt.
Now, having received the amount, the board of Directors wished to include this amount in the
Financial Statements of the company for the Financial Year ended on 31.03.2023. On
08.05.2023, the Board amended the accounts, approved the same and requested the Auditor to
consider this event and issue a fresh Audit Report for the year ended on 31.03.2023. Analyse
the Issues involved and give your views as to whether or not the Auditor could accede to the
request of the Board of Directors.
Ans: Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but
Before the Date the Financial Statements are Issued:
 As per SA 560, “Subsequent Events”, auditor has no obligation to perform any audit
procedures regarding the F.S. after date of the auditor’s report. However, when, after the
date of the auditor’s report but before the date the F.S. are issued, a fact becomes known
to the auditor that. had it been known to the auditor at the date of the auditor’s report,
may have caused the auditor to amend the auditor’s report, the auditor shall:
(i) Discuss the matter with management and, where appropriate, TCWG.
(ii) Determine whether the financial statements need amendment and. if so.
(iii) Inquire how management intends to address the matter in the financial statements.
 If management amends the financial statements, the auditor shall: Meeting Was
(a) Extend the audit procedures to the date of the new auditor’s report: and
(b) Provide a new auditor’s report on the amended financial statements.
New auditor’s report shall not be dated earlier than the date of approval of the amended
F.S.
 In the instant case, XYZ Company Ltd. received an amount of ` 5,800 crore on account
of incentives pertaining to year 2022-23 in the month of May 2023 i.e. after finalisation
of financial statements and signing of audit report. Board of Directors of XYZ Ltd.
amended the accounts, approved the same and requested the Ramadhan & Co. (auditor to
consider this event and issue a fresh audit report on the financial statements for the year
ended on 31.03.2023
Conclusion: After applying conditions given in SA 560. Ramadhan & Co. can issue new
audit subject to date of audit report which should not he earlier than the date of approval of
the amended financial statements.

2
Q.4. You are the auditor of PQR Ltd. which is in the business of supplying food products to
various companies operating aircrafts in domestic circle only. As per terms of agreement with
airlines, the company needs to stock various non-perishable food items for coning one month
(average holding of inventory to the tune of INR 75 Crores). Also the payment terms have
been settled and the company receives payment in 45 days after the supply of goods.
Everything was going-on well till the end of March 2021 when pandemic Covid hit the world
and everything came to a standstill. Aviation sector was hit hard and there were no flights
from April 2021 onwards.
Consequently, the business of PQR Ltd. also got severely affected and the scheduled supplies
of goods to airlines also were not made. Also, the liquidity position of airline companies got
hit and the scheduled payments were also not received on due dates.
As the auditor of PQR Ltd. what audit procedures would you perform to ensure that all
subsequent events are considered, so that financial statements for the year ended on
31.03.2021 represent true and fair view?
Ans: Audit Procedures on subsequent Events:
 SA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to
subsequent events in an audit of financial statements.
 As per SA 560 the term, Subsequent Events may be defined as the events occurring
between the dates of balance sheet and audit report and the facts that become known to
the auditor after the date of the auditor’s report.
 The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the
date of the auditor’s report that require adjustment of, or disclosure in, the financial
statements have been identified.
 The auditor’s procedures on subsequent events shall include the following:
(a) Obtaining an understanding of the procedures through which management has
identified subsequent events.
(b) Inquiring of management and, TCWG as to occurrence of subsequent events which
might affect the financial statements.
(c) Reading minutes of management & TCWG meetings that have been held after the
date of the financial statements.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
 When, as a result of the procedures performed as required the auditor identifies events
that require adjustment of, or disclosure in, the financial statements, the auditor shall
determine whether each such event is appropriately reflected in those financial
statements.

Q.5. M/s LMP Associates, Chartered Accountants while conducting the audit of PQR Ltd want to
conduct an inquiry of management and those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements. Guide M/s LMP
Associates with the matters where specific enquiry may be conducted to evaluate subsequent
events.
Ans: Specific Inquiries having effect on the financial statements:
SA 560 “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent
events in and, where appropriate, TCWG as to whether any subsequent events have occurred
which might an audit of financial statements. SA 560 requires from the auditor to conduct

3
 inquiry of management affect the financial statements. The matters where specific inquiry
may be conducted are as listed below:
1. Whether new commitments, borrowings or guarantees have been entered into.
2. Whether sales or acquisitions of assets have occurred or are planned.
3. Whether there have been increases in capital or issuance of debt instruments, such as the
issue of new shares or debentures, or an agreement to merge or liquidate has been made or
is planned.
4. Whether any assets have been appropriated by government or destroyed, for example, by
fire or flood.
5. Whether there have been any developments regarding contingencies.
6. Whether any unusual accounting adjustments have been made or are contemplated.
7. Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the
case for example, if such events call into question the validity of the going concern
assumption.
8. Whether any events have occurred that is relevant to the measurement of estimates or
provisions made in the financial statements.
9. Whether any events have occurred that are relevant to the recoverability of assets

6.2 SA 570 "Going Concern"

Q.6. CA. Somya is auditor of a company engaged in rearing of poultry birds and obtaining eggs
there from. The company has performed very well since its incorporation in 2013. Its sales
had also grown and the company had expanded its market from the native northern state of
promoters to far-flung areas in eastern parts of country.
However, since last two years, company's fortunes have nosedived. First, due to the effects of
the pandemic and then due to recurrent outbreaks of bird flu thrice in a span of two years. The
company’s sales have dipped from around 50 crores to? 10 crores. Further, a major part of its
livestock was also wiped off during bird flu. She is not optimistic about the going concern
assumption followed by management.
The management now wants to start with new batches of birds. The earlier working capital
facilities of the company granted by bank have also been restructured to support the business.
She was informed that the repayments of restructured working capital term loans are to begin
from ensues year. No fresh credit facilities have been granted by the bank. The company also
plans longer credits from animal feed suppliers.
The company plans to take additional measures to prevent the safety of live stocks, including
aggressive vaccination, preventive health check-ups, and more frequent visits of veterinary
staff.
The villagers in surrounding areas have accused the company of spreading air pollution.
The management has prepared a cash flow forecast for her examination.
Discuss the approach to be adopted by her in examining the "going concern" assumption
keeping in view above with specific reference to cash flow forecast.
Ans: Auditor's Approach in examining "Going Concern" Assumption w.r.t. Cash Flow
Forecast:
 In accordance with SA 570,"Going Concern" if events or conditions have been identified
that may cast significant doubt on the entity's ability to continue as a going SAAE to
concern, auditor shall obtain determine whether or not a material uncertainty exists

4
 related to events or conditions that may cast significant doubt on the entity's ability to
continue as a going concern by performing additional audit procedures, including
consideration of mitigating factors.
 Where the entity has prepared a cash flow forecast. and analysis of forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management s plans for future actions, it includes:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast and
(ii) Determining whether there is adequate support for the assumptions underlying the
forecast.
 In the above situation, cash flow forecast has been prepared by management. Therefore,
she should carefully evaluate assumptions underlying forecast and also reliability of data
to prepare the forecast. For example:
(a) She should verify assumption regarding fresh batch of livestock. The bankers have
not provided fresh credit facilities. How funds from the same would be arranged?
The Reasonability of assumption in cash flow forecast needs to be looked into.
(b) She needs to check loan sanction letters/agreement to verify when repayments are
beginning to see their accuracy in cash flow forecasts.
(c) The company plans to avail longer credits from animal feed suppliers. In the
downturn situation of the company, how would suppliers extend longer credits? This
is going to have effect on the cash flow forecast.
(d) Whether company has accounted for increased expenditure on preventive health
check-up, vaccination and more frequent visits of veterinary staff in cash flow
forecast.
(e) Since villagers have accused the company of spreading air pollution, how does the
company plan to deal with the same? Whether any proposed expenditure in this
regard is accounted for in the cash flow statement. She may also consider other
implications of this issue and possible effect on cash flows.

Q.7. CA Sooraj finds that key financial ratios of a company, like current ratio, debt-service
coverage ratio. Inventory turnover ratio, and trade receivables turnover ratio, are in red and
have deteriorated considerably as compared to last year. The company 1s also hot able to pay
to its creditors on time.
The company is requesting time and again to its bankers to grant additional credit facilities
but bankers are not listening.
There have been significant losses to the company due to the lack of response of the
company’s products in the market. As a result of it, many products are sold at below cost
price. There have been situations where the company is not able to pay the salaries of staff on
time.
All these negative findings have led him to conclude that the use of going concern as the basis
of accounting is not appropriate. He brings this matter to the knowledge of CF0 of the
company. What is reporting duty cast upon him in such a scenario?
The CFO informs him that the management, in turn, is ready to include in the disclosures the
inappropriateness of its use of going concern assumption of accounting.
How should it impact the auditor's opinion n case management itself discloses the
inappropriateness of its use of going concern assumption of accounting now?

5
Ans: Inappropriate Use of Going Concern Assumption of Accounting:
 If the financial statements have been prepared using the going concern basis of
accounting but, in the auditor's judgment, management's use of the going concern basis
of accounting in the financial statements is inappropriate, the auditor shall express
adverse opinion.
 The requirement for an auditor to express an adverse opinion applies regardless of
whether or not the financial statements include disclosure of the inappropriateness of
management's use of the going concern basis of accounting.
Conclusion: Even if management discloses that its use of going concern assumption of.
Accounting is inappropriate; it would have no impact on auditor's opinion. He would need to
express adverse opinion.

Q.8. Toddle Limited had definite plan of its business being closed within a short period From the
close of The accounting year ended on 31st March. 2023. The financial statements for the
year ended on 31/03/2023 had been prepared on the same has is as it had been in earlier
periods with an Additional note that the business of the company shall cease in near future
and the assets shall he disposed of in accordance with a plan of disposal as decided by the
management. The statutory auditors of the company indicated this aspect in Key Audit
Matters only by a reference as to a possible cessation of business and making of adjustments,
if any, thereto to be made t the time of cessation only. Comment on the reporting by the
statutory auditor as above.
OR
TBR Limited has plan of its business being closed due to huge loss incurred due to the recent
outbreak of global pandemic, within a short period from the close of the accounting year
ended on 31st March, 2023. The Financial Statements for the said year have been prepared on
the same basis as in earlier periods with an additional note that the business of the Company
shall cease in near future and the assets shall be disposed off in accordance with a plan of
disposal as decided by the Management. The Statutory Auditors of the Company indicate this
aspect in Key Audit Matters only by a reference as to a possible cessation of business and
making of adjustments, if any, to be made at the time of cessation only. Comment on the
reporting by the Statutory Auditor as above.
Ans: Reporting of cessation of business as a Key Audit Matter:
 As per SA 570 "Going Concern", management intentions to liquidate the entity or to
cease operations are one of the events or conditions that may cast significant doubt on the
entity's ability to continue as going concern. As per SA 570, if events or conditions have
been identified that may cast significant doubt on the entity's ability to continue as a
going concern but, based on the audit evidence obtained, the auditor concludes that no
material uncertainty exists, the auditor Shall evaluate whether, in view of the
requirements of the applicable FRF, the financial statement provides adequate disclosures
about these events or conditions.
 Further, as per SA 701 "Communicating Key Audit Matters in the Independent Auditor's
Report” when matters relating to going concern may be determined to be key audit
matters, and explains that a material uncertainty related to events or conditions that may
cast significant doubt on the entity's ability to continue as a going concern is, by its
nature, a Key Audit Matter. SA 701 also puts emphasis on auditor's responsibility to
communicate Key Audit Matters in the auditor's report.

6
  As per the facts given in the case, intention of TBR Limited has a plan of its business
being closed as huge loss is incurred due to the recent outbreak of global pandemic,
within short period from 31st March 2023. However, financial statements for the year
ended 31.03.2023 have been prepared on the same basis as it had been in earlier periods
with an additional note. Thus, management's intention to liquidate the entity or to cease
operations is one of the events or conditions that may cast significant doubt on the
entity's ability to continue as going concern is a Key Audit Matter.
Conclusion: Auditor is required to Communicate the Key Audit Matters in accordance with
SA 570 as stated above. Simple reference as to a possible cessation of business and making of
adjustments, if any, he made at the time of cessation only by the auditor in his report is not
sufficient.
Note: It is assumed that financial statements of current period as well as of earlier
period are Not prepared on going concern basis of accounting.

Q.9. M/s Airlift Ltd, carrying on the business of Passenger Transportation by air s running into
continuous financial losses as well as reduction in Sales due to stiff competition and frequent
break down of its own aircrafts. The Financial Statements for the year ended on 31.03.2023
are to be now finalized. The Management is quite uncertain as to its ability to continue in near
future and has informed the Auditors that having seized of this matter, it had constituted a
committee to study this aspect and to give suggestions for recovery, if any, from this bad
situation. Till the study is Completed, according to the Management, the issue involves
uncertainty as to its ability to continue its business and it informs the Auditor that the fact of
uncertainty clamping on the “Going Concern” would suitably be disclosed in notes to
accounts. State the reporting requirement if any, in the Independent Auditors report in respect
of this matter.
Ans: Reporting Requirements in the Independent Auditor's report in respect of Going
Concern:
 As per SA 570 "Going Concern", if the auditor concludes that the use of the going
concern assumption is appropriate in the circumstances but a material uncertainty exists,
the auditor shall determine whether the financial statements:
(a) Adequately describe the principal events that may cast significant doubt on the
entity's ability to continue as a going concern and management's plans to deal with
these events or conditions; and
(b) Disclose clearly that there is a material uncertainty related to going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
 If adequate disclosure is made in the financial statements, the auditor shall express an
unmodified opinion and the auditor's report shall include a separate section under the
heading "Material Uncertainty Related to Going Concern" to:
(i) Draw attention to the note in the financial statements that discloses the matters set
out above; and
(ii) State that these events or conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity's ability to continue as a going concern and
that the auditor's opinion is not modified in respect of the matter.
 In the instant case, the auditor should disclose about the material uncertainty and express
an unmodified opinion and in his audit report shall include a separate section under the

7
 heading "Material Uncertainty Related to Going Concern" to draw attention to the note in
the financial statements that discloses the matters set out above; and state that these
events or conditions indicate that a material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going concern and that the auditors opinion
is not modified in respect of the matter.

Q.10. AQP Limited is one of the prominent players in the chemicals industry. The company is a
public company domiciled in India and listed on BSE and NSE. The Company was facing
extreme liquidity constraints and there were multiple indicators that casted doubt over the
company's ability to continue as a going concern.
The Company was led into insolvency proceedings by consortium of banks led by PNB and
the NCLT ordered the commencement of corporate insolvency process against the Company
on 31st August 2022. The company invited prospective lenders, investors and others to
submit their resolution plans to the Resolution Professional (RP) latest by 1st January 2023.
The RP reviewed the resolution plans and ensured conformity with Insolvency and
Bankruptcy Code 2016. The compliant plans were presented to Committee on Creditors
(CoC) on 2nd February 2023 and the resolution plan submitted by PQR Ltd. was evaluated as
highest evaluated Compliant Resolution Plan. CoC of AQP Ltd approved the Resolution Plan
submitted by PQR Ltd. on 2nd March 2023. The approval of NCLT was finally obtained on
4th May 2023.
PQR Ltd submitted detailed plans and commitments as part of the resolution plan including
clearance of all outstanding debts which were leading to negative cash flows
Please suggest how would you deal with this situation as the auditors of AQP Ltd.
Ans: Evaluation of Appropriateness of Going Concern Basis of Accounting:
 As per SA 570 Going Concern, if events or conditions have been identified that may cast
significant doubt on the entity's ability to continue as a going concern, the auditor shall
obtain sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists related to events or conditions that may cast significant doubt on the
entity's ability to continue as a going concern (herein after referred to as "material
uncertainty") through performing additional audit procedures, including consideration of
mitigating factors.
 Additional procedures shall include:
(i) Where management has not yet performed an assessment of the entity's ability to
continue as a going concern, requesting management to make its assessment.
(ii) Evaluating management's plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether management's plans are feasible in the circumstances.
(iii) Where the entity has prepared a cash flow forecast evaluate the reliability of the
underlying data generated to prepare the forecast and determine whether there is
adequate support for the assumptions underlying the forecast.
(iv) Considering whether any additional facts or information have become available
since the date on which management made its assessment.
(v) Requesting WRs from management and, where appropriate, those charged with
governance, regarding their plans for future actions and the feasibility of these plans.
 The auditor shall evaluate whether sufficient appropriate audit evidence has been
obtained regarding and shall conclude on, the appropriateness of management's use of the

8
 going concern basis of accounting in the preparation of the financial statements.
 If events or conditions have been identified that may cast significant doubt on the entity's
ability to continue as a going concern but, based on the audit evidence obtained the
auditor concludes that no material uncertainty exists, the auditor shall evaluate whether,
in view of the requirements of the applicable financial reporting framework, the financial
statements provide adequate disclosures about these events or conditions.
 In the instant case, the approval of the resolution plan is a significant mitigating factor to
counter the going concern issues of AQP Ltd. PQR Ltd has submitted a detailed plan and
commitments that has been given as part of the resolution plan which includes clearance
of all outstanding debts which were leading to negative cash flows.
Conclusion: Events and conditions are mitigated effectively and there is no material
uncertainty in relation to the ability of the company to continue as a going Concern.

Q.11. Star Ltd. is a power generating company which uses coal as raw material for its power
generating plant The Company has been allotted coal blocks in the state of Jharkhand and
Odisha. During the FY 2022-23, a scam regarding allotment of coal blocks was unveiled
leading to a ban on the allotment of coal blocks to various companies including Star Ltd. This
happened in the month of Dec. 2022 and as such entire power generation process of Star Ltd,
came to a halt in that month. As a result of such ban, and the resultant stoppage of the
production process, many key managerial personnel of the company left the Company. There
were delays in the payment of wages and salaries and the banks from whom the Company had
taken funds for project financing also decided not to extend further finance or to fund further
working capital requirements of the Company.
Further, when discussed with the management, the statutory auditor understood that the
Company had no action plan to mitigate such circumstances. Further, all such circumstances
were not reflected the financial statements of Star Ltd. What course of action should the
statutory auditor of the Company consider in such situation?.
Ans: Evaluation of appropriateness of Going Concern Basis of Accounting:
 As per SA 570- "Going Concern" auditor is required to obtain SAAE about
appropriateness of management's use of going concern basis of accounting in preparation
of the F.S. and to conclude whether a material uncertainty exists about the entity's ability
to continue as a going concern.
 When use of going concern basis of accounting is inappropriate, auditor shall express an
adverse opinion.
 In this case. following circumstances indicate inability of Star Ltd. to continue as a going
concern:
(a) Ban on the allotment of coal blocks.
(b) Halt in power generation
(c) Key Managerial Personnel leaving the Company.
(d) Banks decided not to extend further finance and not to fund the working capital
(e) Requirements of the Company.
(f) Non-availability of sound action plan to mitigate such circumstances.
Conclusion: Considering factors as stated above, it is clear that going concern basis is
inappropriate and such circumstances are not reflected in F.S. As such, the statutory auditor
of Star Ltd. should:
(i) Express an adverse opinion in accordance with SA 705: and

9
 (ii) In the Basis of Opinion paragraph of the auditor's report, the statutory auditor should
state that a material uncertainty exists that may cast significant doubt on the entity's
ability to continue as a going concern & that the F.S. inadequately disclose this matter.
Auditor is also required to report as per clause (xix) of CARO 2020 that on the basis of the
financial ratios, ageing and expected dates of realisation of financial assets and payment of
financial liabilities, other information accompanying F.S., auditor's knowledge of HOD and
management plans, whether auditor is of the opinion that no material uncertainty exists as on
the date of the audit report that company is capable of meeting its liabilities existing at the
date of balance sheet as & when they fail due within a period of one year from the balance
sheet date.

Q.12. TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj &
Associates are the statutory auditors of the company for the FY 2022-23. During the course of
audit, CA Saroj noticed that the company had a major customer, namely, Korean Mart from
South Korea. Owing to an outbreak of war and subsequent destruction leading to government
ban on import and export in South Korea, the demand from Korean Mart for the products of
TUV Ltd. ended for an unforeseeable time period. When discussed with the management, CA
Saroj was told that the company is in the process of identifying new customers for their
products. CA Saroj understands that though the use of going concern assumption is
appropriate but a material uncertainty exists with respect to the identification of new
customers. This fact is duly reflected in the financial statements of TUV Ltd. for the FY
2022-23. How should CA Saroj deal with this matter in the auditor's report for the FY 2022-
23? [MTP-Nov. 21; April 23]
Ans: Evaluating appropriateness of going concern assumption:
 SA 570 "Going Concern" requires that the auditor shall consider whether there are events
or conditions that may cast significant doubt on the entity's ability to continue as a going
concern. Loss of a major market or a key customer is one of the operating indicators that
may cast significant doubt on the company's ability to continue as a going concern.
 In the present case, TUV Ltd. has a key customer in South Korea from which the demand
for its products has ended on account of outbreak of war, subsequent destruction and
government ban on import and export in South Korea. Further, the company has not yet
identified new customers and is in the process of doing the same. As such, the
identification of new customer is a material uncertainty that cast a significant doubt on
the company's ability to continue as a going concern. However, this matter is duly
disclosed by the management of TUV Ltd. in the financial statements for the year ended
on 31.03.2023.
Conclusion: Considering that the going concern assumption is appropriate but a material
uncertainty exists with respect to identification of new customer, CA Saroj should:
(1) Express an unmodified opinion and
(2) include in his audit report, a separate section under the heading "Material Uncertainty
Related to Going Concern" to:
(i) Draw attention to the note in the financial statements that discloses the matters and
(ii) State that these events or conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity's ability to continue as a going concern and
that the auditor's opinion is not modified in respect of the matter.

10
Q.13. Abhinandan Limited a chemical manufacturing company, having its factory located at
Nanded Village, for the year 2022-23 appointed Subahu & Co. as their statutory auditors.
During the course of the audit, Subahu & Co. Identified that Abhinandan Limited received a
show cause notice from National Green Tribunal based on the investigation performed by the
regional forest department for violating environmental laws. Upon gathering a further
understanding of the said matter, it was identified that Abhinandan Limited was dumping
toxic solid waste, without treating it, on the nearby grounds, and because of this, the nearby
water bodies were getting polluted. Based on the preliminary investigation performed by the
regional forest department under the directions of the National Green Tribunal, it was
identified that these practices were carried out since 2009 and a lot of damage has been done
to the environment by Abhinandan Limited. A show cause notice was already issued to
Abhinandan Limited by the National Green Tribunal for levying the penalty of an amount of
₹ 500 crore. The unaudited profit for the financial year 2022-23 of Abhinandan Limited was
35 crore and the unaudited turnover was 100 crore. Upon inquiry it was identified that
Abhinandan Limited has disclosed this matter in the financial statements by way of footnote,
the extract of which is provided below:
"The company has received a show cause notice from the National Green Tribunal for some
potential violation of environmental laws and the company's legal department has assessed
and found that the judgment would be in favour of the company. Accordingly, no provision
has been created for such notices."
In the light of the above scenario kindly provide what should be the appropriate option for the
statutory auditor of the company to report this matter. [RTP-Nov. 22]
Ans: Evaluating appropriateness of going concern assumption:
 As per SA 250, "Consideration of Laws and Regulations in an Audit of Financial
Statements", the auditor is required to obtain an understanding and need to evaluate the
impact of other laws and regulations that do not have a direct effect on the determination
of the amounts and disclosures in the financial statements, but compliance with which
may be fundamental to the operating aspects of the business, to an entity's ability to
continue its business, or to avoid material penalties (for example, compliance with the
terms of an operating license, compliance with regulatory solvency requirements, or
compliance with environmental regulations); non-compliance with such laws and
regulations may therefore have a material effect on the financial statements.
 The auditor shall perform the following audit procedures to help identify instances of
non- compliance with other laws and regulations that may have a material effect on the
financial statements:
(a) Inquiring of management and, where appropriate, TCWG, as to whether the entity is
in compliance with such laws and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities.
 As per Sec. 143(3)(1) of the Companies Act, 2013 read with Rule 11 of Companies
(Audit and Auditor's) Rules, 2014, the auditor is required to report whether the company
has disclosed the Impact, if any, of pending litigations on its financial position in its
financial statement.
 As per SA 570, "Going Concern", if the auditor concludes that management's use of the
going concern basis of accounting is appropriate in the circumstances but a material
uncertainty exists, the auditor shall determine whether the financial statements:

11
 (i) Adequately disclose the principal events or conditions that may cast significant doubt
on the entity's ability to continue as a going concern and management's plans to deal
with these events or conditions; and
(ii) Disclose clearly that there is material uncertainty related to events or conditions that
may cast significant doubt on the entity's ability to continue as a going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
 If adequate disclosure about the material uncertainty is not made in the financial
statements, the auditor shall
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with
SA 705; and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor's report, state that
a material uncertainty exists that may cast significant doubt on the entity's ability to
continue as a going concern and that the financial statements do not adequately
disclose this matter.
 In the current scenario, Abhinandan Limited has received a show cause notice from the
National Green Tribunal of an amount which is more than the net profit and the turnover
of the company for the year. In the event of an unfavorable order for Abhinandan
Limited, there will be an impact on Abhinandan Limited's ability to continue as a going
concern. As a result, appropriate disclosure should be provided by management for such
events which cast significant doubt on the entity's ability to continue as a going concern.
Conclusion: As no appropriate disclosure has been provided by Abhinandan Limited for
show cause notice, Subahu & Co. should report this matter in their audit report under "Going
Concern Para" as per SA 570 and under clause (1) of Sec. 143(3) of the Companies Act.
2013. Also, the auditor is required to issue an adverse opinion as per SA 705, "Modifications
to the Opinion in the Independent Auditor's Report"

Q.14. Joy Ltd. is an entertainment company which runs a circus and travels around the country to
entertain the masses. The circus began losing its popularity over the past few years and
attendance has reportedly dropped by as much as 75% in the current financial year Animal
rights activists continuously targeted the circus for its use of animal creatures like elephants in
the show. The CEO noted that the audience seemed to be abandoning the circus due to their
expanding entertainment options. The high cost of moving the show from city to city
eventually made the business model untenable. As a result, many key managerial personnel of
the company left the company, there were delays in the payment of wages and salaries, and
the bank from whom the company had taken funds also decided not to extend further finance
or to fund further working capital requirements of the company.
When discussed with the management, the statutory auditor understood that the company had
no action plan to mitigate such circumstances (Use of going concern assumption is
inappropriate). Further, all such circumstances were not reflected in the financial statements
of joy Ltd. What course of action should the statutory auditor of the company take in the
auditor's report in such situation?
Ans: Evaluation of appropriateness of Going Concern Basis of Accounting:
 SA 570 "Going Concern" deals with the auditor's responsibilities in the audit of financial
statements relating to going concern and the implications for the auditor's report.
 The auditor's responsibilities are to obtain sufficient appropriate audit evidence

12
 regarding, and conclude on, the appropriateness of management's use of the going
concern basis of accounting in the preparation of the financial statements, and to
conclude, based on the audit evidence obtained, whether a material uncertainty exists
about the entity's ability to continue as a going concern.
 When the use of going concern basis of accounting is inappropriate i.e., if the financial
statements have been prepared using the going concern basis of accounting but, in the
auditor's judgment, management's use of the going concern basis of accounting in the
preparation of the financial statements is inappropriate, the auditor shall express an
adverse opinion
 Also, when adequate disclosure of a material uncertainty is not made in the financial
statements the auditor shall express a qualified opinion or adverse opinion, as
appropriate, in accordance with SA 705; and in the Basis for Qualified (Adverse)
Opinion section of the auditor's report, state that a material uncertainty exists that may
cast significant doubt on the entity's ability to continue as a going concern and that the
financial statements do not adequately disclose this matter.
 In the present case, the following circumstances indicate the inability of Joy Ltd. to
continue as a going concern
(a) Expanding entertainment options of the audience
(b) High cost of moving the show
(c) Key Managerial Personnel leaving the Company.
(d) Banks decided not to extend further finance and not to fund the working capital
requirements of the Company.
(e) Non availability of sound action plan to mitigate such circumstances.
Conclusion: Considering the above factors it is clear that the going concern basis is
inappropriate for the Company. Further, such circumstances are not reflected in the financial
statements of the Company. As such, the statutory auditor of Joy Ltd. should:
(1) Express an adverse opinion in accordance with SA 705; and
(2) In the Basis of Opinion paragraph of the auditor's report, the statutory auditor should
state that a material uncertainty exists that may cast significant doubt on the entity's
ability to continue as a going concern and that the financial statements do not adequately
disclose this matter.

6.3 – SA 580 “Written Representations”

Q.15. Following is a written representation given by RES Limited to its statutory auditors Le. M/s
CTK & Associates for audit of financial year 2022-2i The audit was completed and report
dated 31.723 was issued.
Point out, if there is any, anomaly in written representation reproduced below. 15th April,
2023
To CTK & Associates
Chartered Accountants
Dear Sir,
This representation letter is provided in connection with your audit of the financial statements
of RES Limited for the year ended March 31, 2023 for the purpose of expressing an opinion
as to whether the financial statements give a true and fair view in accordance with the
applicable accounting standards in India.
We confirm that (to the best of our knowledge and belief, having made such inquiries as we

13
 considered necessary for the purpose of appropriately informing ourselves):
Financial Statements
(a) We have fulfilled our responsibilities, as set out in the terms of the audit engagement
dated 17th August 2022 for the preparation of the financial statements in accordance with
financial reporting Standards, in particular, the financial statements give a true and fair
view in accordance with the applicable accounting standards in India.
(b) Significant assumptions used by us in making accounting estimates, including those
measured at fair value, are reasonable.
(c) Related party relationships and transactions have been appropriately accounted for and
disclosed in accordance with the requirements of applicable ASs in India. (SA 550).
(d) All events subsequent to the date of the F.S. and for which applicable accounting
standards in India require adjustment or disclosure have been adjusted or disclosed. (SA
560)
(e) The effects of uncorrected misstatements are immaterial, both individually and in the
aggregate, to the financial statements as a whole. A list of the uncorrected misstatements
is attached to the representation letter. (SA 450)
Information provided
(a) We have provided you with:
 Access to all information of which we are aware that is relevant to the preparation of
the financial statements such as records, documentation and other matters;
 Additional information that you have requested from us for the purpose of the audit;
and
 Unrestricted access to persons within the entity from whom you determined it
necessary to obtain audit evidence.
(b) All transactions have been recorded in the accounting records and are reflected in the F.S.
(c) We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
(d) We have disclosed to you all information in relation to fraud or suspected fraud that we
are aware of and that affects the entity and involves:
 Management;
 Employees who have significant roles in internal control; or
 Others where the fraud could have a material effect on the financial statements.
(e) We have disclosed to you all information in relation to allegations of fraud, or suspected
fraud, affecting the entity's financial statements communicated by employees, former
employees, analysts, regulators or others.
(f) We have disclosed to you all known instances of non-compliance or suspected
noncompliance with laws and regulations whose effects should be considered when
preparing F.S.
(g) We have disclosed to you the identity of the entity's related parties and all the related
party relationships and transactions of which we are aware. (SA 550)
Chief Financial Officer
Ans: Anomalies as to Date of Written Representation:
 The date of the written representations shall be as near as practicable to, but not after, the
date of the auditor's report on the financial statements. As the auditor is concerned with
events occurring up to the date of the auditor's report that may require adjustment to or
disclosure in the financial statements, the written representations are dated as near as

14
 practicable to, but not after, the date of the auditor's report on the financial statements.
 In the given situation, written representation is dated 15th April 2023. The audit report is
dated 31st July 2023. There is a considerable lag between date of written representations
and date of audit report.
 It could signify that all subsequent events after date of financial statements requiring
adjustments or disclosure may not have been adjusted or disclosed in the financial
statements by management.
Conclusion: As audit report is dated 31st July, 2023, it reflects that auditor has considered
subsequent events occurring between date of financial statements and date of auditor's
report. However, written representations pertain to 15th April 2023.

Q.16. In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a special audit
conducted at the instance of the management on a possible suspicion of a fraud and requested
for a copy of the report to enable him to report on the fraud aspects. Despite many reminders
'it was not provided. In absence of the special audit report, Mr. 'N' insisted that he be provided
with at /east a written representation in respect of fraud on/by the company. For this request
also the management remained silent. Please guide Mr. 'N'
Ans: Auditors Responsibilities Relating to Fraud:
 As per SA 240, "The Auditor's Responsibilities relating to Fraud in an Audit of Financial
Statements", the primary responsibility for the prevention and detection of fraud rests
with both TCWG of the entity and management. In addition, an auditor conducting an
audit in accordance with SAs is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement, whether
caused by fraud or error.
 As per SA 580, "Written Representations", if management does not provide the requested
written representations, the auditor shall discuss the matter with management; re-evaluate
the integrity of management and evaluate the effect that this may have on the reliability
of representations (oral or written) and audit evidence in general; and take appropriate
actions, including determining the possible effect on the opinion in the auditor's report.
 The auditor shall disclaim an opinion on the financial statements if the auditor concludes
that there is sufficient doubt about the integrity of management such that the written
representations are not reliable; or management does not provide the written
representations.
 In the instant case, in the course of audit of K Ltd., its auditor Mr. N observed that there
was a special audit conducted at the instance of the management on a possible suspicion
of fraud. Therefore, the auditor requested for special audit report, which was not
provided by the management despite of many reminders. Mr. N also insisted for written
representation in respect of fraud on/by the company. For this request also, management
remained silent.
 Section 143(12) of Companies Act, 2013 requires that if an auditor of a company in the
course of the performance of his duties as auditor, has reason to believe that an offence of
fraud involving such amount or amounts as may be prescribed, is being or has been
committed in the company by its officers or employees, the auditor shall report the matter
to the Central Government within such time and in such manner as may be prescribed.
For this purpose, Rule 13 prescribes the amount of t 1 Cr. or more.
 Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud

15
 by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year; If yes, the nature and the amount involved is to be
indicated.
Conclusion: Auditor is required to state the facts in his report and he should also disclaim an
opinion on the financial statements. In exceptional circumstances, he may also consider
whether it is appropriate to withdraw from engagement.

Q.17. PRSH & Co. is the statutory auditor of Make My Journey Ltd. The company is in the
business of tours and travels. Annual turnover of the company is INR 2000 Crores and profits
are INR 190 Crores. During the planning meeting of the management and the auditors, it was
discussed that the management needs to provide written representation letter to the auditors
for the preparation of the financial statements and for the completeness of the information
provided to the auditor. At the time of closure of the audit, there has been some confusion
about the requirements of the written representation letter. Management argued that
representation need not be written, it can also be verbal which has been provided to the audit
team during the course of their audit. Auditors have completed their documentation and hence
in a way, representation based on verbal discussions with the auditors has also got
documented. Auditors explained that this is mandatory to obtain written representation in
accordance with the requirements of SA 580. However, still some confusion remains
regarding the date and period covered by the written representation. You are required to
advice about the date of and period covered by written representation in view of SA 580.
Ans: Date of and period covered by written representation:
SA 580 "Written Representations" provides the following:
 The date of the written representations shall be as near as practicable to the date of the
auditor's report. However, it should not be after the date of auditor's report. The written
representations shall be for all financial statements and period(s) referred to in the
auditor's report.
 In some circumstances it may be appropriate for the auditor to obtain a written
representation about a specific assertion in the financial statements during the course of
the audit. Where this is the case, it may be necessary to request an updated written
representation.
 WRs are for all periods referred to in the auditor's report because management needs to
reaffirm that the written representations it previously made with respect to the prior
periods remain appropriate. The auditor and management may agree to a form of written
representation that updates written representations relating to the prior periods by
addressing whether there are any changes to such written representations and, if so, what
they are.
 Situations may arise where current management was not present during all periods
referred to in the auditor's report. Such persons may assert that they are not in a position
to provide some or all of the written representations because they were not in place
during the period. This fact, however, does not diminish such persons' responsibilities for
the financial statements as a whole. Accordingly, the requirement for the auditor to
request from them written representations that cover the whole of the relevant period(s)
still applies.

16
Q.18. Comment on the following: Statutory auditor of O Ltd requested the management for a
written representation in respect of obsolescence of inventory and warranty obligations
recognized by the company in its financial statements. The management denied the
representation on the ground that during the course of audit, all the required procedures were
performed by the auditor and after obtaining sufficient appropriate audit evidence, auditor has
issued a clean report. Please comment.
Ans: Written Representations as to Accounting Estimates:
 SA 540 "Auditing Accounting Estimates, Including Fair Value Accounting Estimates and
Related Disclosures" requires auditor to obtain WRs from the management and, where
appropriate, TCWG whether they believe significant assumptions used in making
accounting estimates are reasonable.
 Depending on nature, materiality and extent of estimation uncertainty, WRs about
accounting estimates recognised or disclosed in the financial statements may include
representations:
(a) About the appropriateness of the measurement processes, including related
assumptions and models, used by management in determining accounting estimates
in the context of the applicable FRF, and the consistency in application of the
processes.
(b) That the assumptions appropriately reflect management's intent and ability to carry
out specific courses of action on behalf of the entity, where relevant to the
accounting estimates and disclosures.
(c) That disclosure related to accounting estimates are complete and appropriate under
the applicable FRF.
(d) That no subsequent event requires adjustment to the accounting estimates and
disclosures included in the financial statements.
 For those accounting estimates not recognised or disclosed in the financial statements,
written representations may also include representations about:
(a) The appropriateness of the basis used by management for determining that the
recognition or disclosure criteria of the applicable financial reporting framework
have not been met.
(b) The appropriateness of the basis used by management to overcome the presumption
relating to the use of fair value set forth under the entity's applicable financial
reporting framework, for those accounting estimates not measured or disclosed at
fair value.
Conclusion: Management's contention on the ground that during the course of audit, all the
required procedures were performed by the auditor and after obtaining sufficient appropriate
audit evidence, auditor has issued a clean report, for not providing written representation is
not correct. The management should provide written representations to the auditor.
Duty of the auditor if management refuses to provide written representations:
As per SA 580 "Written Representations", if the management does not provide one or more of
the requested written representations, the auditor shall:
(i) Discuss the matter with management,
(ii) Re-evaluate the Integrity of the management and evaluate the effect that this may have
on the reliability of representations (oral or written) and audit evidence in general, and
(iii) Take appropriate actions, including determining the possible effect on the opinion in the
auditor's report.

17
 (iv) Disclaim an opinion on the financial statements in accordance with SA 705
"Modifications to the Opinion in the Independent Auditor's Report".

PART- II COMPREHENSIVE CASE STUDY

Infinity Hospitality Private Limited was established in 1996 and was in the business of running hotels
in tourist destinations in state of Kerala. It took lease properties on long-term leases ranging from 10
to 12 years, most with a lock-in of a whole term. The terms did not cover the force majeure clause.
The company was family-owned business and had created a good reputation as value for a money
budget hotel. Most of the time hotels clocked 60 to 75% occupancy rate and during the festive
season/ vacations, hotel business clocked 100% Occupancy.
The capital structure of the company was debt oriented and over-leveraged.
Primary working capital was blocked in maintaining and up keeping the leased properties, running
the restaurant, leases, food and beverages, salary, Director's remuneration etc.
The owners looked at the business as a cash cow and did not plough back the funds to expand the
business but were content with the decent profits the hotels were generating.
As the properties were leased and not owned, most of the cash flow generated from operations was
used in servicing the property and huge loans from financial institutions. What was left was
withdrawn as Directors' remuneration and dividend.
Everything was going on smoothly. However, there were flash floods in Kerala due to unprecedented
rains. There were landslides and roads were blocked. The entire tourist season was washed away due
to infrastructural challenges. Accessibility to resorts and hotels was badly hindered. Logistics support
took time to reach in far flung areas. Visit to the "The God's own country" was last on the mind of
tourists. The company was hardly trying to get back to some semblance of normalcy when pandemic
struck. It was double whammy for the company.
The impact on travel, tourism and hospitality business was very severe. The management of Infinity
Hospitality Private Limited believed that bad days would end soon and the business would be back to
normal. They also were optimistic about the government coming up with support for the industry and
were hopeful of negotiating with lessors and Financial institutions for relief. They decided on
humanitarian grounds not to terminate the employees and continued paying them a regular salary,
maybe deferring 25% to be paid after one year The immediate fallout was on the top line as suddenly,
the business stopped.
The auditors, M/s XYZ and Associates, were conducting the audit of the company and were
grappling with the situation and are seeking your guidance for the course of action they need to
follow.
Theoretical Questions:
Q.1. What additional audit procedures must the auditor undertake as per requirements of SA 570
based on the facts given in the case?

Q.2. According to your judgment, what risk assessment procedures should the auditor consider for
arriving at a conclusion based on the management assertion of the entity being Going
Concern?

Q.3. What should be approach of the auditor if the management agrees that the material
uncertainly exists, but the entity is a Going Concern? Also discuss reporting requirements.

Q.4. What if the auditor believes, on the basis of his additional audit procedures conducted to

18
 conclude that the entity is not a Going Concern, but the management is not accepting the
same? What course of action the auditor needs to undertake?

Q.5. What kind of written representation does the auditor need to obtain in case of the scenario
covered in Q.3 above?

Multiple Choice Questions

Q.1. Which of the following is not a financial event/ condition as per SA 570 Going Concern?
(a) Change from credit to cash on delivery model with suppliers
(b) Arrears or discontinuance of dividend
(c) Opening of a new chain of hotels by renowned competitor near the entity's area
(d) Adverse key financial ratios

Q.2. Please choose the mitigating measure as the management is unable to pay lease rentals.
(a) Cancel the lease
(b) Restructure the lease agreement a ml negotiate for deferment and relief
(c) Terminate the employees and pay the lessor.
(d) All the above

Q.3. Which one of the following is not a responsibility of the auditor relating to communicating
events or conditions identified that may cast significant doubt on the entity's Going Concern
assertion?
(a) Perform additional audit procedures to identify events/ conditions beyond 12 months
from the date of financial statements
(b) Whether the events constitute a material uncertainty
(c) The adequacy of related discloses in the financial statements
(d) The implications for the auditor's report

Q.4. Written Representation need to be mandatorily obtained from:

(a) Audit Committee
(b) Client relationship Managers
(c) Company Secretary
(d) CFO

Q.5. Which of the following is not main pillar of written representations?

(a) The management responsibility for preparation of financial statement
(b) Assertion related to completeness
(c) Assertion related to access to data and information
(d) Written representation provides sufficient appropriate audit evidence

Part A - Theoretical Questions

1. Additional Procedures to be performed by Auditor:
In the given situation, events and conditions have been identified which cast significant doubt
on the entity’s ability to continue as a Going Concern, the auditor needs to obtain sufficient
appropriate audit evidence to determine whether or not material uncertainty and gather
evidence including of mitigating factors. It can be done by performing following additional
procedures:
(A) Analysing and discussing cash flow, profit and other relevant forecast with management.

19
 (B) Analysing and discussing the entity's latest available interim financial statement.
(C) Reading the terms of loan agreements and determining whether any have been breached.
(D) Reading minutes of the meetings of shareholders, TCWG and relevant committees for
reference to financing difficulties.
(E) Inquiring of the entity's legal counsel regarding the existence of litigation and claims and
the reasonableness of management's assessments of their outcome and the estimate of
their financial implications.
(F) Confirming the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third party and assessing the financial ability
of such parties to provide additional funds.
(G) Performing audit procedures regarding subsequent events to identify those that either
mitigate or otherwise affect the entity's ability to continue as a going concern.
(H) Confirming the existence, terms and adequacy of borrowing facilities.
(I) Where management has not yet performed an assessment of the entity's ability to
continue as a going concern, requesting management to make its assessment.
(J) Evaluating management's plans for further actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether the management's plans are feasible in the circumstances.
(K) Evaluating management's plans for future actions may include inquiries of management
as to its plan for future action, including, for example, its plan to liquidate assets, borrow
money or restructure debt, reduce or delay expenditures, or increase capital.
(L) Considering whether any additional facts or information have become available since the
date on which management made it assessment.
(M) Requesting written representation from management and, where appropriate, TCWG,
regarding their plans for future actions and the feasibility of these plans.

2. Risk Assessment Procedures to be performed:

 When performing risk assessment procedures as required by SA-315, the auditor shall
consider whether events or conditions exist that may cast significant doubt on the entity's
ability to continue the going concern. In so doing, the auditor shall consider whether
management has already performed a preliminary assessment of the entity's ability to
continue as a going concern.
 The auditor shall discuss the assessment with management and determine whether
management has identified events and conditions that, individually or collectively, cast
significant doubt on the entity's ability to continue as a going concern and if so,
management's plan to address them.
 The auditor shall specifically draw attention of Management on following events or
condition and get the response on how they plan to address them.
 The company is debt heavy and over leveraged. The leased properties are having
considerable lock-in period with absence of force majeure clause. There are no
contingency reserves available with company. All these factors shall be taken into
account while performing risk assessment procedures.

3. Auditor's approach in case of existence of Material Uncertainties :

 If the auditor concludes that the management's use of going concern basis of accounting
is appropriate in the circumstances but a material uncertainty exists, auditors shall
determine whether the FS.:

20
 (a) Adequately disclose the principal events or conditions that make a significant doubt
on the entity's ability to continue as a going concern and management's plan to deal
with these events or conditions, and
(b) Disclose clearly that there is a material uncertainty related to events or conditions
that may cast significant doubt on entity's ability to continue as a going concern and
therefore, that it may be unable to realize its assets, and discharge its liabilities in the
normal course of business.
(c) The disclosures may include:
(i) Management's evaluation of the significance of the events or conditions relating
to the entity's ability to meet its obligations;
(ii) Significant judgements made by management as a part of its assessment of the
entity's ability to continue as a going concern;
(iii) Disclosures about the magnitude of the potential impact of the principal events
or conditions, and the likelihood and timing of the occurrence;
 Auditor shall express and unmodified opinion and the auditor's reports shall include a
separate section under the heading "Material Uncertainty Related to Going Concern" to:
 Draw attention to the note in the financial statement that discloses the events or
conditions and
 State that these events are conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity's ability to continue as a going concern and
the auditor's opinion is not modified in respect of the matter and how the matter was
addressed in the audit

4. Reporting Requirements in case of Inappropriate use of Going Concern:

If management has prepared financial statements using the Going Concern assertion to which
auditor differs as according to his judgement, the Going Concern assertion by the
management is not appropriate, then the auditor is required to express an adverse opinion.

5. Written Representations :
The auditor needs to obtain written representation from management and where appropriate,
those charged with governance, regarding their plans for future action and the feasibility of
these plans.

Part B - Multiple Choice Questions

1. (c) Opening of a new chain of hotels by renowned competitor near the entity's are

2. (b) Restructure the lease agreement and negotiate for deferment and relief

3. (a) Perform additional audit procedures to identify events/ conditions beyond 12 months
from the date of financial statement

4. (d) CFO

5. (d) Written representation provides sufficient appropriate audit evidence

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 PART- III MULTIPLE CHOICE QUESTIONS

1. When the management amends the financial statements, which were already issued, what
audit procedures is the auditor required to perform?
(a) Carry out the audit procedures necessary to gain sufficient appropriate audit evidence
over the event.
(b) Extend the audit procedures to the date of the new auditors report.
(c) Provide a new auditors report on the amended financial statements. The new auditors
report shall not be dated earlier than the date of approval of the amended financial
statements.
(d) All of above

2. If the use of going concern basis of accounting in the preparation of financial statements
considered appropriate but a material uncertainty exists and adequate disclosure about the
material uncertainty is not made in the financial statements, the auditor shall
(a) Express an adverse opinion or a qualified opinion as per SA 705(Revised).
(b) Express a disclaimer of opinion.
(c) Express an unmodified opinion and include a separate section in the auditor's report under
the heading “Material uncertainty Related to Going Concern” to highlight the note
disclosing the matter.
(d) Express an unmodified opinion and consider including an Emphasis of Matter paragraph
to highlight the note disclosing the matter.

3. Which of the following statements is not correct about performing audit procedures to
identify subsequent event?
(a) The procedures are to be performed by the period between the date of financial
statements & date of auditor's report or as near as practicable.
(b) Obtain written representation from the management that events have been adjusted or
disclosed as per applicable financial reporting framework.
(c) Perform additional procedures on matters which have already yielded satisfactory
conclusions.
(d) The auditor has to perform procedures in respect of all the facts which would have an
impact on the auditor's report.

4. Arrange the following audit procedures in proper order, in case of requested written
representations not provided:
I. Take appropriate actions including determining possible effect on audit opinion.
II. Re-evaluate integrity of management.
III. Discuss matter with management.
IV. Evaluate effect on reliability of representations (oral or written) and audit evidence.
(a) 1-4, 11-2, III-1; IV-3
(b) 1-2; 11-3; III-4; IV-3
(c) 1-2; 11-4; III-1; IV-3
(d) 1-4; II-1, III-3; IV-2

5. Mr. Sunil Verma is conducting the statutory audit of Upshaant Ltd., an unlisted public
company, for FY 2022-23 as an engagement partner on behalf of Verma & Associates having

22
 six partners out of which four are chartered accountants and two are advocates. This was the
third consecutive year of audit by the said audit firm of Upshaant Ltd. For current year's audit,
a new audit engagement letter was sent by the audit firm to the company.
The financial statements of Upshaant Ltd. for FY 2022-23 was required to be amended due to
occurrence of subsequent events after the balance sheet date because of which the audit report
was also amended by Verma & Associates which indicated that the auditor's procedures on
subsequent events were restricted solely to the amendment of the financial statements
described in the relevant note to the financial statements.
Whether due to amendment in audit report, its date need to be changed and what other
alternative was available to Verma & Associates with respect to such amendment in financial
statements?
(a) Date of audit report will be changed. Alternative available was to provide new or
amended audit report by including a Key Matters paragraph.
(b) Original Date of audit report will remain unchanged and additional date will be included.
Alternative available was to provide new or amended audit report by extending the basis
of opinion paragraph.
(c) Date of audit report will be changed. Alternative available was to provide new or
amended audit report by including an Emphasis of Matter paragraph or Other Matter(s)
paragraph.
(d) Original Dates to provide new or amended audit red and aditional date will be included.
Alternative available was to provide now or amended audit report by including an
Emphasis of Matter paragraph or Other Matter(s) paragraph.

6. If the use of going concern basis of accounting in the preparation of financial statements is of
considered appropriate but a material uncertainty exists and adequate disclosure about the
material uncertainty is made in the financial statements, the auditor shall:
(a) Express an adverse opinion
(b) Express a qualified opinion.
(c) Express a disclaimer of opinion
(d) Express an unmodified opinion and include a separate section in the auditor's report under
the heading "Material Uncertainty Related to Going Concern” to highlight the note
disclosing the matter

7. If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor's judgment, management's use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate, the auditor shall:
(a) Express an adverse opinion
(b) Express a qualified opinion
(c) Express a disclaimer of opinion
(d) Express an unmodified opinion and consider including an Emphasis of Matter paragraph
to highlight the note disclosing the matter

8. Which of the following is not an indicator about material uncertainty over the entity's ability
to continue as a going concern:
(a) Net liability or net current liability position
(b) Cancellation of company's production license due to change on government policies.
(c) Non-declaration of dividend to equity shareholders.

23
 (d) Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
Answer Key

1. (d) All of above

2. (a) Express an adverse opinion or a qualified opinion as per SA 705 (Revised).

3. (c) Perform additional procedures on matters which have already yielded satisfactory
conclusions.

4. (a) 1-4; 11-2; III-1, IV-3

5. (d) Original Date of audit report will remain unchanged and additional date will be included.
Alternative available was to provide new or amended audit report by including an
Emphasis of Matter paragraph or Other Matter(s) paragraph.

6. (d) Express an unmodified opinion and include a separate section in the auditor's report under
the heading "Material Uncertainty Related to Going Concern" to highlight the note
disclosing the matter

7. (a) Express an adverse opinion

8. (c) Non-declaration of dividend to equity shareholders.

PART- IV INTEGRATED CASE SCENARIO

CA Sneha, a partner in M/s ] & Associates, is carrying out a statutory audit of M/s ABC Stores Ltd,
for the Financial Year 2022-23, and she is ready to sign her audit report on 01.07.2023. There are
some written representations which are pending with the management of the company pertaining to
such an audit, and she sent Deepak (her articled trainee), who is also a member of the engagement
team, to the company's office for collection of the same.
On returning back, Deepak tells CA Sneha that major stocks of the company got destroyed because of
a fire in their plant on 27.06.2023, and it has affected the company's operations badly. However, the
business operations are likely to be resumed by management at an alternate place.
CA Sneha postponed the issuance of the audit report to consider the impact of such an event on the
financial state of affairs of the company. She wants the management to disclose the impact of this
unfortunate event in financial statements for the year 2022-23, to which management is disinclined.
After the management's refusal, she issued her audit report on 15.07.2023.
The management of the company seeks an appointment from CA Sneha to discuss an important
matter on 20.07.2023. They informed her that the company had lost a lawsuit filed against it by one
of the creditors on 18.07.2023 in a fast-track court, and now the company has to pay the plaintiff a
huge amount of Rs. 2 crores. The events causing this lawsuit arose after 31.03.2023.
CA Sneha is a bit perplexed, and her first question to the people from management visiting her office
was whether audited financial statements have been made available to any third parties or filed with
the regulator. The management responded negatively.
Now, CA Sneha wants them to amend the financial statements to include the impact of this lawsuit
on the financial affairs of the company. This time, they agreed and amended the financial statements

24
accordingly to cover the impact of both the events that of the fire in the plant and losing the lawsuit,
but they requested CA Sneha to issue a new audit report against the earlier one dated 15.7.2023.
The management amends the financial statements, which are finally approved on 25.7.2023. CA
Sneha issues a new audit report.
Considering the above situation, answer the following questions: -
Q.1. What should be the appropriate date of signing of the new audit report?
(a) 20.07.2023
(b) Anytime between 15.07.2023 & 18.07.2023
(c) On or after 25.07.2023
(d) Anytime between 15.07.2023 & 25.07.2023

Q.2. CA Sneha would have taken into account a lot of procedures to get knowledge of the events
occurring after the balance sheet date up to the date of the audit report relating to the
company. Which of the following does not fall under such audit procedures as per SA 560?
(a) Obtaining an understanding of the management's procedures set up to identify subsequent
events.
(b) Inquiring of the management w.r.t the occurrence of any such subsequent events.
(c) Reading the minutes of the meetings of the board held after the balance sheet date during
this period.
(d) Getting the Interim financial statements prepared till the date of the audit report
mandatorily as a condition to issue the audit report

Q.3. W.r.t the first audit report dated 15.07.2023, which type of opinion was most likely provided
by her?
(a) Modified opinion
(b) Unqualified opinion.
(c) Disclaimer of opinion
(d) Including a statement in Emphasis of Matter/Other matters para.

Q.4. W.r.t the new audit report issued, which type of opinion is most appropriate?
(a) Disclaimer of opinion
(b) Unqualified opinion
(c) Adverse opinion
(d) Unqualified opinion and a statement in Emphasis of Matter/Other matters para.

Q.5. The fire event occurring on 27.6.2023 in the company's plant requires the following action on
part of management:-
(a) Disclosure in notes to accounts
(b) Adjustment in financial statements
(c) Waiting for the insurance company to settle the claim
(d) Preparing financial statements afresh

Answer Key - Integrated Case Scenario

1. (c) On or after 25.07.2023

2. (d) Getting the Interim financial statements prepared till the date of the audit report
mandatorily as a condition to issue the audit report

25
3. (a) Modified opinion

4. (d) Unqualified opinion and a statement in Emphasis of Matter/Other matters para.

5. (a) Disclosure in notes to accounts

Integrated Case Scenario - 2

CA Namit, a partner in M/s J Associates, is carrying out a statutory audit of M/s XYZ Gears Ltd. for
the Financial Year 2022-23 and le in the process of issuing an audit report. His articled trainee,
Manpreet, is very curious about knowing the various facts relating to the consideration of Standards
on Auditing while carrying out an audit & issuing the audit report.
She asks CA Namit about the relevance of the Going concern, assumption in their audit and further
reporting to which CA Namit explains to her that both parties have got their own responsibilities
accounting exemption. The management of the company has its own set of responsibilities while
reporting upon the same is a very strict and sensitive matter for the auditor as per the requirement of
the standard an auditing.
He tells Manpreet to prepare a list of procedures as she thinks that an auditor should carry out when
identifies that the company is facing a downfall in business never seen before due to never
technology the market and other competitors having sprung up swiftly adopting new technology.
He finds that this condition may cast significant doubt on the company's ability to continue as a going
concern.
Manpreet thinks and researches and hands over a list of audit procedures to CA Namit for a final
discussion. CA Namit clarifies accordingly. CA Namit concludes that the use of a going concern
basis of accounting is appropriate in this company's case, but a material uncertainty exists as to the
future prospects of the current business. However, the management has made an appropriate
disclosure w.r.t such material uncertainty in the financial statements.
Manpreet's list of audit procedures includes:-
(I) Requesting management to make its assessment relating to the company's ability to continue as
a going concern.
(II) Evaluating management's plan of future actions.
(III) Make a specific assessment of the company's ability to continue as a going concern.
(IV) Analysing the cashflow forecast of the company.
(V) Considering the additional facts or information available since the date of management
assessment
(VI) Make appropriate disclosures in the financial statements in connection with going concerns
(VII) Requesting Written Representation from management regarding the plans of future actions the
feasibility of these plans.
(VIII) Writing a para addressed to the stakeholders in the audit report citing the results of procedures
adhered to relating to the going concern assumption. Keeping in view above, answer the
following questions:-
Q.1. CA Namit tells Manpreet about the auditor's responsibilities in the above case on the water
discussion. Which of the following doesn't fall under the auditor's responsibilities?
(a) Obtaining sufficient and appropriate audit evidence on the matter under discussion.
(b) Conclude on the appropriateness of the management's use of going concern.
(c) Assessing whether a material uncertainty exists about the company's ability to continue
concern.
(d) Guarantee the company's ability to continue as a going conceru based upon his audit
procedures.

26
Q.2. Identify which set of auntie procedures are relevant in the above case scenario as per the list
prepared by Manpreet,
(a) (I), (II), (IV), (V) & (VII)
(b) (I), (III) & (V)
(c) (I), (IV), (VI), (VII) & (VIII)
(d) (I), (II), (VI), (IV) & (V)

Q.3. CA Namit's conclusion to the above case will lead him to give which type of audit opinion
from the following?
(I) Modified opinion
(II) Unmodified opinion.
(III) A separate section "Material uncertainty w.r.t. “Going concern” in his audit report.
(a) (I) only
(b) (II) only
(c) (I) & (III)
(d) (II) & (III)

Q.4. Consider the following statements:

Statement I : The Management is under a responsibility to make specific assessment of the
company's ability to continue as a going concern,
Statement II: The Management is under a responsibility to make appropriate disclosures in
connection with going concern in the financial statements.
(a) Statement I is correct only.
(b) Statement II is correct only as Statement I falls under the auditor's responsibilities.
(c) Both statements are correct.
(d) Both statements are incorrect.

Q.5. Which of the following is most appropriate regarding “going concern” assumption?
(a) It signifies that company is reflecting net losses in its financial statements.
(b) It signifies that company is not modernising its plant and machinery.
(c) It signifies that company has no intention of curtailing materially the scale of its
operations foreseeable future.
(d) It signifies that assets are likely to be recorded at the prices they would fetch.

Answer Key - Integrated Case Scenario 2

1. (d) Guarantee the company's ability to continue as a going concern based upon his audit
procedures.

2. (a) (I) (II), (IV), (V) & (VII)

3. (d) (II) & (III)

4. (c) Both statements are correct.

5. (c) It signifies that company has no intention of curtailing materially the scale of its
operations foreseeable future.

27
 7. “Reporting”
PART- I DESCRIPTIVE QUESTIONS
7.1 - SA 700 “Forming an Opinion and Reporting on Financial Statements”
Q.1. KPI Ltd. is a company on which International Standards on Auditing are applicable along
with Standard on Auditing issued by the ICAI. The company appointed new auditors for the
audit of the financial statements for the year ended on 31st March 2024 after doing all
appointment formalities. In the auditor‟s report, auditor referred the International Standard on
Auditing in addition to the Standard on Auditing issued by the ICAI.
As an expert, you are required to advise the auditor regarding auditor‟s report for audits
conducted in accordance with both the Standards. [RTP-Nov. 19]
Ans: Auditor‟s Report for Audits Conducted in Accordance with Both Standards on Auditing
Issued by ICAI and International Standards on Auditing:
As per SA 700, “Forming an Opinion and Reporting on Financial Statements”, an auditor
may be required to conduct an audit in accordance with the International Standards on
Auditing, in addition to the SAs issued by ICAI. If this is the case, the auditor‟s report may
refer to SAs in addition to the International Standards on Auditing, but the auditor shall do so
only if:
(a) There is no conflict between the requirements in the International Auditing Standards and
those in SAs that would lead the auditor:
 to form a different opinion, or
 not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in
the particular circumstances, is required by SAs; and
(b) The auditor‟s report includes, at a minimum, each of the elements set out in Auditor‟s
Report Prescribed by Law or Regulation discussed above when the auditor uses the
layout or wording specified by the Standards on Auditing.
When the auditor‟s report refers to both the ISAs and the Standards on Auditing issued by
ICAI, the auditor‟s report shall clearly identify the same including the jurisdiction of origin of
the other auditing standards.

Q.2. CA Sameer is statutory auditor of Tram Fram Ltd. for FY 2023-24. While concluding audit,
CA Sameer decided to issue an unmodified opinion, though he also concluded that a material
uncertainty exists with respect to company‟s ability to continue as a going concern on account
of a pending litigation related to labour laws. He is of the view that the company has made
appropriate disclosures with respect to such pending litigation in the notes to accounts
annexed to the financial statements of Tram Fram Ltd. for the FY 2023-24. Explain how CA
Sameer will deal with the above situation in his auditor‟s report (draft the relevant portion of
the auditor‟s report.)
Ans: Material Uncertainty Related to Going Concern:
In given situation, auditor is required to include in audit report an additional para titled as
“Material Uncertainty Related to Going Concern” so as to state the fact related to going
concern in that para.
Material Uncertainty Related to Going Concern
We draw attention to Note 10 in the financial statements, which indicates that the outcome of

1
 a litigation on account of labour laws is pending in case of the company during the year
31st March, 2024. As stated in Note 11, this event or condition, indicate that a material
uncertainty exists that may cast significant doubt on the Company‟s ability to continue as a
going concern. Our opinion is not modified in respect of this matter.

Q.3. CA S has been appointed as Statutory Auditor of SRT Ltd. for the financial year 2023-24.
The Company while preparing financial statements for the year under audit prepared one
additional profit and loss account that disclosed specific items of expenditure and included
the same as an appendix to the financial statements. CA S has not been able to understand this
as the additional profit and loss account is not covered under applicable financial reporting
framework. Guide him as to how he should deal with this issue while reporting on the
financial statements of SRT Ltd. [July 21 (5 Marks); RTP-May 23]
Ans: Supplementary Information Presented with the Financial Statements:
SA 700 “Forming an Opinion and Reporting on Financial Statements” deals with the
supplementary information presented with the financial statements. Accordingly,
 If supplementary information that is not required by applicable FRF is presented with the
audited F.S., the auditor shall evaluate whether, in the auditor‟s professional judgment,
supplementary information is nevertheless an integral part of the F.S. due to its nature or
how it is presented.
 When it is an integral part of the F.S., the supplementary information shall be covered by
the auditor‟s opinion.
 If supplementary information that is not required by the applicable FRF is not considered
an integral part of audited F.S., the auditor shall evaluate whether such supplementary
information is presented in a way that sufficiently and clearly differentiates it from the
audited F.S. If not, then the auditor shall ask management to change the presentation of
supplementary information. If management refuses to do so, the auditor shall identify the
unaudited supplementary information and explain in the auditor‟s report that such
supplementary information has not been audited.
 When an additional profit and loss account that discloses specific items of expenditure is
disclosed as a separate schedule, included as an appendix to the financial statements, the
auditor may consider this to be supplementary information that can be clearly
differentiated from the financial statements.
 Thus, additional profit and loss account is not considered an integral part of the audited
financial statements and the auditor shall evaluate that supplementary information is
presented in a way that sufficiently and clearly differentiates it from the audited financial
statements.

Q.4. The auditors of a listed company have affirmed in their audit report communication of
significant audit findings including significant deficiencies in internal control of the company
identified to those charged with governance. Where are such matters included in audit report
of a listed company? Also dwell upon importance of such communication.
Ans: Auditor’s Responsibilities:
 Matters as stated in the question are in nature of auditor‟s responsibilities and are stated
in “The Auditor‟s Responsibilities for the Audit of the Financial Statements” section of
the auditor‟s report in accordance with SA 700.

2
  Communication of significant audit findings and deficiencies identified in internal
control to TCWG is one of important responsibilities of auditor. Such communication
assists TCWG in fulfilling their responsibility to oversee financial reporting process and
in fulfilling their oversight responsibilities.

Q.5. MN & Associates, Chartered Accountants have been appointed as statutory Auditors of
Cotton Ltd. for the FY 2023-24. The Company is into the business of yarn manufacturing. For
this purpose, cotton ginning is also done within the factory premises. Raw cotton is purchased
from local market and processed in-house. The Company received a notice from the State
Government to deposit market development fee for the last 5 years to the tune of ₹ 10.00
Crores. The Company and all other organisations in the same business has not deposited the
market development fee, taking shelter of an old circular issued by the Government. The trade
association met with the government officials to resolve the matter and agreed to deposit the
same prospectively. However, the matter relating to payment of development fee for the last 5
years is pending before the Government as at the end of the financial year. The Company,
however, disclosed the same in notes to accounts, as contingent liability, without quantifying
the effect and proper explanation. If the liability is provided in the books of account, entire
reserves will be wiped off. Auditor seeks your guidance as to how this disclosure affects them
while forming an opinion on financial statements. [July 21 (5 Marks)]
Ans: Forming an opinion and reporting on financial statements:
 As per Ind AS 37, “Provisions, Contingent Liabilities and Contingent Assets”, an entity
should disclose for each class of contingent liability at the end of the reporting period a
brief description of the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured in the standard;
(b) an indication of the uncertainties relating to the amount or timing of any outflow; &
(c) the possibility of any reimbursement.
 A 700 “Forming an opinion and reporting on financial statements”, requires the auditor
to evaluate whether in view of the requirements of the applicable FRF
(i) The F.S. adequately disclose the significant accounting policies selected and applied;
(ii) The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
(iii) The accounting estimates made by the management are reasonable;
(iv) The information presented in the financial statements is relevant, reliable,
comparable and understandable;
(v) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information
conveyed in the financial statements.
 If financial statements prepared in accordance with the requirements of a fair
presentation framework do not achieve fair presentation, the auditor shall discuss the
matter with management and, depending on the requirements of the applicable FRF and
how the matter is resolved, shall determine whether it is necessary to modify the opinion
in the auditor‟s report in accordance with SA 705.
 In the present case, the matter relating to payment of development fee for the last 5 years
is pending before the Government as at the end of the financial year. The Company,
however, disclosed the same in notes to accounts, as contingent liability, without

3
 quantifying the effect and proper explanation. If the liability is provided in the books of
account, entire reserves will be wiped off.
Conclusion: Considering the requirements of Ind-AS 37 as stated above, auditor must ensure
that disclosure as per Ind-AS 37 to be given in financial statements. If appropriate disclosures
not given in the financial statements, auditor need to modify the report as per the
requirements of SA 705.

1.2 - SA 701 “ Communicating Key Audit Matters in the Independent Auditor’s Report”
Q.6. “The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into account the key factors”. You are
required to define key audit matters and briefly discuss the factors determining the key audit
matters. [MTP-April 18]
Ans: Considerations to determine Key Audit Matters:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor‟s Report”
Key Audit Matters are those matters that, in the auditor‟s professional judgment, were of most
significance in the audit of the F.S. of the current period. Key audit matters are selected from
matters communicated with TCWG.
Auditor shall determine, from the matters communicated with TCWG, those matters that
required significant auditor attention in performing the audit. In making this determination,
the auditor shall consider the following:
(a) Areas of higher assessed RMM, or significant risks identified in accordance with
SA 315;
(b) Significant auditor judgments relating to areas in the F.S. that involved significant
management judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during
the period.
(d) The auditor shall determine which of the matters so determined above were of most
significance in the audit of the F.S. of the current period and therefore are the key
audit matters.

Q.7. AKY Ltd. is a listed company engaged in the business of software and is one of the
largest companies operating in this sector in India. The company‟s annual turnover is
40,000 crores with profits of 5,000 crores. Due to the nature of the business and the size of
the company, the operations of the company are spread out in India as well as outside India.
The company‟s contracts with its various customers are quite complicated & different.
During the course of the audit, the audit team spends significant time on audit of revenue - be
it planning, execution or conclusion. This matter was also discussed with management
at various stages of audit. The efforts towards audit of revenue also involve significant
involvement of senior members of the audit team including the audit partner.
After completion of audit for the year ended on 31st March 2024, the audit partner was
discussing significant matters with the management wherein they also communicated to
the management that he plans to include revenue recognition as key audit matter in his
audit report. The management did not agree with revenue recognition to be shown as
key audit matter in the audit report, Comment. [MTP - Oct. 19]

4
Ans: Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent Auditor‟s Report”, deals
with the auditor‟s responsibility to communicate key audit matters in the auditor‟s report. As
per SA 701, the auditor shall determine, from the matters communicated with TCWG, those
matters that required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment.
(ii) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during
the period.
The auditor shall determine which of the matters determined in accordance with above were
of most significance in the audit of the financial statements of the current period and therefore
are the key audit matters.
In the instant case, AKY Ltd., a listed company engaged in the business of software and its
contracts with its various customers are also quite complicated and different. Further, the
audit team spends significant time on audit of revenue and efforts towards audit of revenue
also involve significant involvement of senior members of the audit team including audit
partner during audit. This matter was also discussed with management at various stages. After
completion of audit, the audit partner communicated the management regarding inclusion of
paragraph on revenue recognition as key audit matter in his audit report.
Conclusion: Assessment of the auditor is valid as concerned matter qualifies to be a key
audit matter; hence, it should be reported accordingly by the auditor in his audit report.

Q.8. What is the auditor‟s responsibility to report a key audit matter for which there are no
relevant disclosures in the financial statements? [RTP-May 22]
Ans: Auditor’s responsibility to report KAM for which there are no relevant disclosures in
the F.S.:
 When communicating key audit matters, the fact that there are no disclosures in the
financial statements related to a matter determined to be a key audit matter does not
relieve the auditor from the requirement to communicate it. An auditor may determine a
key audit matter related to the audit for which relevant disclosure requirements do not
exist in the applicable FRF.
 For example, the implementation of a new IT system (or significant changes to an
existing IT system) during the period may be an area of significant auditor attention, in
particular, if such a change had a significant effect on the auditor‟s overall audit strategy
or related to significant risk (e.g., changes to a system affecting revenue recognition
 Also, if an auditor determines that it is necessary to include information about the entity
in order to effectively describe a key audit matter that has not been disclosed by
management and management does not agree to disclose that information, the auditor
should reconsider the adequacy of the disclosures in accordance with applicable financial
reporting framework.

5
  The auditor should communicate the matter as a key audit matter unless law or regulation
precludes public disclosure about the matter or in extremely rare circumstances, the
auditor determines that the matter should not be communicated in the auditor‟s report
because the adverse consequences of doing so would reasonably be expected to outweigh
the public interest benefits of such communication.

Q.9. Below is draft extract of audit report of a listed company. Para (A) below reflects certain
matter stated in audit report communicated with CFO of company and Para (B) is in nature of
auditor‟s response to said matter.
(A) The Company recognizes revenues when the control of goods is transferred to the
customer at the net consideration which the Company expects to receive for those goods
from customers in accordance with contracts terms and conditions. The terms of sales
arrangements based on the terms and conditions of relevant contract and nature of
discount and rebates create complexities that require judgment in determining revenues.
(B) We read the Company‟s revenue recognition policy and assessed its compliance in terms
of Ind AS 115 “Revenue from contracts with customers”.
We assessed design and tested the operating effectiveness of internal controls related to
sales and rebates/discounts.
We tested on a sample basis that revenue has been recognized in the proper period with
reference to the supporting documents including confirmations from customers.
From description given above, identify what auditors are trying to report and under what
heading such matter should be reflected in audit report of the company?
Ans: Communicating Key Audit Matters:
 Matter stated in question is in nature of Key audit matter and should be stated under
heading “Key audit matters” in audit report. Key audit matters are those matters that, in
the auditor‟s professional judgment, were of most significance in the audit of the
financial statements of the current period. Key audit matters are selected from matters
communicated with TCWG.
 SA 701 states that auditor shall determine, from the matters communicated with TCWG,
those matters that required significant auditor attention in performing the audit.
In making this determination, significant auditor judgments relating to areas in the
financial statements that involved significant management judgment including
accounting estimates that have been identified as having high estimation uncertainty be
taken into account.
 Matter stated in the question relates to revenue recognition and creation of complexities
requiring judgment in revenues. Further, description also describes how matter was
addressed by auditors by performing various audit procedures in accordance with
SA 701.

Q.10. The property, plant and equipment of ABC Ltd. Included & 25.75 Crores of earth removing
machines of outdated technology which had been retired from active use and had been kept
for disposal after knock down. These assets appeared at residual value and had been last
inspected ten years back. As an auditor, what may be your reporting concern as regards
matters specified above? [May 18 (5 Marks)]

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Ans: Reporting Concerns in relation to significant events:
Auditor is required to report under the various requirements of Standards of Auditing, legal
and Regulatory provisions. In the present situation, major reporting requirements will be:
(a) As per the requirement of SA 260 “Communication with Those Charged with
Governance” auditor should communicate significant matters arising during the audit that
were discussed, or subject to correspondence, with management.
(b) The situation as given in the question appears to be a Key Audit Matter and hence auditor
is required to report the situation in the audit report as Key Audit Matter.
(c) Further as per requirement of Para 3(1) of CARO, 2020, auditor is required to comment
(i) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of Property, Plant and Equipment;
(ii) Whether these Property, Plant and Equipment have been physically verified by the
management at reasonable intervals.
In the present case, physical verification of assets held under disposal was done
ten years back.
Conclusion: In the present case, auditor reporting concerns will be as per the requirement of
SA 260, SA 701 and Para 3(1) of CARO, 2020.
Alternative Answer: Answer of this question may also be based on the reporting issues
like Valuation, Accounting and Disclosures as per the requirements of applicable FRF.
In that case, if auditor is not satisfied with the valuation, accounting and disclosures, he
may qualify the report as per the requirements of SA 705.

Q.11. While auditing the complete set of consolidated financial statements of] Ltd., a
listed company, using a fair presentation framework, PQR & Co, a Chartered Accountant
firm, discovered that the consolidated financial statements are materially misstated due to
the non-consolidation of one of the subsidiaries. The material misstatement is
deemed to be pervasive to the consolidated financial statements. The effects of the
misstatement on the consolidated financial statements could not be determined because
it was not practicable to do so. Thus, PQR & Co. decided to provide an adverse opinion
for the same and further determined that, there are no key audit matters other than the
matter to be described in the Basis for Adverse Opinion section. Comment whether
PQR & Co. need to report under SA 701 “Communicating Key Audit Matters in the
Independent Auditor‟s Report”? [Dec. 21 (5 Marks); MTP-Sep. 22]
Ans: Relationship between Key Audit Matters, the Auditor’s Opinion and Other Elements of
the Auditor’s Report:
 SA 700 establishes requirements and provides guidance on forming an opinion on the
F.S. Communicating KAM is not a substitute for disclosures in the F.S. that the
applicable FRF requires management to make, or that are otherwise necessary to achieve
fair presentation.
 SA 705, “Modifications to the Opinion in the Independent Auditor‟s Report”, addresses
circumstances in which the auditor concludes that there is a material misstatement
relating to the appropriateness or adequacy of disclosures in the financial statements.
 When auditor expresses a qualified or adverse opinion in accordance with SA 705,
presenting the description of a matter giving rise to a modified opinion in Basis for
Qualified (Adverse) Opinion section helps to promote intended users‟ understanding and

7
 to identify such circumstances when they occur. Separating the communication of this
matter from other KAMs described in the Key Audit Matters section, therefore, gives it
the appropriate prominence in the auditor‟s report.
 Further, when auditor expresses a qualified or adverse opinion, communicating other
KAMS would still be relevant to enhancing intended users‟ understanding of the audit,
and therefore the requirements to determine KAMs apply. If adverse opinion is expressed
in circumstances when auditor has concluded that misstatements, individually or in the
aggregate, are both material and pervasive to the F.S. depending on the significance of
the matter(s) giving rise to an adverse opinion, the auditor may determine that no other
matters are key audit matters.
 In the given situation J Ltd., a listed company, has not consolidated one of its
subsidiaries. Further, Consolidated Financial Statements of Ltd. Are materially misstated
due to such non- consolidation. The material misstatement is also deemed to be material
and pervasive and effect of the failure to consolidate have not been determined. In the
given situation it is appropriate to give Adverse Opinion by PQR & Co., a Chartered
Accountant Firm.
 Since, in the given case, Adverse Opinion is being expressed thus PQR & Co. can
communicate Key Audit Matter in given below manner:
“Key Audit Matters: Except for the matter described in the Basis for Adverse Opinion
section, we have determined that there are no other key audit matters to communicate in
our report”

Q.12. Mr. Hemant Ramsey was appointed as the engagement partner for conducting the audit
of Kshetra Lap Ltd. for F.Y. 2023-24, on behalf of Ramsey & Associates. Mr. Vishay
Tyagi was appointed as the engagement quality control reviewer by the firm for the said
audit. During F.Y. 2023-24, there was an implementation of ERP system in a phased
manner, in Kshetra Lap Ltd. due to which some of its business processes got automated.
As a result of the implementation of such a system, there was a significant effect on
the auditor‟s overall audit strategy. Mr. Hemant discussed the implementation of such
a system with Mr. Vishay and also told him that such a matter may be a key audit matter
to be reported in the audit report. Mr. Vishay considered the significance of such matter
but however he was of the opinion that such a matter did not appear to link with the matters
disclosed in the financial statements and so there was no need to disclose such matter as a
key audit matter. Whether the contention of Mr. Vishay is proper with respect to the
matters to be communicated as a key audit matter? [RTP-Nov. 21]
Ans: Determining Key Audit Matters:
SA 701, “Communicating Key Audit Matters in the Independent Auditor‟s Report”, deals
with the auditor‟s responsibility to communicate key audit matters in the auditor‟s report. As
per SA 701, the auditor shall determine, from the matters communicated with TCWG, those
matters that required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following:
(i) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and Its Environment.

8
 (ii) Significant auditor judgments relating to areas in the financial statements that
involved significant auditor judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
(iii) The effect on the audit of significant events or transactions that occurred during
the period.
Auditor shall determine which of the matters determined in accordance with above were of
most significance in the audit of the F.S. of the current period and therefore are the key
audit matters.
Such matters are often linked to matters disclosed in the F.S. and are intended to reflect areas
of the audit of the financial statements that may be of particular interest to intended users.
In addition to matters that relate to the specific required considerations, there may be
other matters communicated with TCWG that required significant auditor attention and
that therefore may be determined to be key audit matters. Such matters may include,
for example, matters relevant to the audit that was performed that may not be required to
be disclosed in the financial statements. For example, the implementation of a new IT system
(or significant changes to an existing IT system) during the period may be an area of
significant auditor attention, in particular if such a change had a significant effect on the
auditor‟s overall audit strategy or related to a significant risk (e.g., changes to a system
affecting revenue recognition).
In the given case, there was implementation of ERP system in the company due to which
some of its business processes got automated and which had a significant effect on the
auditor‟s overall audit strategy during the period.
Accordingly, such a matter can be considered as a key audit matter if according to Mr.
Hemant, such a matter required significant attention that had affected his overall audit
strategy.
Conclusion: Contention of Mr. Vishay is not proper as matters that do not link with the
matters disclosed in the financial statements can also be considered as a key audit matter if it
required significant attention of the auditor which had an impact on its audit.

Q.13. CA. Amar has come across certain key matters while auditing the accounts of PR Ltd.
for the financial year 2023-24. He, being the associate of your firm, seeks your advice on
“Communicating Key Audit Matters” in the Auditor‟s report. Guide him.
Ans: Communicating Key Audit Matters:
 As per SA 701 “Communicating Key Audit matters in the Independent Auditor‟s Report”
Key Audit Matters are those matters that, in the auditor‟s professional judgment, were of
most significance in the audit of F.S. of current period.
 The auditor shall describe each key audit matter, using an appropriate sub-heading, in a
separate section of the auditor‟s report under the heading “Key Audit Matters,”
 The introductory language in this section of the auditor‟s report shall state that:
(a) Key audit matters are those matters that, in the auditor‟s professional judgment, were
of most significance in the audit of the financial statements of the current period; and
(b) These matters were addressed in the context of the audit of the F.S. as a whole, and
in forming the auditor‟s opinion thereon, and the auditor does not provide a separate
opinion on these matters.

9
  The description of each key audit matter in the Key Audit Matters section of the
auditor‟s report shall include a reference to the related disclosure(s), if any, in the F.S. &
shall address:
(a) Why the matter was considered to be one of most significance in the audit and
therefore determined to be a key audit matter, and
(b) How the matter was addressed in the audit.
 The auditor shall describe each key audit matter in the auditor‟s report unless:
(i) Law or regulation precludes public disclosure about the matter; or
(ii) In extremely rare circumstances, the auditor determines that the matter should not
be communicated in the auditor‟s report because the adverse consequences of doing
so would reasonably be expected to outweigh the public interest benefits of
such communication. This shall not apply if the entity has publicly disclosed
information about the matter.
The auditor shall not communicate a matter in the Key Audit Matters section of the
auditor‟s report when the auditor would be required to modify the opinion in accordance with
SA 705 (Revised) as a result of the matter.

7.3 - SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”

Q.14. MNO Ltd. is a power generating company having its plants in the north eastern states of the
country. For the FY 2023-24. M/s PRT & Associates are the statutory auditors of the
company. During the course of audit, the audit team was unable to obtain sufficient
appropriate audit evidence about a single element of the consolidated financial statements.
That is, the auditor was also unable to obtain audit evidence about the financial information of
a joint venture investment (In XYZ Ltd.) that represents over 90% of the entity‟s net assets.
What kind of opinion should the statutory and that issue in such case?
Ans: Type of opinion to be expressed:
M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the
financial information of a joint venture investment that represents over 90% of the entity‟s net
assets. The possible effects of this inability to obtain sufficient appropriate audit evidence are
both material and pervasive to the consolidated financial statements.
Therefore, the statutory auditor should issue a disclaimer of opinion. Relevant extract of
Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying F.S. of MNO Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our
report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on these F.S.
Basis for Disclaimer of Opinion
The Group‟s investment in its joint venture XYZ Company is carried at 95 crores on the
Group‟s consolidated balance sheet, which represents over 90% of the Group‟s net assets as
on March 31, 2024. We were not allowed access to the management and the auditors of XYZ
Company, including XYZ Company‟s auditors‟ audit documentation. As a result, we were
unable to determine whether any adjustments were necessary in respect of the Group‟s
proportional share of XYZ Company‟s assets that it controls jointly, its proportional share of
XYZ Company‟s liabilities for which it is jointly responsible, its proportional share of XYZ‟s

10
 income and expenses for the year, (and the elements making up the consolidated statement of
changes in equity) and the consolidated cash flow statement.

Q.15. “When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
Opinion”, “Adverse Opinion”, or “Disclaimer of Opinion”, as appropriate, for the Opinion
section.” As an expert you are required to brief the special considerations required for
expressing:
(a) Qualified Opinion;
(b) Adverse Opinion and
(c) Disclaimer of Opinion. [RTP-Nov. 18, May 20]
Ans: Special Considerations required for modified opinion:
(a) Special consideration required for expressing Qualified Opinion:
When the auditor expresses a qualified opinion due to a material misstatement in the
financial statements, the auditor shall state that, in the auditor‟s opinion, except for the
effects of the matter(s) described in the Basis for Qualified Opinion section:
(i) When reporting in accordance with a fair presentation framework, the
accompanying financial statements present fairly, in all material respects (or give a
true and fair view of) [...] in accordance with [the applicable FRF); or
(ii) When reporting in accordance with a compliance framework, the accompanying
financial statements have been prepared, in all material respects, in accordance with
[the applicable FRF].
When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor shall use the corresponding phrase “except for the possible effects
of the matter(s)..” for the modified opinion.
(b) Special consideration needed for expressing Adverse Opinion:
When the auditor expresses an adverse opinion, the auditor shall state that, in the
auditor‟s opinion, because of the significance of the matter(s) described in the Basis for
Adverse Opinion section:
(i) When reporting in accordance with a fair presentation framework, the
accompanying financial statements do not present fairly (or give a true and fair view
of) [...] in accordance with [the applicable FRF); or
(ii) When reporting in accordance with a compliance framework, the accompanying
financial statements have not been prepared, in all material respects, in accordance
with [the applicable FRF].
(c) Special consideration is required for expressing Disclaimer of Opinion: When the
auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor shall:
(i) State that the auditor does not express an opinion on the accompanying financial
statements;
(ii) State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements; and
(iii) Amend statement required in SA 700 (Revised), which indicates that financial
statements have been audited, to state that the auditor was engaged to audit the

11
 financial statements.
Unless required by law or regulation, when the auditor disclaims an opinion on the F.S.,
the auditor‟s report shall not include a Key Audit Matters section in accordance with
SA 701.

Q.16. As an auditor of a company registered under section 8 of the Companies Act, 2013 you find
that as per the notification of the Ministry of Corporate Affairs regarding applicability of
Indian Accounting Standards (Ind-AS), the company has to prepare its financial statements
for the year ended on 31st March, 2024 under Ind-AS. The management of the company is
however of the strong view that being a section 8 company having charitable objects, Ind-AS
cannot apply to the company. The financial statements are therefore prepared by the
management under the earlier GAAP and a note for the same is given in the financial
statements. How would you report on these financial statements? [Nov. 19 (5 Marks)]
Ans: Reporting on financial statements:
As per SA 200, the overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the F.S. as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the F.S. are prepared, in all material respects, in accordance with
applicable FRF, and
(b) To report on F.S. and communicate as required by the SAs, in accordance with auditor‟s
findings.
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the
auditor‟s report is insufficient, SAs require that auditor disclaim an opinion or withdraw
from the engagement.
In the present case, company was required to prepare its F.S. as per Ind-AS, but the F.S. are
being prepared under the earlier GAAP. FRF followed by the company is not acceptable.
Conclusion: FRF applied by the management is unacceptable and hence auditor is required
to disclaim the opinion in accordance with SA 705 or withdraw from the engagement.
Note: Answer given in suggested Answer of ICAI is based on the provisions of Sec. 129 and
Sec. 133 and specifies that the auditor is required to ensure applicable monetary limits w.r.t.
Ind- AS and advise the management to prepare the F.S. as per Ind-AS.
Answer given in suggested answer does not seems to be appropriate as requirement of
question was how the auditor report on such financial statements, whereas answer is given on
applicability of Ind-AS as per legal requirements of company law.

Q.17. CA Madhu is the statutory auditor of Lakshmi Ltd. for the Financial year 2023-24. In respect
of loans and advances of ` 75 Lakhs given to Sriman Pvt. Ltd., the company has not
furnished any agreement to CA Madhu and in absence of the same, he is unable to verify the
terms of repayment, chargeability of interest and other terms.
Justify the type of opinion which CA Madhu should give in such situation. Also, Draft
an appropriate Opinion paragraph and Basis of opinion paragraph.
[Dec. 21 (5 Marks), MTP-March 23]
Ans: Type of Opinion to be expressed:
In the present case, with respect to loans and advances of ` 75 Lakhs given to Sriman Private
Ltd., the company has not furnished any agreement to CA Madhu.

12
 In absence of such agreement, CA Madhu is unable to verify the terms of repayment,
chargeability of interest and other terms. For an auditor, while verifying any loans &
advances, one of the most important audit evidences is the loan agreement. Therefore,
the absence of such document in the present case, tantamount to a material misstatement
in the financial statements of the company. However, the inability of CA Madhu to
obtain such audit evidence is though material but not pervasive so as to require him to
give a disclaimer of opinion.
Thus, in the present case, CA Madhu should give a qualified opinion. The relevant extract of
the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to
us, except for the effects of the matter described in the Basis for Qualified Opinion section of
our report, the F.S. of Lakshmi Ltd. 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 on
31.03.2024 and profit/ loss for the year ended on that date.
Basis for Qualified Opinion
The Company is unable to furnish the loan agreement with respect to loans and advances of
` 75 Lakhs given to Sriman Pvt. Ltd. Consequently, in absence of such agreement, we are
unable to verify the terms of repayment, chargeability of interest and other terms.

Q.18. You have been appointed as an auditor of Dharmnath & Sons for FY 2023-24, as entity other
than a company incorporated under the Companies Act, 2013, using a fair presentation
framework Appointment had been made in the month of April, 2024. The financial statements
have been prepared by the management in accordance with the Accounting Standards.
The management had prepared by the management in accounts receivable system from
November 2023 and still in the implementation phase and thus management is in the process
of rectifying system deficiencies and correcting the errors. At the time of implementation of
a new system, the earlier system of accounting of receivables had been discarded. The auditor
was unable to obtain sufficient appropriate audit evidence about the entity‟s accounts
receivable and inventories. The possible effects of the inability to obtain sufficient
appropriate audit evidence are deemed to be both material and pervasive to the financial
statements. Write the opinion paragraph and basis of opinion paragraph to be included in the
Independent Auditor‟s Report. [RTP-May 22]
Ans: Opinion Paragraph and Basis of Opinion Paragraph:
Disclaimer of Opinion
We were engaged to audit the financial statements of Dharmnath & Sons (“the entity”), which
comprise the balance sheet as on March 31, 2024, the statement of Profit and Loss, (the
statement of changes in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies.
We do not express an opinion on the accompanying F.S. of the entity. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our
report, we have not been able to obtain SAAE to provide a basis for an audit opinion on
these F.S.
Basis for Disclaimer of Opinion
We were not appointed as auditors of the Company until after March 31, 2024, and thus

13
 did not observe the counting of physical inventories at the beginning and end of the year.
We were unable to satisfy ourselves by alternative means concerning the inventory quantities
held on March 31, 2023, and 2024, which are stated in the Balance Sheets at ` xxx and ` xxx,
respectively. In addition, the introduction of a new computerized accounts receivable system
in Nov. 2023 resulted in numerous errors in accounts receivable. As of the date of our report,
management was still in the process of rectifying the system deficiencies and correcting the
errors. We were unable to confirm or verify by alternative means accounts receivable
included in the Balance Sheet at a total amount of ` xxx as on March 31, 2024. As a result
of these matters, we were unable to determine whether any adjustments might have been
found necessary in respect of recorded or unrecorded inventories and accounts receivable, and
the elements making up the statement of Profit and Loss (and statement of cash flows).

Q.19. TEA Ltd., FMCG Company having its tea gardens in north eastern states of the country is
exclusively dealing in blending, processing, packing and selling of various brands of Tea.
During the year under audit, the company entered into joint venture for purchasing Tea
Gardens in Sri Lanka and Kenya. M/s GN & Associates are the statutory auditors of the
company for the financial year 2023-24. During the course of audit, the audit team was
unable to obtain sufficient appropriate evidence about a single element of the consolidated
financial statement being Joint venture investment in Kali Ltd. representing over 90% of the
group‟s net assets having both material and pervasive possible effect to the consolidated
financial statements. The group‟s investment in Kali Ltd. is carried at ` 100 crores in the
group‟s consolidated balance sheet.
Draft opinion paragraph and basis of opinion paragraph. [MTP-Oct. 22]
Ans: Drafting of Opinion Paragraph and Basis of Opinion Paragraph:
M/s GN & Associates are unable to obtain SAAE about the financial information of a joint
venture investment that represents over 90% of the group‟s net assets. The possible effects of
this inability to obtain sufficient appropriate audit evidence are both material and pervasive to
the consolidated financial statements. Therefore, the statutory auditor should issue a
disclaimer of opinion.
Relevant extract of Disclaimer of Opinion and Basis for Disclaimer of Opinion paragraph is
as under:
Disclaimer of Opinion
We were engaged to audit the accompanying consolidated financial statements of Tea Ltd.,
FMCG Company (hereinafter referred to as the “Holding Company”) and its subsidiaries (the
Holding Company and its subsidiaries together referred to as “the Group), which comprise the
consolidated balance sheet as on March 31, 2024, the consolidated statement of Profit and
Loss, (consolidated statement of changes in equity) and consolidated statement of cash flows
for the year then ended, and notes to the consolidated financial statements, including a
summary of significant accounting policies (hereinafter referred to as the “Consolidated
Financial Statements”).
We do not express an opinion on the accompanying consolidated financial statements of the
Group. 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 consolidated financial statements.

14
 Basis for Disclaimer of Opinion
Group‟s Investment in its joint venture Kali Ltd. Company is carried at ` 100 crores on the
Group‟s consolidated balance sheet, which represents over 90% of the Group‟s net assets as
on March 31, 2024. We were not allowed access to the management and the auditors of XYZ
Company, including XYZ Company‟s auditors‟ audit documentation. As a result, we were
unable to determine whether any adjustments were necessary in respect of the Group‟s
proportional share of Kali Ltd.‟s assets that it controls jointly, its proportional share of Kali
Ltd.‟s liabilities for which it is jointly responsible, its proportional share of Kali Ltd.‟s income
and expenses for the year, (and the elements making up the consolidated statement of changes
in equity) and the consolidated cash flow statement.

Q.20. CA. Uma is the Statutory Auditor of RJ Ltd. for the financial year 2023-24. The company is
engaged in the production of electronic products. During the course of the audit, CA. Uma
obtained certain audie the production of led disclosure of related party transactions and
structured finance deals which was not considered with the affirmation leading to
misstatement in the financial statements. Discuss how CA. Uma should deal with the situation
in the auditor‟s report and the different options which can be considered? [Nov. 22 (5 Marks)]
Ans: Auditor’s duties in case of inconsistency in Audit evidences:
 SA 705 “Modifications to the Opinion in the Independent Auditor‟s Report” deals with
the auditor‟s responsibility to issue an appropriate report in circumstances when, in
forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a
modification to the auditor‟s opinion on the financial statements is necessary.
 The decision regarding which type of modified opinion is appropriate depends upon:
(a) Nature of the matter giving rise to modification, that is, whether F.S. are materially
misstated or, in the case of an inability to obtain SAAE, may be materially
misstated; and
(b) Auditor‟s judgment about pervasiveness of the effects or possible effects of the
matter on FS
 Further, auditor shall modify the opinion in the auditor‟s report when the auditor
concludes that based on the audit evidence obtained, the F.S. as a whole are not free from
material misstatement.
 In the present case, during the course of audit, CA Uma obtained certain audit evidence
which were not consistent with the affirmation made in the financial statements.
Therefore, CA Uma should modify his report in accordance with SA 705.
Conclusion: Since CA Uma has obtained audit evidence which are inconsistent with
affirmations made in the F.S., CA Uma should modify his opinion as per the circumstances
of the case.
 CA Uma shall express a qualified opinion when, having obtained sufficient appropriate
audit evidence, he concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements
 CA Uma shall express an adverse opinion, when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.

15
Q.21. CA Abhimanyu is the statatutory auditor of PQR Ltd for the FY 2021-24. During the course
of audit CA Abhimanyu the following:
(1) With respect to the debtors amounting to ` 150 crores, no balance confirmation was
received by the audit team. Further, there have been defaults on the payment obligations
by debtors on the due dates during the year under audit. The Company has created a
provision for doubtful debts to the tune of ` 25 Cr. during the year under audit. The
Company has stated that the provision is based on receivables which are older than 36
months, which according to the audit team is inadequate and as such the audit team is
unable to ascertain the carrying value of trade receivables.
(2) Further, in respect of Inventories (which constitutes 40% of the total assets of the
company). during the reporting period, the management has not undertaken physical
verification of Inventories at periodic intervals. Also, the Company has not maintained
adequate inventory records at the factory. The audit team was unable to undertake the
physical inventory count as such the value of inventory could not be verified.
Under the above circumstances what kind of opinion should CA Abhimanyu give?
[RTP-Nov. 22]
Ans: Type of Opinion to be expressed:
In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit
evidence with respect to the following:
(1) The balance confirmation with respect to debtors amounting to ` 150 Crores is not
available. Further there has been default in payment by the debtors and the provision so
made is not adequate. The audit team is also unable ascertain the carrying value of trade
receivables.
(2) With respect to 40% of the company‟s inventory, neither the physical verification has
been done by management nor are adequate inventory records maintained. The audit
team is also unable to undertake the physical inventory count as such the value of
inventory could not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, and the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive. Thus, CA Abhimanyu
should give a Disclaimer of Opinion.
Relevant extract of Disclaimer of Opinion and Basis for Disclaimer of Opinion paragraph is
as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying F.S. of PQR Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our
report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on these F.S.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ` 150
Crores. Further, there have been defaults on the payment obligations by debtors on the due
dates during the year under audit. The Company has created a provision for doubtful debts to
the tune of ` 25 Crores during the year under audit which is inadequate in the circumstances
of the company. The carrying value of trade receivables could not be ascertained. Further, in
respect of Inventories (which constitutes 40% of the total assets of the company), during the

16
 reporting period, the management has not undertaken physical verification of inventories at
periodic intervals. Also, the company has not maintained adequate inventory records at the
factory. We were unable to undertake the physical inventory count and as such the value of
inventory could not be verified.

Q.22. In the financial year 2023-24, MSD Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company‟s ability to continue as going concern. Due to such event, it may
not be possible for the company to realize its assets or pay off the liabilities during the regular
course of its business. The financial statement and notes to the financial statements of the
company do not disclose this fact. What kind of opinion should the statutory auditor of MSD
Ltd. issue in such circumstances? [MTP-March 22, April 23]
Ans: Type of Opinion to be expressed:
In the present case, there exists a material uncertainty that cast a significant doubt on the
company‟s ability to continue as going concern and the same is not disclosed in the F.S. of
MSD Ltd.
As such, F.S. of MSD Ltd. for FY 2023-24 are materially misstated and the effect of the
misstatement is so material and pervasive on the financial statements that giving only a
qualified opinion will be insufficient and therefore the statutory auditor of MSD Ltd. should
issue an adverse opinion.
Relevant extract of Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly,
the financial position of MSD Ltd. as on March 31, 2024, and of its financial performance
and its cash flows for the year then ended in accordance with the Accounting Standards
issued by the ICAI.
Basis for Adverse Opinion
MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business
activity of the company. Due to such event, it may not be possible for the company to realize
its assets or pay off the liabilities during the regular course of its business. This situation
indicates that a material uncertainty exists that may cast significant doubt on the Company‟s
ability to continue as a going concern. The F.S. and notes to the financial statements of the
company do not disclose this fact.

Q.23. ABC Ltd. has been dealing in tyres since 1995. The company envisaged to expand its
business and wanted to manufacture the tyres besides trading. Accordingly, the machinery
was imported, installed and manufacturing operations commenced. The Government also
gave certain incentives like power subsidy, land acquisition subsidy, etc. After 2 years of
operations, company received a notice from the Income Tax authorities to pay tax on
incentive received in the form of power subsidy. The demand notice was served for 150.00
lakhs. The company, however filed an appeal with higher tax authorities against the demand
and the matter is undecided as on 31.03.2024. Legal team of the Company anticipated that tax
liability might mature. The company has not made a provision of anticipated tax liability.

17
 Considering the provisions of Companies Act, 2013, how an auditor of ABC Ltd. should see
this matter and report in audit report, if required? [July 21 (5 Marks), MTP-Sep. 22]
Ans: Reporting of Non-provision for tax:
The Council of the ICAI has taken note of the fact that there is a practice prevalent whereby
companies do not make provision for tax even when such a liability is anticipated. It has
expressed the view that on an overall consideration of the relevant provisions of law, non-
provision for tax (where a liability is anticipated) would amount to contravention of the
provisions of Sections 128 and 129 of the Companies Act, 2013.
Accordingly, it is necessary for the auditor to qualify his report and such qualification should
bring out the manner in which the accounts do not disclose a “true and fair” view of the state
of affairs of the company and the profit or loss of the company.
Applying the above to the facts given in the question, auditor should qualify his report. An
example of the manner in which the report on the balance sheet and the Statement of Profit
and Loss may be qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated
aggregate amount of taxation not so provided for is ` .......... including........... for the Year
ended on.......... To the extent of such non-provision for the year, the profits of the Company
for the financial year under report have been overstated and to the extent of such aggregate
non-provision, the reserves of the company appearing in the said balance sheet have been
over-stated and the current liabilities and provisions appearing in the said balance sheet have
been understated”.

Q.24. After accepting the statutory audit of M/s All in One Ltd., a departmental store, you became
aware of the fact that management of the company have imposed certain limitations on the
scope of your assurance function which may adversely affect and result in your inability to
obtain sufficient appropriate audit evidence to discharge your responsibility required by the
statute. Indicate the consequences and your response to the limitations imposed by the
management on your scope. [May 19 (4 Marks)]
Or
While conducting audit of VED Ltd., you as an auditor are not only prevented in completing
certain audit procedures but also are not able to obtain audit evidence even by performing
alternative procedures. How you will deal with this situation? [Jan. 21 (4 Marks)]
Ans: Limitation after the auditor has accepted the engagement:
 As per SA 705 “Modifications to the Opinion in the Independent Auditor‟s Report”, if,
after accepting the engagement, the auditor becomes aware that management has
imposed a limitation on the scope of the audit that the auditor considers likely to result in
the need to express a qualified opinion or to disclaim an opinion on the financial
statements, the auditor shall request that management remove the limitation.
 If management refuses to remove the limitation, the auditor shall communicate the matter
to TCWG, unless all of TCWG are involved in managing the entity, and determine
whether it is possible to perform alternative procedures to obtain sufficient appropriate
audit evidence.
 If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(a) If auditor concludes that the possible effects on the F.S. of undetected misstatements,

18
 if any, could be material but not pervasive, the auditor shall qualify the opinion; or
(b) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law
or regulation; or
(ii) If withdrawal from the audit before issuing the auditor‟s report is not practicable
or possible, disclaim an opinion on the financial statements.
 If the auditor withdraws, before withdrawing, the auditor shall communicate to those
charged with governance any matters regarding misstatements identified during the audit
that would have given rise to a modification of the opinion.

Q.25. ADKS & Co. LLP are the newly appointed statutory auditors of PKK Ltd. During the course
of audit, the statutory auditors have come across certain significant observations which they
believe could lead to material misstatement of financial statements. Management has a
different view and does not concur with the view of the statutory auditors. Considering this
the statutory auditors are determining as to how to address these observations in terms of their
reporting requirement. Please advise. [MTP-April 19]
Ans: Addressing material misstatements while reporting:
 As per SA 705, if the auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement or the auditor is
unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement, the auditor shall modify the
opinion in his report.
 The auditor in such a case needs to determine the modification as follows:
(a) Qualified Opinion: The auditor shall express a qualified opinion when:
(i) Auditor, having obtained SAAE, concludes that misstatements, individually or
in the aggregate, are material, but not pervasive, to the F.S.; or
(ii) The auditor is unable to obtain SAAE on which to base the opinion, but the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
(b) Adverse Opinion: Auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements
(c) Disclaimer of Opinion: Auditor shall disclaim an opinion when the auditor is
unable to obtain SAAE on which to base the opinion, and the auditor concludes that
the possible effects on the F.S. of undetected misstatements, if any, could be both
material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties, the auditor concludes that, notwithstanding having
obtained SAAE regarding each of the individual uncertainties, it is not possible to
form an opinion on the F.S. due to the potential interaction of the uncertainties and
their possible cumulative effect on the financial statements.

19
Q.26. XYZ Ltd. is a company engaged in manufacture of cranes. CA Sudhir is statutory auditor of
company for the FY 2023-24. The company has taken long-term funding for fixed capital
requirements and short-term funding for its working capital requirements. During the course
of audit, CA Sudhir found that the company‟s financing arrangements are about to expire and
the company is unable to renegotiate or obtain the replacement financing. As such the
company may be unable to realize its assets and discharge its liabilities in the normal course
of business. Notes to accounts annexed to the financial statements discuss the magnitude of
financing arrangements, the expiration and the total financing arrangements; however, the
financial statements do not include discussion on the impact or the availability of refinancing.
Thus, the financial statements (and notes thereto) do not fully disclose this fact. What kind of
opinion should CA Sudhir issue in case of XYZ Ltd.?
Ans: Type of opinion to be expressed:
In the present case, XYZ Ltd. is unable to renegotiate or obtain the replacement financing for
its long. term and short-term funding requirements. This situation indicates the existence of a
material uncertainty that may cast significant doubt on the Company‟s ability to continue as a
going concern and therefore, XYZ Ltd. may be unable to realize its assets and discharge its
liabilities in the normal course of business. Further, the financial statements of XYZ Ltd. do
not disclose this fact adequately. Thus, the financial statements of XYZ Ltd. are materially
misstated due to the inadequate disclosure of the material uncertainty. CA Sudhir will express
a qualified opinion as the effects on the financial statements of this inadequate disclosure are
material but not pervasive to the financial statements.
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified
Opinion paragraph is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to
us, except for the incomplete disclosure of the information referred to in the Basis for
Qualified Opinion section of our report, the aforesaid standalone F.S. give the information
required by the Act in the manner so required and give a true and fair view in conformity with
the accounting principles generally accepted in India, of the state of affairs of XYZ Ltd. as on
March 31, 2024, and profit/loss, for the year ended on that date.
Basis for Qualified Opinion
As discussed in Note 6, the Company‟s financing arrangements are about to expire and the
Company has been unable to conclude renegotiations or obtain replacement financing. This
situation indicates that a material uncertainty exists that may cast significant doubt on the
Company‟s ability to continue as a going concern. The financial statements do not adequately
disclose this matter.

Q.27. ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates
are the statutory auditors of ABC Ltd. for the FY 2023-24. During the course of audit, CA
Prakash, the engagement partner, found that the Company‟s financing arrangements have
expired and the amount outstanding was payable on March 31, 2024. The Company has been
unable to renegotiate or obtain replacement financing and is considering filing for
bankruptcy. These events indicate a material uncertainty that may cast significant doubt on
the Company‟s ability to continue as a going concern and therefore it may be unable to realize
its assets and discharge its liabilities in the normal course of business. The financial

20
 statements (and notes thereto) do not disclose this fact. What opinion should CA Prakash
express in case of ABC Ltd.?
Ans: Type of Opinion to be expressed:
In the present case based on the audit evidence obtained, CA Prakash has concluded that a
material uncertainty exists related to events or conditions that may cast significant doubt on
the entity‟s ability to continue as a going concern, and the entity is considering bankruptcy.
The financial statements of ABC Ltd. omit the required disclosures relating to the material
uncertainty.
In such circumstances, CA Prakash should express an adverse opinion because the effects on
the financial statements of such omission are material and pervasive.
Relevant extract of Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph
is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly,
the financial position of the entity as on March 31, 2024, and of its financial performance &
its cash flows for the year then ended in accordance with the Accounting Standards issued by
the ICAI.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. has expired and the amount outstanding was
payable on March 31, 2024. The entity has been unable to conclude renegotiations or obtain
replacement financing and is considering filing for bankruptcy. This situation indicates that a
material uncertainty exists that may cast significant doubt on the Company‟s ability to
continue as a going concern. The financial statements do not adequately disclose this fact.

Q.28. If financial statements prepared in accordance with the requirements of a fair presentation
framework do not achieve fair presentation, the auditor shall discuss the matter with
management and, depending on the requirements of the applicable financial reporting
framework and how the matter is resolved, shall determine whether it is necessary to modify
the opinion in the auditor‟s report in accordance with SA 705.
Under SA 705, in what circumstances does the report of the statutory auditor require
modifications? What are the types of modifications possible in the said report?
Ans: Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent Auditor‟s Report” a
modified opinion may be expressed in the following circumstances:
(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are
not free from material misstatement, may be due to following reasons:
 Inappropriate method of selection of Accounting Policies;
 Accounting policies are not consistent with applicable FRF;
 Disclosures as required by FRF are not given.
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement, may be due to
following reasons:
 Limitations imposed by management
 Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)

21
  Circumstances related to Nature and Timing of auditor‟s work.
Types of Modified Opinion:
(a) Qualified opinion: It is issued under following circumstances:
 Financial statements are materially misstated which in the auditor‟s judgments are
not pervasive.
 Auditor is unable to obtain Sufficient and appropriate audit evidence which in the
auditor judgment are not pervasive
(b) Adverse Opinion: It is issued when financial statements are materially misstated which
in the auditor‟s judgments is having pervasive effect.
(c) Disclaimer of Opinion: It is issued when auditor is unable to obtain sufficient and
appropriate audit evidence which in the auditor judgment are having pervasive effect.

Q.29. The auditor‟s inability to obtain sufficient appropriate audit evidence (also referred to as a
limitation on the scope of the audit) may arise from:
(i) Circumstances beyond the control of the entity;
(ii) Circumstances relating to the nature or timing of the auditor‟s work; or
(iii) Limitations imposed by management.
Explain with the help of examples. [RTP-May 20]
Ans: Examples of situations in which auditor is unable to obtain SAAE:
(i) Circumstances beyond entity control
(1) The entity‟s accounting records have been destroyed.
(2) The accounting records of a significant component have been seized indefinitely by
governmental authorities.
(ii) Circumstances related to Nature and Timing of auditor’s work
(1) Eentity is required to use the equity method of accounting for an associated entity,
and the auditor is unable to obtain sufficient appropriate audit evidence about the
latter‟s financial information to evaluate whether the equity method has been
appropriately applied.
(2) The timing of the auditor‟s appointment is such that the auditor is unable to observe
the counting of the physical inventories.
(3) The auditor determines that performing substantive procedures alone is not
sufficient, but the entity‟s controls are not effective.
(iii) Limitations imposed by management
(1) Management prevents the auditor from observing the counting of the physical
inventory.
(2) Management prevents the auditor from requesting external confirmation of specific
account balances.

Q.30. CA. K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for
the first time. The company is preparing its accounts keeping in view applicable requirements
of Division II of Schedule III of Companies Act, 2013. On scrutiny of financial statements of
company put up for audit, it was noticed that notes to accounts show ageing of trade payables
as per amended requirements of Schedule III of the Companies Act, 2013. The ageing
schedule forming part of notes is as under:
Outstanding for following periods from due date of payment (` In crore)

22
 Particulars Less than 1-2 years 2-3 years More than Total
1 year 3 years
MSME NIL NIL NIL NIL NIL
Others 2 4 3 1 10
Disputed dues-MSME NIL NIL NIL NIL NIL
Disputed dues-others NIL NIL NIL NIL NIL
Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit
ratio disclosed in notes to accounts have slipped drastically as compared to last year and from
standard norms. Most of the key financial ratios are in red. There is no other relevant
information concerning above in notes to accounts.
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid
stocks), it was noticed that there is no debit transaction in the month of March, 2024. On
inquiry, he came to know that stock audit of company was conducted in the month of January,
2024 and stock auditors have commented vide their report dated 25.2.2024 that company had
negative drawing power due to high creditors. Accordingly, the bankers have refused further
debits in cash credit account from start of March, 2024. There is no information in this respect
in financial statements and notes to accounts. Discuss how CA K should deal with above for
reporting in his audit report under the Companies Act, 2013. [MTP-Oct. 22, RTP-May 23]
Ans: Reporting in case of significant doubt on the entity ability to continue as going concern:
 Based on the facts relating to ageing schedule given in the situation, it is clear that
company is not able to pay its creditors on time. Outstanding to creditors for a period of 1
year or more account for 80% of total dues to the creditors from due date of payment.
Most of key financial ratios are adverse. Further, bankers have refused further debits in
cash credit account due to negative drawing power from March 2023. Cash credit loans
are repayable on demand. There is no other information or disclosure available how
company plans to run its business without bank finance.
 All these factors are indicators that a material uncertainty exists that may cast a
significant doubt on company‟s ability to continue as going concern. There is no express
disclosure of this fact in F.S. Therefore, it is a situation where material uncertainty exists
which has cast a significant doubt on company‟s ability to continue as going concern in
accordance with SA 570, “Going Concern”.
Conclusion: Keeping in view the fact that although a material uncertainty exists casting a
significant doubt on the ability of company to continue as going concern, adequate disclosure
of material uncertainty is not made in financial statements, CA K shall give qualified or
adverse opinion in accordance with SA-705, “Modifications to the Opinion in the
Independent Auditor‟s Report”.

7.4 - SA 706 “Emphasis of Matter Paragraph & Other Paragraphs in the Independent
Auditor’s Report”
Q.31. PTD Limited is engaged in business of executing construction contracts for its clients. There
are non- current receivables outstanding in financial statements of the company as on 31st
March, 2024 for ` 500 crore. Such amounts represent claims raised by the company on its
clients relating to cost overruns necessitated due to delays caused by clients, change in work
specifications and related matters. Besides negotiations, the company has also gone for
arbitration in some of the said cases. The management of company has considered above

23
 amounts to be fully recoverable as stated in notes to accounts.
CA. Piyush, auditor of the company, has relied only upon management representation in this
regard. Besides, he has decided to include the said matter in “Emphasis of Matter” Paragraph
in audit report.
How do you view decision to include above matter in “Emphasis of Matter” Paragraph by
auditor of the company?
Ans: Reporting of ‘Emphasis of Matter’ Paragraph:
 Emphasis of Matter (EOM) is a paragraph included in the auditor‟s report that refers to a
matter appropriately presented or disclosed in the financial statements that, in the
auditor‟s judgment, is of such importance that it is fundamental to users‟ understanding
of the financial statements.
 As per SA 706, objective of the auditor, having formed an opinion on the F.S., is to draw
users‟ attention, when in the auditor‟s judgment it is necessary to do so, by way of clear
additional communication in the auditor‟s report, to:
(a) A matter, although appropriately presented or disclosed in the F.S., that is of such
importance that it is fundamental to users‟ understanding of the F.S. or
(b) As appropriate, any other matter that is relevant to users‟ understanding of the audit,
the auditor‟s responsibilities or the auditor‟s report.
 Further, auditor shall include an EOM paragraph in the auditor‟s report provided the
auditor would not be required to modify the opinion in accordance with SA 705 as a
result of the matter.
 In the given situation, auditor has relied upon management representation letter only. He
has not performed any other audit procedures like verifying contracts with customers,
status of arbitration proceedings etc. Since management representations by themselves do
not constitute SAAE, performing necessary audit procedures may lead auditor to
conclude that modification in opinion is necessary. In such circumstances, matter cannot
be included in EOM Paragraph.
 Therefore, auditor should form his opinion by performing necessary audit procedures and
obtaining sufficient appropriate evidence. It is only when he concludes that modification
of opinion is not required as a result of said matter in terms of SA 705, the said matter
may be included in EOM paragraph.

Q.32. Beta Limited, is a company registered with SEBI, having five subsidiaries M/s XYZ,
Chartered Accountants, have been appointed as Statutory Auditors for the audit of the
consolidated Financial Accountants have been appointed as March 31, 2024. Out of five
subsidiaries, the audit of one subsidiary was conducted by another auditor, M/s Badnam and
Company, Chartered Accountants The “Opinion” para of audit report furnished by M/s XYZ
Chartered Accountants is given below:
Opinion
In Our opinion and to the best of our information and according to the explanations given to
us the consolidated financial statements give a true and fair view, except the financial
statement of one subsidiary whose accounts were audited by M/s Badnam and Company,
Chartered Accountants and about the same we are not in a position to express our opinion as
the audit has not been performed by us:

24
 (i) In the case of the consolidated Balance Sheet, of the state of affairs of the company as on
March 31, 2024.
(ii) In the case of the consolidated profit and loss account, of the profit/loss for the year
ended on that date.
Do you find any deficiencies in the opinion para? If yes, you are required to give your
suggestions and redraft the opinion para.
Ans: Identification of deficiencies in opinion Para:
The opinion para contains the following deficiencies:
1. Out of five subsidiaries, the audit of one subsidiary was conducted by another auditor,
M/s Badnam and Company - needs to be reported in other matter para.
2. Opinion regarding cash flow statement has not been covered.
As per SA 700 & 706 the redrafted opinion para and other matter para are given hereunder:
Opinion Para
In our opinion and to the best of our information and according to the explanations given to
us and based on the consideration of the reports of the other auditors on the financial
statements of the subsidiaries as noted below, the consolidated financial statements give a true
and fair view in conformity with the accounting principles generally accepted in India:
(a) in the case of the consolidated Balance Sheet, of the state of affairs of the Company as on
March 31, 2024;
(b) in the case of the consolidated Profit and Loss Account, of the profit/loss for the year
ended on that date; and
(c) in the case of the consolidated Cash Flow Statement, of the cash flows for the year ended
on that date.
Other Matter Para
We did not audit the financial statements of one subsidiary, whose financial statements reflect
total assets (net) of XXXX as on March 31, 2024, total revenues of XXXX and net cash
outflows amounting to XXXX for the year then ended. These financial statements have been
audited by other auditor‟s M/s Badnam and Company, Chartered Accountants whose reports
have been furnished to us by the Management, and our opinion is based solely on the reports
of the other auditors. Our opinion is not qualified in respect of this matter.

Q.33. Enumerate certain important matters which can be included in „Emphasis of Matter
Paragraph‟ in an Auditor‟s Report.
Ans: Matters which can be included in Emphasis of Matter Paragraph in Auditor’s Report:
 As per 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor‟s Report” Emphasis of Matter is a paragraph which is included in
auditor‟s report to draw users‟ attention to important matter(s) which are already
disclosed in Financial Statements and are fundamental to users‟ for understanding of
Financial Statements.
 Specific requirements for the auditor to include Emphasis of Matter paragraphs in the
auditor‟s report in certain circumstances. These circumstances include:
(a) When a FRF prescribed by law or regulation would be unacceptable but for the fact
that it is prescribed by law or regulation.
(b) To alert users that the financial statements are prepared in accordance with a special
purpose framework.

25
 (c) When facts become known to the auditor after the date of the auditor‟s report and the
auditor provides a new or amended auditor‟s report (i.e., subsequent events).
 Matters which can be included in „EOM Paragraph‟ in an Auditor‟s Report, may be listed
as below:
(a) Uncertainty relating to the future outcome of an exceptional litigation or
regulatory action.
(b) A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor‟s report.
(c) Early application (where permitted) of a new accounting standard that has a
pervasive effect on the financial statements in advance of its effective date.
(d) A major catastrophe that has had, or continues to have, a significant effect on the
entity‟s financial position.

Q.34. Where should the placement of the key audit matters section be in the auditor‟s
report? [RTP-May 22]
Ans: Placement of the key audit matters section in the auditor’s report:
 Generally, the Key Audit Matters section is required to be placed after the Basis for
Opinion paragraph and before the Management‟s Responsibility paragraph.
 In case, „Material uncertainty relating to going concern‟ section is required as per SA
570(Revised), then KAM section is placed after that section.
 Further, regarding placement of KAM section, SA 706, “Emphasis of Matter Paragraphs
and Other Matter Paragraphs in the Independent Auditor‟s Report” provides as under:
When a Key Audit Matters section is presented in the auditor‟s report, an EOM
paragraph may be presented either directly before or after the Key Audit Matters
section, based on the auditor‟s judgment as to the relative significance of the information
included in the Emphasis of Matter paragraph. The auditor may also add further
context to the heading “Emphasis of Matter”, such as “Emphasis of Matter - Subsequent
Event”, to differentiate the Emphasis of Matter paragraph from the individual
matters described in the Key Audit Matters section.

Q.35. AKB Associates, a renowned audit firm in the field of CA practice for past two decades. The
firm was appointed to conduct statutory audit of Rica Ltd. an unlisted company, which is
engaged in the business of paper manufacturing. It decided to commence the audit for the
recently concluded financial year. Once after making significant progress in the audit, the
auditors made the following observations:
Observation 1: The management had disclosed in the financials that, during the year, one of
the warehouses of the Company was affected due to a major flood. As a result of the same,
the Company had incurred some losses. But the management was of the view that it was not
material.
Observation 2: Due to flood, few records maintained by the Company with respect to a
particular transaction was completely destroyed and there was no duplicate record maintained
by the Company. However, those details were not pervasive, but material.
You are required to advise, whether AKB Associates should report Observations 1 and 2 in its
audit report? If so, under which heading should it be reported? [RTP-Nov. 20]

26
Ans: Reporting of modifications and EOM Para:
Observation 1:
Facts of the case: The management had disclosed in the financials that, during the year,
one of the warehouses of the Company was affected due to a major flood. As a result
of the same, the Company had incurred some losses. But the management was of the
view that it was not material.
Relevant provisions: As per SA 706, “Emphasis of Matter Paragraph & Other Matter
Paragraph in the Independent Auditor‟s Report”, an Emphasis of Matter Paragraph refers to
matter appropriately disclosed in the financials, that in the auditor‟s judgment is of such
importance that it is fundamental to users‟ understanding of the financials.
Reporting requirements: The auditor shall report about the consequences of the flood
which affected the Company‟s warehouse under Emphasis of Matter Paragraph.
Observation 2:
Facts of the case: Due to flood, few records maintained by the Company with respect
to a particular transaction was completely destroyed and there was no duplicate record
maintained by the Company. However, those details were not pervasive, but material.
Relevant provisions: As per SA 705, “Modification to Opinion in the Independent
Auditor‟s Report”, where the auditor is unable to obtain sufficient and appropriate audit
evidence and where such mater is material but not pervasive, the auditor shall issue a
qualified opinion.
Thus, in the given situation, on account of flood few records pertaining to particular
transactions was completely destroyed and in the absence of duplicate records, the auditor
was unable to obtain sufficient and appropriate audit evidence and those details were material
but not pervasive.
Reporting requirements: In accordance with SA 705, auditor is required to issue
qualified opinion.

Q.36. Difficult Books Limited is engaged in manufacturing of active pharmaceutical ingredients.

Due to change in laws and regulations, every company engaged in manufacturing in active
pharmaceutical ingredients would now require production capacity license which will restrict
the production of companies. Management of the company assessed the impact of the change
in law over the financial position of company and appropriately disclosed the same in the
financial statement.
Audit Team of the company evaluated management‟s disclosure and found it appropriate and
sufficient. However, considering the said matter as most important and fundamental to users
understanding regarding financial statement the audit team decided to disclose the same in
Other Matter Paragraph. You as an Engagement Partner are required to guide the Audit Team
with respect to reporting of the said matter in Audit Report. [MTP-Oct. 22]
Ans: Emphasis of Matter Para and Other Matter Para in Audit Report:
 As per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs
in the Independent Auditor‟s Report” if the auditor considers it necessary to draw
users‟ attention to a matter presented or disclosed in the financial statements that,
in the auditor‟s judgment, is of such importance that it is fundamental to users‟
understanding of the financial statements, the auditor shall include an Emphasis of
Matter paragraph in the auditor‟s report provided:

27
 (i) The auditor would not be required to modify the opinion in accordance with SA 705
as a result of the matter; and
(ii) When SA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor‟s report.
 In the instant case, since Difficult Books Limited is engaged in manufacturing of
active pharmaceutical ingredients, would now require production capacity license which
will restrict the production of companies, due to change in laws and regulations.
Management of the Difficult Books Limited assessed the impact of the change in
law over the financial position of company and appropriately disclosed the same
in the financial statement.
 Audit team evaluated management‟s disclosure and found it appropriate & sufficient.
However, considering the said matter as most important and fundamental to users
understanding regarding financial statement the audit team decided to disclose
the same.
Conclusion: As the matter discussed is already disclosed and presented appropriately in
financial statement and is of such importance that is fundamental to the users understanding
of the financial statement, it required to be disclosed under Emphasis of Matter paragraph.
Therefore, decision of audit team to disclose the same in Other Matter Paragraph is not in
order, it should be disclosed in Emphasis of Matter Paragraph.

Q.37. D Ltd., a Delhi based company having turnover of ` 25 crores, has a branch at USA
having a turnover of ` 10 lakhs (as converted from US dollars). The area where the branch
office is located in USA was severely affected by storms and the office along with
all accounting records was completely destroyed. Due to the unavailability of records,
the financial statements of D Ltd. for the financial year 2023-24 did not include the
figures pertaining to the said branch. As the statutory auditor of D Ltd., how will you report
on the same?
Ans: Reporting on financial statements when information of component is not included:
 As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of
Audit in accordance with Standards on Auditing” in conducting an audit of financial
statements, the overall objective of the auditor is to obtain reasonable assurance about
whether the Financial statements as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in accordance with
an applicable FRF. In all cases when reasonable assurance cannot be obtained and
a qualified opinion in the auditor‟s report is insufficient, the SAs require that the
auditor disclaim an opinion or withdraw from the engagement.
 In the present case, D Ltd., a Delhi based company having turnover of ` 25 crores, has a
branch at USA having a turnover of ` 10 lakhs (as converted from US dollars). The
area where the branch office is located in USA was severely affected by storms and the
office along with all accounting records was completely destroyed. Due to the
unavailability of records, the financial statements of D Ltd. for the financial year
2023-24 did not include the figures pertaining to the said branch.
 In the present situation, company is required to make appropriate disclosures in the notes
to accounts in this regard. Based on the disclosures made in the financial statements,

28
 auditor is required to include an Emphasis of Matter Para in the auditor‟s report as per
requirement of SA 706. If, however no disclosure is made in the financial statements,
auditor need to qualify the audit report as turnover of the branch is only ` 10 lakhs
which does not seems to have pervasive effect as the total turnover of the company is
` 25 Crores.
Conclusion: If appropriate disclosures are given in Notes to Accounts, an unmodified
opinion with Emphasis of Matter para need to be issued. However, if appropriate disclosures
are not given in Notes to Accounts, auditor should qualify the report in accordance with
SA 705.
Note: Answer given in Suggested Answer of ICAI is based on the provisions of Sec. 143(8)
and specifies who can conduct branch audit.
Answer given in suggested answer does not seems to be appropriate as requirement of
question was how the auditor report, whereas content of answer is primarily on the basis of
who can conduct branch audit. In a case where branch records are not available, then there is
no logic of mentioning the provisions relating to the concept of branch audit. Answer needs to
be given from perspective of company auditor, how to deal in such a situation.
Q.38. In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some
matters. The statutory auditor wants to draw the user‟s attention towards such matters, though
his opinion is not modified in respect of such matters. Draft the relevant paragraphs of the
audit report for the following matters:
(1) The company has a plan to resume its construction activities with respect to one of its
thermal power projects, The activity of such power plant was suspended in the FY 2020-
21. The thermal power project comprises of the plant and equipment amounting to
` 5.95 crores and capital work in progress of ` 147.50 crores.
(2) The financial statements of 5 branches are included in the Standalone Financial
Statements of BDS Ltd. whose financial statements reflect total assets of ` 90 crores
as on 31.03.2024 and total revenue from operations of ` 40 crores for the year ended on
that date. The financial statements of these branches have been audited by the
branch auditors.
Ans: Emphasis of Matter Para and Other Matter Para in Audit Report:
Emphasis of Matter
We draw attention to the following note of the standalone financial statements: Note 27
regarding the plans of the Company to resume construction/developmental activities
of a thermal power project. The carrying amounts related to the project as on 31st March,
2024 comprise of plant and equipment of ` 5.95 crores and capital work in progress
of ` 147.50 crores. Our opinion is not modified in respect of this matter.
Other Matter
We did not audit the financial statements of 5 branches included in the Standalone
Financial Statements of the company whose financial statements reflect total assets of
` 90 crores as on 31.03.2024 and total revenue from operations of ` 40 crores for the year
ended on that date. The financial statements of these branches have been audited
by the branch auditors whose reports have been furnished to us, and our opinion insofar
as it relates to the amounts and disclosures included in respect of these branches, is based
solely on the report of the branch auditors.
Our opinion is not modified in respect of this matter.

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7.5 - Notes on Accounts & Qualifications; Audit Report & Certificate; Communication
with TCWG
Q.39. Distinguish between Notes on Accounts and Qualifications.
Ans: Notes on Accounts vs. Qualifications:
Notes on Accounts Qualifications
Notes represents management‟s stand on a Qualifications represents auditor
matter Qualification and assessment on all disagreement on the matters with
matters involving difference of opinion Management.
between them and the auditors.
Notes of a qualificatory nature appear in the Qualifications are stated by auditor in the
accounts and forms part of Financial auditor‟s report.
Statements.
Management may insist upon the auditor for Auditor needs to exercise his professional
not modifying his audit opinion considering judgment to determine whether disclosures
the management has disclosed full facts & in the notes alone would suffice or a
assessment of the matter through notes on the qualification is needed in audit report.
F.S.
Notes on accounts includes information which Qualification must be expressed by the
is necessary to make the financial statements Auditor in a clear and unambiguous
understandable by the users. manner.

Q.40. Compare and explain the following: Reporting to Shareholders vs. Reporting to TCWG
Ans: Reporting to Shareholders vs. Reporting to TCWG:
Reporting to Shareholders Reporting to TCWG
Sec. 143 of Companies Act, 2013 deals with SA 260 deals with the provisions relating to
the provisions relating to reporting to reporting to TCWG.
Shareholders. Thus, it is a Statutory Audit
Report which is addressed to the members.
Statutory Audit Report is on true and fair It is a reporting on matters those charged
view and as per prescribed Format. with governance like scope of audit, audit
procedures, audit modifications, etc.
Statutory Audit Reports are in public Reporting to TCWG is an internal document
domain. i.e., private report.

Q.41. Compare and explain the following: Audit Qualification vs. Emphasis of Matter.
Ans: Audit Qualification vs. Emphasis of Matter:

Audit Qualification Emphasis of Matter (EOM)

SA 705 deals with provisions relating to SA 706 deals with the provisions relating to
Audit Qualification. Emphasis of Matter.
Audit Qualifications are modifications to  EOM is a paragraph which is included
Auditors opinion where auditor concludes in auditor‟s report to draw users‟
that there is a material misstatement in the attention to important matter(s) which
F.S. due to which the modification to the are already disclosed in F.S. and are

30
 opinion of the auditor is necessary.  fundamental to users‟ for understanding
of F.S.
 EOM presupposes that there is
Sufficient Appropriate audit evidence
and the matter has been correctly
disclosed.
Audit Qualifications are given when auditor EOM is a paragraph which is issued when
has concluded that F.S. are materially the auditor feels that it is necessary to invite
misstated or do not confirm to FRF. attention to a particular mater which has
Depending upon nature of material been appropriately disclosed in F.S. which
misstatement being pervasive or otherwise in the opinion of the auditor is necessary for
the appropriate type of modified opinion is better understanding of the F.S.
issued.

Q.42. Write a short note on Certificate for Special Purpose vs. Audit Report.
Ans: Report and Certificate:
Audit Report: An audit report is a formal statement usually made after an enquiry,
examination or review of specified matters under report & includes the reporting auditor‟s
opinion thereon. While issuing an audit report, auditor is responsible to ensure that his
opinion is in due accordance with facts, and that it is arrived at by the application of due
care & skill.
Meaning of Certificate: A certificate is a written confirmation of the accuracy of the facts
stated therein and does not involve any estimate or opinion. Such certificates are often
required by Government authorities in support of statements or other information
prepared by an enterprise. Such certificates represent that the auditor has verified certain
figures and is satisfied about their accuracy.
Report Certificate
It is an expression of opinion on true & fair It is a confirmation of correctness and
view of financial statements & books of accuracy of subject matter for which
account. certificate is being issued.
Report is based on practitioner professional Certificate is based on actual facts &
judgment. figures.
Scope of audit is wide and generally covers Scope of certificate is narrow and restricted
an opinion on complete set of financial to subject matter only.
statements.
Audit report is generally issued annually as Certificates are issued as per the specific
per the requirements of statute. requirements of law.
Auditor‟s responsibility in case any In case of wrong certification, auditor is
misstatement is not being identified, is held liable irrespective of due diligence.
subject to his negligence in performance of
his duties.

31
7.6 - SA 710 “Comparative Information - Corresponding Figures and Comparative
Financial Statements”
Q.43. Mr. A, a practicing Chartered Accountant, audited the financial statements of C Ltd. for the
previous year 2022-23 and expressed an unmodified opinion. C Ltd. was of the view that Mr.
A is not conducting the audit properly and therefore, for the current year 2023-24, it
appointed Ms. B, a leading practicing Chartered Accountant to conduct the audit and present
Comparative Financial Statements. Ms. B, while performing the auditing procedures, found
that C Ltd. has undercharged the wages of ` 10 lakhs during the previous year resulting in
overstatement of profits. What are the further procedures, Ms. B is required to pursue?
Ans: Auditor‟s Procedures in respect of examination of comparative financial statements:
1. SA 710 “Comparative Information - Corresponding Figure & Comparative Financial
Information deals with the auditor‟s responsibilities regarding comparative information
in an audit of F.S.
2. To examine comparative information, auditor is required to perform the following
procedures:
 Determine whether F.S. include Comparative information required by FRF, &
Whether such information is classified appropriately.
 Evaluate Whether the comparative information agrees with the amounts and other
disclosures presented in the prior period; and
3. In given case, auditor identified material misstatement for the previous year, F.S. of
which are audited by Mr. A; Ms. B Current Auditor is required to discuss the matter with
the management and issue suitable report based on the action taken by the management
in this regard.
Conclusion: Ms. B is required to communicate the matter to the management and request
them to inform the same to Mr. A. After revision or non-revision of the prior period‟s F.S.,
Ms. B may report accordingly.

Q.44. It was observed from the modified audit report of the financial statements of AS Ltd. for
the year ended on 31st March, 2023 that depreciation of 2.50 crores for the year
2022-23 had been charged off to the statement of Profit and Loss instead of including it in
“Carrying value of asset under construction”. State in relation to the audit for the year ended
on 31st March 2024, whether such modification in the previous year‟s audit report would
have any audit implication for the current year and if yes, how would you deal with it in your
audit report? [Nov. 18 (5 Marks), MTP-Oct. 20, March 23]
Ans: Impact of Modification in the predecessor auditor’s report:
 SA 710 “Comparative Information - Corresponding Figure and Comparative
Financial Information deals with the auditor‟s responsibilities regarding comparative
information in an audit of F.S.
 As per SA 710, when the auditor‟s report on the prior period, as previously issued,
included a qualified opinion, a disclaimer of opinion, or an adverse opinion and the
matter which gave rise to the modified opinion is resolved and properly accounted for or
disclosed in the financial statements in accordance with the applicable FRF,
auditor‟s opinion on the current period need not refer to the previous modification.
 As per SA 710, if the auditor‟s report on the prior period, as previously issued, included a
modified opinion and the matter which gave rise to the modification is unresolved,

32
 the auditor shall modify the auditor‟s opinion on the current period‟s financial
statements. In the Basis for Modification paragraph in the auditor‟s report, the auditor
shall either:
(a) Refer to both the current period‟s figures and the corresponding figures in the
description of the matter giving rise to the modification when the effects or possible
effects of the matter on the current period‟s figures are material; or
(b) In other cases, explain that the audit opinion has been modified because of the
effects or possible effects of the unresolved matter on the comparability of the
current period‟s figures and the corresponding figures.
 In the instant case, it was observed from the modified audit report of the financial
statements of AS Ltd. for the year ended on 31st March, 2023 that depreciation of
` 2.50 crores for the year 2022-23 had been charged off to the statement of Profit & Loss
instead of including it in “Carrying value of asset under construction”.
Conclusion: If AS Ltd. does not correct the treatment of depreciation to the extent of
` 2.50 crore for previous year, the auditor will have to modify his report for both current and
previous year‟s figures as mentioned above. If, however, the figures and provisions are
corrected, the auditor need not consider to the earlier year‟s modification.

Q.45. You as a statutory auditor had audited the financial statements of A Ltd., a listed
company, for F.Y, 2022-23. The company has included the comparative financial information
in the financial statements prepared for the current F.Y. 2023-24. You as an auditor
want to obtain sufficient appropriate audit evidence that comparative financial information
has been presented, in all material aspects, in accordance with the requirements
in the applicable financial reporting framework. List out audit procedures, as specified in
relevant SA, which you are required to follow for the purpose. [Dec. 21 (5 Marks)]
Ans: Auditor’s Procedures in respect of examination of corresponding figures:
SA 710 “Comparative Information - Corresponding Figure and Comparative Financial
Information deals with the auditor‟s responsibilities regarding comparative information
in an audit of financial statements.
To examine the comparative information, auditor is required to perform the following
procedures:
(a) Determine whether F.S. include Comparative information required by applicable
FRF, & whether such information is classified appropriately.
(b) Evaluate the following:
 Whether the comparative information agrees with the amounts and other
disclosures presented in the prior period; and
 Whether the accounting policies reflected in the comparative information
are consistent with those applied in the current period.
 * Whether, changes in accounting policies, if any, have been properly accounted
for & adequately presented and disclosed.
(c) If the auditor becomes aware of a possible material misstatement in the comparative
information while performing the current period audit, the auditor shall perform such
additional audit procedures as are necessary in the circumstances to obtain sufficient
appropriate audit evidence to determine whether a material misstatement exists.

33
 (d) If the auditor had audited the prior period‟s financial statements, the auditor shall also
follow the relevant requirements of SA 560, “Subsequent Events”.
(e) As required by SA 580, “Written Representations”, the auditor shall request written
representations for all periods referred to in the auditor‟s opinion. The auditor shall also
obtain a specific written representation regarding any prior period item that is separately
disclosed in the current year‟s statement of profit and loss.

Q.46. For the year ended on 31st March, 2023, the audit report of Avinash Ltd., contained
a qualification regarding non-provision for diminution in the value of investments to
the extent of t 50 lakhs. As an Auditor of the Company for the year 2023-24, how would
you report, If:
(i) The Company does not make provision for diminution in the value of investments
in the year 2023-24.
(ii) The Company makes adequate provision for diminution in the year 2023-24.
[May 18 (5 Marks)]
Ans: Auditor’s responsibilities w.r.t. Corresponding figures:
 As per SA 710, “Comparative Information - Corresponding Figures & Comparative
Financial Statements When the auditor‟s report on the prior period, as previously
issued, included a modified opinion and the matter which gave rise to the
modified opinion is resolved and properly accounted for or disclosed in the financial
statements in accordance with the applicable FRF, the auditor‟s opinion on the
current period need not refer to the previous modification.
 SA 710 further states that if the auditor‟s report on the prior period, as previously
issued, included a modified opinion and the matter which gave rise to the
modification is unresolved, the auditor shall modify the auditor‟s opinion on the
current period‟s financial statements.
 In the Basis for Modification paragraph in the auditor‟s report, the auditor
shall either:
(i) Refer to both the current period‟s figures and the corresponding figures
in the description of the matter giving rise to the modification when the effects
or possible effects of the matter on the current period‟s figures are material; or
(ii) In other cases, explain that the audit opinion has been modified because of
the effects or possible effects of the unresolved matter on the comparability of
the current period‟s figures and the corresponding figures.
Conclusion:
(a) If P Ltd. does not make provision the auditor will have to modify his report for
both current and previous year‟s figures as mentioned above.
(b) If, however, the provision is made, the auditor need not refer to the earlier year‟s
modification.

7.7 - SA 720 “The Auditor’s Responsibilities relating to Other Information.”

Q.47. LMP Associates, Chartered Accountants, conducting the audit of PQR Ltd., a listed
Company for the year ended on 31st March, 2024 is concerned with the auditor‟s
responsibilities relating to other information, both financial and non-financial, included
in the Company‟s annual report. While regarding other information, LMP Associates

34
 considers whether there is a material inconsistency between other Information & the
financial statements. As a basis for the consideration the auditor shall evaluate their
consistency, compare selected amounts or other items in the other information with
such amounts or other items in the financial statements. Guide LMP Associates with
examples of “Amounts” or “other items” that may be included in the “other information” with
reference to SA 720. [Nov. 19 (5 Marks), MTP-April 21]
Ans: Reading and considering the Other information:
SA 720 “Auditor‟s Responsibilities relating to Other Information” deals with auditor‟s
responsibilities relating to Other Information, whether financial or non-financial
information included in an entity‟s annual report.
Other information may include amounts or other items that are intended to be the
same as, to summarize, or to provide greater detail about, the amounts or other items
in the financial statements. Examples of such amounts or other items may include:
(A) Amounts:
1. Items in a summary of key financial results, such as net income, earnings
per share, dividends, sales and other operating revenues, and purchases and
operating expenses.
2. Selected operating data, such as income from continuing operations by major
operating area, or sales by geographical segment or product line.
3. Special items, such as asset dispositions, litigation provisions, asset impairments,
tax adjustments, environmental remediation provisions, & restructuring
& reorganization expenses.
4. Liquidity & capital resource information, such as cash, cash equivalents &
marketable securities; dividends; & debt, capital lease & minority interest
obligations.
5. Capital expenditures by segment or division.
6. Amounts involved in, and related financial effects of, off-balance sheet
arrangements.
(B) Other Items:
1. Explanations of critical accounting estimates & related assumptions.
2. Identification of related parties & descriptions of transactions with them.
3. Descriptions of the nature of off-balance sheet arrangements.
4. Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases.
5. Descriptions of changes in legal or regulatory requirements, such as new tax or
environmental regulations.
6. General descriptions of the business environment and outlook.
7. Descriptions of trends in market prices of key commodities or raw materials.
8. Contrasts of supply, demand and regulatory circumstances between
geographic regions.

Q.48. GS & Co., Chartered Accountants, have been appointed Statutory Auditors of MAP Ltd.
for the F.Y 2023-24. The audit team has completed the audit and is in the process of
preparing audit report Management of the company has also prepared draft annual
report. Audit in-charge was going through the draft annual report and observed that

35
 the company has included an item in its Annual Report indicating downward trend in
market prices of key commodities/raw material as compared to previous year. However,
the actual profit margin of the company as reported in financial statements has gone in
the reverse direction. Audit Manager discussed this issue with partner of the firm who in
reply said that auditors are not covered with such disclosures made by the management in
its annual report, it being the responsibility of the management.
Do you think that the partner is correct in his approach on this issue?
Discuss with reference to relevant Standard on Auditing the Auditor‟s duties with regard to
reporting. [Nov. 20 (4 Marks), MTP-Oct. 21, April 23; RTP-May 23]
Ans: Auditor‟s responsibilities as to Other Information included in Annual Report:
 SA 720 “The Auditor‟s Responsibilities relating to Other Information” deals with
the auditor‟s responsibilities relating to Other Information, whether financial or non-
financial information included in an entity‟s annual report. Accordingly, descriptions
of trends in market prices of key commodities or raw materials is an example of amounts
or other items that may be included in the other information.
 The auditor‟s discussion with management about a material inconsistency
(or other information that appears to be materially misstated) may include requesting
management to provide support for the basis of management‟s statements in the
other information. Based on management‟s further information or explanations,
the auditor may be satisfied that the other information is not materially misstated.
For example, management explanations may indicate reasonable and sufficient grounds
for valid differences of judgment.
Auditor’s duties with regard to reporting:
If the auditor concludes that a material misstatement of the other information exists, the
auditor shall request management to correct the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been
made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.
Conclusion: Considering the requirements of SA 720 as stated above, it can be concluded
that partner is not correct in his approach.

Q.49. ING Associates, Chartered Accountants, conducting the audit of XYZ Ltd., a listed
Company for the year ended on 31st March 2024 is concerned with the auditor‟s
responsibilities relating to misstatements in other information, both financial and
non-financial, included in the Company‟s annual report. While reading other information,
ING Associates considers whether there is any material misstatement of the other
information in the Company. After performing their procedures, the auditor concludes that
a material misstatement of the other information exists. ING Associates discussed with the
management about the other information that appeared to be materially misstated to
the auditor and also requested management to provide evidence for the basis of
management‟s statements in the other information along with supporting documents.
Guide ING Associates as how to respond to that material misstatement of other information
obtained prior to the date of auditor‟s report. Will your answer be different in case
ING Associates conclude the same after the date of auditor‟s report? [MTP-Oct. 20]

36
Ans: Auditor’s responses on a material misstatement in the Other Information:
 SA 720 “The Auditor‟s Responsibilities relating to Other Information” deals with
the auditor‟s responsibilities relating to Other Information, whether financial or non-
financial information included in an entity‟s annual report.
 If the auditor concludes that a material misstatement of the other information exists, the
auditor shall request management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine that the correction
has been made; or
(b) Refuses to make the correction, the auditor shall communicate the matter with
TCWG and request that the correction be made.
 If the auditor concludes that a material misstatement exists in other information obtained
prior to the date of the auditor‟s report, and the other information is not corrected
after communicating with TCWG, the auditor shall take appropriate action, including:
(a) Considering the implications for the auditor‟s report and communicating with
TCWG about how the auditor plans to address the material misstatement in the
auditor‟s report,
(b) Withdrawing from the engagement, where withdrawal is possible under applicable
law or regulation.
 If the auditor concludes that a material misstatement exists in other information obtained
after the date of the auditor‟s report, the auditor shall:
(a) If the other information is corrected, perform the procedures necessary in the
circumstances; or
(b) If the other information is not corrected after communicating with TCWG,
take appropriate action considering the auditor‟s legal rights and obligations, to seek
to have the uncorrected material misstatement appropriately brought to the attention
of users for whom the auditor‟s report is prepared.

7.8 - Duties of Auditor

Q.50. CA G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd.,
CA G observed that certain loans and advances were made without proper securities;
certain trade receivables and trade payables were adjusted inter se; and personal expenses
were charged to revenue. As a company auditor comment on the reporting responsibilities
of CA G. [Nov. 19 (5 Marks)]
Ans: Inquiry into Propriety Matters u/s 143(1):
 Section 143(1) of the Companies Act, 2013 requires the auditor to conduct inquiry
into certain matters and if the auditor finds answer of any of these matters in adverse,
auditor is required to report, otherwise no reporting is required. In relation to
observations stated in the question, auditor should inquire as follows:
1. Clause (a) of Sec. 143(1) requires the auditor to inquire “Whether loans and
advances made by the company on the basis of security have been properly secured
and whether the terms on which they have been made are prejudicial to the
interests of the company or its members”.
2. Clause (b) of section 143(1), requires the auditor to inquire “whether transactions
which are represented merely by book entries are prejudicial to the interests
of the company”.

37
 3. Clause (e) of section 143(1) requires the auditor to inquire “Whether personal
expenses have been charged to revenue account”.
 If auditor finds that the loans and advances have not been properly secured, he may
enter an adverse comment in the report without modifying opinion on F.S. if the loans
and advances are properly described and presented in terms of Part I of Schedule III
to the Companies Act.
 If relation to his observation regarding inter se adjustment of trade receivables and
trade payables, being a book entry, auditor should have inquired into the legitimate
interests of the company. If appears prejudicial, he may enter adverse comment
in the report.
 Regarding charging of personal expenses to revenue account auditor should
inquire whether such expenses are incurred on the basis of the company‟s contractual
obligations, or in accordance with accepted business practice. If personal
expenses incurred by the company are not covered by contractual obligations or by
accepted business practice and charged to revenue account, it would be the duty of the
auditor to report thereon.
Conclusion: In instant case, Mr. G, statutory auditor, needs to enquire in light of above
provisions, as a result of the enquiries if he is satisfied then there is no further duty to report
on these matters.

Q.51. As an auditor, how would you deal with the following: In the audit of ABC Private
Limited, auditor came across cases of payments to Directors, whereby, expenses of a
personal nature were re- imbursed. [Nov. 20 (4 Marks)]
Ans: Personal Expenses of Directors:
 All payments to Directors as remuneration or perquisites whether in the case of a
public or private company need to be authorised in accordance with the Companies Act
as well as Articles of Association of the company.
 If the terms of appointment of a Director include payment of expenses of a personal
nature, then such expenses can be incurred by the company; otherwise, no such
expense can be incurred or reimbursed by the company.
 In the instant case the auditor has to ensure that the payment is authorized by the
Articles of Association and the same has been covered by terms of appointment.
 Further as this payment is also covered u/s 143(1), and hence auditor is also required
to inquire into the matter and make a disclosure in his report accordingly.

Q.52. You have been appointed statutory auditor of a company for the financial year ended
31st March, 2023 in place of the retiring auditor. During the course of audit, you observe
that a fraud had been committed by a general manager who retired in March 2023. While
going into further details, it was found that the fraud was going on since last 2-3 years and the
total amount misappropriated was likely to exceed ` 100 lakhs. As statutory auditor,
what would be your reporting responsibilities to the government? [Nov. 17 (5 Marks)]
Ans: Auditor’s duties to report fraud to the Central Government:
 Sec. 143(12) of Companies Act, 2013 requires that if an auditor of a company in the
course of the performance of his duties as auditor, has reason to believe that an offence of
fraud involving such amount or amounts as may be prescribed, is being or has been

38
 committed in the company by its officers or employees, auditor shall report the matter to
the C.G. within such time and in such manner as may be prescribed. For this purpose,
Rule 13 prescribes the amount of ` 1 Cr. or more.
 Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of
Reporting of Frauds in various cases. Accordingly:
(1) If an auditor of a company, in the course of the performance of his duties as
statutory auditor, has reason to believe that an offence of fraud, which involves or is
expected to involve individually an amount of ` 1 Cr. or above, is being or has
been committed against the company by its officers or employees, the auditor shall
report the matter to the CG.
(2) The auditor shall report the matter to the CG as under:
(a) the auditor shall report the matter to the Board or the Audit Committee,
as the case may be, immediately but not later than 2 days of his knowledge of
the fraud, seeking their reply or observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and
the reply or observations of the Board or the Audit Committee along with his
comments (on such reply or observations of the Board or the Audit Committee)
to the CG within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the
Audit Committee within the stipulated period of 45 days, he shall forward his
report to the CG along with a note containing the details of his report that
was earlier forwarded to the Board or the Audit Committee for which he has
not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs
in a sealed cover by Registered Post with Acknowledgement Due or by Speed
Post followed by an e-mail in confirmation of the same;
(e) the report shall be on the letterhead of the auditor containing postal address,
e-mail address and contact telephone number or mobile number and be signed
by the auditor with his seal and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.

Q.53. Mr. Raj, the engagement partner of R.O.K. & Co., in connection with statutory audit
of Waria Ltd., had assigned the responsibility of enquiring into propriety matters of the
Company as required by section 143(1) of the Companies Act, 2013, to Mr. Samay,
an engagement team member. Mr. Samay while making such enquiries, was having
following queries, as tabulated below, which he ought to get resolved from Mr. Raj,
as follows:
Sr. No. Query of Mr. Samay
1 What documents to be seen in case of loan given by the company in lieu of
hypothecation of goods from lender as a security for the purpose of reporting
as per clause (a) of Sec. 143(1)?
2 What shall be cost of Debentures and Bonus Shares sold by the company
for which the cost is not ascertainable for the purpose of reporting as per
clause (c) of Sec. 143(1).

39
 3 Whether the shares allotted by Waria Ltd. against a loan taken by it froma
NBFC can be considered to be allotted for cash for the purpose of reporting
as per clause (1) of Sec.143(1)?
Assuming that you are Mr. Raj the engagement partner, please provide answer to the queries
of Mr. Samay? [MTP-March 21]
Ans: Responses to Queries raised by Samay:
Query 1: What documents to be seen in case of loan given by the company in lieu of
hypothecation of goods from lender as a security for the purpose of reporting as per
clause (a) of section 143(1) of the Companies Act, 2013?
Response: Mr. Samay should see deed of Hypothecation or other document creating the
charge. together with a statement of stocks held at the balance sheet date in order.
Query 2: What shall be the cost of Debentures and Bonus Shares sold by the company
for which the cost is not ascertainable for the purpose of reporting as per clause (c) of
section 143(1) of the Companies Act, 2013?
Response:
For Debentures sold: Where the cost of debentures sold is not ascertainable, the book
value thereof at the date of sale may be treated as the cost for the purposes of this clause.
For Bonus Shares sold: When bonus shares are received, the number of shares in the
portfolio would be increased by the bonus shares while the cost of the total portfolio would
remain the same as before. The result would be that the average cost per unit of the total
holding would come down proportionately. The usual accounting practice for apportioning
the cost of a part of the total holding on the sale thereof is to take it at its average cost.
Query 3: Whether the shares allotted by Waria Ltd. against a loan taken by it from a
NBFC can be considered to be allotted for cash for the purpose of reporting as per
clause (f) of section 143(1) of the Companies Act, 2013?
Response: The law on the subject has hitherto been that, where the consideration for the issue
of shares is an adjustment against a bona fide debt payable in money on demand by the
company, the shares are deemed to have been subscribed in cash.
According to the legal opinion obtained by the ICAI, the expression “shares allotted
for cash” may also include shares allotted against a debt. Therefore, in cases which are
covered by the decision in Spargo‟s case, no comment is required by the auditor, even though
the company may have in the Return of Allotment u/s 75, shown such shares as allotted
against adjustment of a debt. Thus, the shares allotted by Waria Ltd. against a loan taken
by it from a NBFC can be considered to be allotted for cash.

7.9 - Matters to be included in Auditor’s Report under CARO, 2020

Q.54. The Property, Plant and Equipment of Amir Ltd. included ` 25.75 crores of earth
removing machines of outdated technology which had been retired from active use and
had been kept for disposal after knock down. These assets appeared at residual value and
had been last inspected ten years back. As an Auditor, what may be your reporting
concern in view of CARO, 2020 on matters specified above? [MTP-April 21]
Ans: Reporting w.r.t. Fixed Assets:
 Para 3(i) of CARO, 2020 requires the auditor to comment:
 whether the property, plant and equipment assets have been physically verified
by the management at reasonable intervals;

40
  whether any material discrepancies were noticed on such verification and if so;
 whether the same have been properly dealt with in the books of account.
 In the present case, PPE included ` 25.75 crores of earth removing machines of
outdated technology which had been retired from active use and had been kept for
disposal after knock down. These assets appeared at residual value and had been
last inspected ten years back.
 Inspection of abovementioned machine was done 10 years back. Though it is a retired
machine, however value is ` 25.75 crores which is a significant amount, requires
physical verification at regular intervals.
Conclusion: Auditor is required to state the fact about discrepancies in system of physical
verification of machineries held for disposal.

Q.55. Jam Private Limited was engaged in business of manufacture of Cycles. CA Roy was
appointed as a Statutory Auditor of the Company for the financial year 2021-22.
During the year under audit, Jam Private Limited obtained working capital facilities from
ABC Bank Limited for ` 10 crore hypothecating the Stock of goods as primary security.
On inquiry CA Roy was informed by management that stock statements are furnished
periodically to ABC Bank Limited and the details of submission of quarterly stock
statement are as follows:
Period of Stock Value as per Books of Stock Value as per quarterly statement
Quarter Account as at the end of the submitted to ABC bank limited as at
quarter ( ` in Crore) the end of quarter ( ` in Crores)
Q1-2021-22 11.50 14.00
Q2-2021-22 14.75 17.00
Q3-2021-22 11.50 14.00
Q4-2021-22 15.25 15.25
The management of Jam Private Limited did not disclose the above variations in Notes to
accounts forming part of financial Statements of the Company for the year 2021-22.
The management replied that there are no variations as on the Balance sheet date and further
they are of the view that stock statement furnished to bank is only a formality and computed
arbitrarily only for the purpose of securing higher drawing power and hence statutory auditors
need not be bothered.
Is the contention of the management valid? As a Statutory Auditor how CA Roy should
deal and discuss the disclosure/reporting requirements if any, as per the Companies Act, 2013
and CARO, 2020. [May 22 (5 Marks); MTP-March 23]
Ans: Reporting requirements under Companies Act, 2013 and CARO, 2020
 As per Schedule III of the Companies Act, 2013, where the Company has borrowings
from banks or financial institutions on the basis of security of current assets, it shall
disclose the following:
(a) whether quarterly returns or statements of current assets filed by the Company with
banks or financial institutions are in agreement with the books of account.
(b) if not, summary of reconciliation and reasons of material discrepancies, if any to be
adequately disclosed. w.r.t. Inventories.
 Clause (b) of Para 3(ii) of CARO, 2020 requires the auditor to report whether during any
point of time of the year, the company has been sanctioned working capital limits in

41
 excess of ` 5 crore, in aggregate, from banks or financial institutions on the basis of
security of current assets; whether the quarterly returns or statements filed by the
company with such banks or financial institutions are in agreement with the books of
account of the Company, if not, give details.
 In the given case, company has obtained working capital facilities from ABC Bank
Limited for ` 10 crore hypothecating the stock of goods as primary security. Quarter-
wise stock statements filed by the company with the banks are not in agreement with the
books of account.
Conclusion: Contention of the management that there are no variations as on the Balance
sheet date and statutory auditors need not be bothered is not correct. Such variations need to
be disclosed in Notes to Accounts forming part of financial statements and also need to be
reported by auditor under CARO, 2020. CA. Roy should report the differences as per the
Companies Act, 2013 and CARO 2020 as follows:

Q.56. Gautam Limited had borrowed ` 1,000 crore from XYZ Bank, the principal of which
was repayable after 5 years and interest was payable at the end of each year. For 4 years,
Gautam Limited paid the interest amount on time. Gautam Limited defaulted the
5th instalment of interest payment and principal which was due on June 30, 2022. On
March 31, 2023, Gautam Limited approached XYZ bank and MNO bank to restructure the
existing liability. As a result, the existing principal and outstanding and overdue interest
was restructured into a new loan amounting to 1,100 crore. The management did not provide
any disclosure for the default on the loan on the belief that the old loan ceased to exist
and the new loan has maturity after 5 years.
During the statutory audit for the financial year 2022-23, KP & Co. identified this
transaction and obtained the relevant documents and understanding. Based on the underlying
documents, it was identified that the said restructuring agreement was approved and
signed on April 8, 2023, by both of the banks. As a result, on March 31, 2023, the
restructuring was still not approved.
In the light of the above scenario, kindly guide the statutory auditors in the reporting of this
transaction. [RTP-Nov. 22]
Ans: Reporting w.r.t. repayment of dues:
 As per Para 3(ix)(a) of CARO, 2020 auditors of a company are required to comment
in his report whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, the period
and amount of default to be reported as per the format below:
Nature of Name of Amount not Whether No. of days Remarks,
borrowing, lender* paid on due principal delay or If any
including debt date or interest unpaid
securities

*Lender-wise details to be provided in case of defaults to banks, financial institutions

and Government.
 In the given case, the company Gautam Limited defaulted in payment of the principal
amount of the loan due of 1000 crore on 30 June 2022 and the interest instalment of 100
crore. The said default continued till the end of the year and on 8 April 2023, a

42
 restructuring agreement was signed by the banks and company for restructuring the
outstanding loan. Moreover, no disclosure was provided by the company with respect to
the said matter.
Conclusion: Auditor is required to report under Clause (ix) of Para 3 of CARO, 2020, i.e.,
whether the company has defaulted in repayment of loans or other borrowings or in the
payment of interest thereon to any lender, if yes, then provide the details of the period and the
amount of default.
Also, the auditor needs to consider the impact of such non-disclosure and the non-
compliance with the FRF and accordingly the auditor needs to either issue a qualified
opinion or an adverse opinion as per SA 705.

Q.57. SPM Ltd., about to complete fifty years of age since its incorporation in the F.Y 2023-2024,
decided during the F.Y. 2022-23 to upgrade its registered office at an important location in
Mumbai city. As part of planned package, it decided to acquire a land very adjacent to the site
of registered office, which had been owned by Mr. Parry who is a director of the Company.
Since he was reluctant to part with the ownership, he had been persuaded to convey the
property in favour of the company in exchange of a site owned by the company located at the
next street to the street where the registered office is situated, which is 1.50 times larger in
area than that of the site owned by the director adjacent to the Registered office. Happier with
what he was offered in negotiation, Mr. Parry agreed for transferring the property in favour of
the company in a deed of exchange duly executed by authorized persons of the Board, and
Mr. Parry. The registration formalities were completed by 31st Dec., 2022. Assuming that
you are engagement partner for the audit of the accounts of the company for the financial year
ended on 31st March, 2023, give a list of additional audit procedures and reporting
requirements, if any, that this transaction might trigger in your audit. [May 23 (5 Marks)]
Ans: Reporting under CARO, 2020:
 Para 3(xv) of CARO, 2020 requires the auditor to comment “whether the company
has entered into any non-cash transactions with directors or persons connected with him
and if so, whether provisions of Section 192 of Companies Act, 2013 have
been complied with”.
 Reporting requirements under this clause are in two parts. The first part requires the
auditor to report on whether the company has entered into any non-cash transactions
with the directors or any persons connected with such director/s. The second part of the
clause requires the auditor to report whether the provisions of section 192 of the Act have
been complied with. Therefore, the second part of the clause becomes reportable only
if the answer to the first part is in affirmative.
 For reporting on the first part of this clause, the starting point of the auditor‟s procedures
could be obtaining a management representation as to whether the company has
undertaken any non-cash transactions with the directors or persons connected with the
directors. The auditor would need to corroborate the management representation
with sufficient appropriate audit evidence.
 The second part of this clause requires the auditor to report whether the company has
complied with the provisions of section 192 in this regard. Section 192(1) and (2) of the
Act envisage the following compliances in respect of such transactions:

43
 (i) Company should have obtained a prior approval for such arrangement by a
resolution in the general meeting.
(ii) If the concerned Director or connected person is a director of the company‟s holding
company, the latter too should have obtained a similar prior approval for the
arrangement by a resolution at its general meeting.
(iii) Notice for approval of the resolution should contain details of the arrangement along
with the value of assets involved duly calculated by a registered valuer.
 Auditor should check compliance with section 192(2) of the Act and verify the notice of
the general meeting that it includes particulars of arrangement along with the value of the
assets involved in such arrangements.
Suggested paragraph on reporting:
According to information and explanations given to us, Company has entered into non-cash
transactions with one of the directors/persons connected with the director during the year,
by the acquisition of assets by assuming directly related liabilities, which in our opinion is
covered under the provisions of Sec. 192 of the Act, and for which approval has not yet
been obtained in a general meeting of the Company. In case said non-cash transactions are
entered into by company after obtaining prior approval of shareholders in general
meeting, then, factual position giving details of approval must be disclosed.

Q.58. Whilst the Audit team has identified various matters, they need your advice to include
the same in your audit report in view of CARO, 2020:
(a) The long-term borrowings from the parent has no agreed terms and neither the
interest nor the principal has been repaid so far. [MTP-Nov. 21]
(b) The Company is in the process of selling its office along with the freehold land available
at Chandigarh and is actively on the lookout for potential buyers. Whilst the same was
purchased at ` 25 Lakhs in 2008, the current market value is ` 250 Lakhs.
This property is pending to be registered in the name of the Company, due to certain
procedural issues associated with the Registration though the Company is having a valid
possession and has paid its purchase cost in full. The Company has disclosed this amount
under Fixed Assets though no disclosure of non-registration is made in the notes forming
part of the accounts. [MTP-Oct. 21]
(c) An amount of 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership
firm, which is a „related party‟ in accordance with the provisions of the Companies Act,
2013 for the marketing services rendered by them. Based on an independent assessment,
the consideration paid is higher than the arm‟s length pricing by 0.25 Lakhs per month.
Whilst the transaction was accounted in the financial statements based on the amounts‟
paid, no separate disclosure has been made in the notes forming part of the accounts
highlighting the same as a „related party‟ transaction. [MTP-Oct. 19, MTP-Nov. 21]
(d) The Internal Auditor of the Company has identified a fraud in the recruitment of
employees by the HR department wherein certain sums were alleged to have been
taken as kickback from the employees for taking them on board with the Company.
After due investigation, the concerned HR Manager was sacked. The amount of such
kickbacks is expected to be in the range of ` 12 Lakhs.
[MTP-March 19, Oct. 21., RTP-May 19]

44
Ans: Reporting under CARO, 2020:
(a) Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which
requires him to report “whether all transactions with the related parties are in compliance
with sections 177 and 188 of Companies Act, 2013 where applicable and the details
have been disclosed in the Financial Statements etc., as required by the applicable
accounting standards”.
(b) Auditor is required to report the matter as per Para 3(i)(c) of CARO, 2020 which
requires him to report, “whether the title deeds of all the immovable properties
disclosed in the financial statements are held in the name of the company. If title
deeds are not held in name of the company, details thereof to be provided in the
below mentioned format:
Description Gross Held in Whether Period held - Reason for
of Property carrying name of promoter, director indicate not being
value or their relative or range, where held in name
employee appropriate of company*

*Also indicate if in dispute.

(c) Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which requires
him 79 report whether all transactions with the related parties are in compliance
with sections 177 and 188 of Companies Act, 2013 where applicable and the details
have been disclosed in the Financial Statements etc., as required by the applicable
accounting standards”.
Reporting is required, as one of related party transaction amounting ` 3.25 lakhs per
month i.e. in lieu of marketing services has been noticed of which amount ` 0.25 lakh per
month is exceeding the arm‟s length price has not been disclosed highlighting
the same as related party transactions as per AS 18.
(d) Auditor is required to report the matter as per Para 3(xi) of CARO, 2020 which requires
him to report, “whether any fraud by the company or any fraud on the Company has
been noticed or reported during the year; If yes, the nature and the amount involved is
to be indicated.”
Reporting is required, as a fraud has been identified in recruitment of employees by the
HR Department wherein certain sums were alleged to have been taken as kickback from
the employees of company amounting to ` 12 lakhs approx.

Q.59. LIU Private Limited is a company based out of Mumbai. The company had an authorised
capital of ` 200 lakh and paid-up capital plus reserves of ` 95 lakh as of 31st March.
During the audit for the year ended 31st March 202X, the auditor M/s Y&S Associates
noted the following points:
(i) On 15th December, the company had total bank borrowings of ` 75 lakh. On the said
date, the company received a new loan of 30 lakh for a new project that was to be
developed. However, the project was shelved on 17th December due to technical reasons,
and the whole loan was paid on the same date.
(ii) During the financial year, a new proceeding was initiated against the company
for holding a benami property worth ` 2.5 crore. However, the company‟s legal team
had advised that the case would not withstand the law and would be dismissed during

45
 the hearing in April of next financial year.
(iii) The company had incurred a cash loss of 39 lakh during the financial year compared
to a cash profit of ` 15 lakh in the previous financial year. The total turnover of
the company for the financial year was ` 45 Crore.
During the year, the Y&S Associates had offered to resign from acting as the company‟s
auditors. However, they later decided to postpone their resignation to the following year. At
the conclusion of the audit, there was a difference of opinion between two articled assistants
(Jack & Jill), who were assigned to the engagement, concerning disclosing the points
mentioned above in the Companies (Auditor‟s Report) Order 2020. Jack was of the opinion
that the proceeding initiated under Benami Property Act need not be disclosed since
the expert legal team had informed them that the case would not withstand the law.
However, he insisted that the cash loss shall be disclosed along with the amount. Jill was of
the opinion that CARO is not at all applicable to the company, hence nothing needs to
be reported. They both approached the firm‟s partners (Mr. Y & Mr. S) to resolve their
argument. Mr Y supported Jack‟s viewpoint & Mr S supported Jill‟s viewpoint. Now,
both partners approached their Senior Partner to get clarification on the same. As a Senior
Partner, kindly clarify the correct disclosure requirement. [RTP-May 23]
Ans: Applicability of CARO, 2020:
CARO 2020 is applicable to every company, including a foreign company, except,
(i) a banking company;
(ii) an insurance company;
(iii) a company licensed to operate under section 8 of the Companies Act,
(iv) a One Person Company and a small company, and
(v) a private limited company, not being a subsidiary or holding company of a public
company, having a paid up capital and reserves and surplus not more than ` 1 crore
as on the balance sheet date and which does not have total borrowings exceeding t
` 1 crore from any bank or financial Institution at any point of time during the financial
year and which does not have a total revenue as disclosed in Scheduled II to the
Companies Act, 2013 (including revenue from discontinuing operations) exceeding 10
crore during the financial year as per the financial statements.
In the given case though LIU is a private company, and its paid-up capital is less than
` 1 crore as on the balance sheet date, it is to be noted that for the period 15th December to
17th December, the total borrowings of the company had exceeded ` 1 crore (75 lakh + 30
lakh). The borrowings are less than ` 1 crore as of the balance sheet date and the authorised
capital is ` 200 lakh, are irrelevant to the current scenario. Also, the turnover of the company
was greater than ` 40 crore. Hence, CARO 2020 is applicable to LIU Private Limited.
Reporting requirements under CARO, 2020:
(i) As per Para 3(1)(e) of CARO 2020, auditor shall report whether any proceedings
have been Initiated or pending against the company for holding any benami
property under the Benami Transactions (Prohibition) Act, 1988 and rules made
thereunder, if so, whether the company has appropriately disclosed the details in
its financial statements.
In the given situation, a new proceeding was initiated against the company for holding a
benami property worth ` 2.5 crores during the financial year. However, the company‟s
legal team had advised that the case would not withstand the law and would be dismissed

46
 during the hearing, which would be held in April of the next financial year.
Therefore, above observation of a new proceeding initiated against the company
for holding a benami property worth ` 2.5 crores need to be disclosed as per Para
3(1)(e) of CARO 2020.
(ii) As per Para (xvii) of CARO 2020, auditor shall include a statement on whether
the company has incurred cash losses in the financial year and in the immediately
preceding financial year, if so, state the amount of cash losses.
In the given situation, the company incurred a cash loss of ` 39 lakh during the
financial year. Hence, a cash loss of ` 39 lakh during the financial year need to be
reported as per clause (xvii) of para 3 of CARO 2020.
(iii) As per clause (xviii) of para 3 of CARO 2020, auditor shall include a statement on
whether there has been any resignation of the statutory auditors during the year, if so,
whether the auditor has taken into consideration the issues, objections or concerns raised
by the outgoing auditors.
In the instant case, there has been no resignation made by the statutory auditors
during the financial year. The mere fact that Y&S Associates were thinking of resigning
does not matter in the current scenario, and hence this clause shall not be applicable
in the given situation.

Q.60. You are appointed as the Auditor of XMP Pvt. Ltd. for financial year 2022-23 after
the resignation of RS & Co. Chartered Accountants, as statutory auditor of the company.
RS & Co., had certain concerns on the accounting matters of the company, leading to change
of auditors. All the compliances u/ss 139 & 140 are made by the company with regard to
resignation and appointment.
During the course of audit, it came to your notice that a survey has been conducted
on December 7, 2022 by the Income Tax Department and department has unearthed
unrecorded sales of ` 5 lakhs which had been made in cash on different dates during the year
2021-22. XMP Pvt. Ltd. has purchased gold from such collections and these transactions
are not recorded. Company surrendered and disclosed these transactions before the assessing
officer and paid taxes thereon. However, company has not recorded those transactions
in books of account even after surrender before Income Tax authorities.
You want to report the above matters in CARO, but the management requested you not
to report them. Comment with respect to auditor‟s response to the management and his
reporting requirements to the shareholders. [Nov. 22 (5 Marks)]
Ans: Considerations of issues raised by outgoing auditor:
 Clause (xviii) of Para 3 of CARO, 2020 requires the auditor to report whether there
has been any resignation of the statutory auditors during the year, if so, whether the
auditor has taken into consideration the issues, objections or concerns raised by the
outgoing auditors.
 The incoming auditor should consider the reasons for resignation. The incoming auditor
should also refer to last audit/review report issued by the outgoing auditor to
understand the modifications, if any, in the audit/review report.
 Clause (viii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether
any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax assessments under the Income Tax Act,

47
 1961, if so, whether the previously unrecorded income has been properly recorded in the
books of account during the year.
 In the given case outgoing auditor, RS & Co. had certain concerns on the accounting
matters of the company, leading to change of auditors. Further incoming auditor
came to notice that there were unrecorded cash sales of ` 5 lakhs during the year
2021-22 & purchased gold; company surrendered and disclosed these transactions
before the assessing officer and paid taxes thereon. However, company has not recorded
those transactions in books of account even after surrender before Income Tax
authorities. Management requested auditor not to report the matters.
Conclusion: Management request cannot be accepted. Auditor is under a duty to report
the matter under Clauses (viii) and (xiii) of Para 3 of CARO, 2020. In addition, auditor
is required to determine the impact of undisclosed transactions on the financial statements
of current year & make suitable modifications in audit report as per requirements of
SA 705.

Q.61. In the course of audit of MM Ltd., your audit team has identified the following matter:
All amount of ` 4 Lakhs per month for the marketing services rendered is paid to
M/s. MG Associates, a partnership firm in which Director of MM Ltd. is also a managing
partner, with a profit sharing ratio of 30%. Based on an independent assessment,
the consideration paid is higher than the arm‟s length pricing by ` 1.50 Lakhs per month.
Whilst the transaction was accounted in the financial statements based on the amounts paid,
no separate disclosure has been made in the notes forming part of the accounts.
Give your comments for reporting under CARO. [Nov. 20 (4 Marks)]
Ans: Reporting of Related Party Transactions under CARO:
 Clause (xiii) of Para 3 of CARO, 2020, requires auditor to report whether all transactions
with the related parties are in compliance with Secs. 177 & 188 of Companies Act, 2013
where applicable and the details have been disclosed in the F.S. etc., as required by the
applicable ASs.
 Therefore, the duty of the auditor, under this clause is to report:
(i) Whether all transactions with the related parties are in compliance with sections
177 and 188 of the Companies Act, 2013.
(ii) Whether related party disclosures as required by relevant Accounting Standards
(AS 18, as may be applicable) are disclosed in the financial statements.
 In the given case, MG Associates is a related party and also rendering marketing
services to MM Ltd. in return of Consideration of ` 4 Lakhs which is related party
transaction. No separate disclosure has been made in the notes to accounts in this
context, which was required to be made.
In view of above, Auditor shall report as under:
1. Nature of the related party relationship and the underlying transaction: MG Associates
is a partnership firm in which Director of MM Ltd. is also a managing partner,
with a profit sharing ratio of 30%. Payment of ` 4 Lakhs to MG Associates is a related
party transaction.
2. Amount involved is consideration for the Marketing services rendered by MG
Associates (` 4 Lakhs p.m.) is higher than the arm‟s length pricing by ` 1.50 Lakhs p.m.
(` 18 Lakhs p.a.)

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Q.62. As an auditor, how will you report under CARO in each of the following situation?
(i) Since more than seven months, payment of electricity bills to company established
under statute is outstanding.
(ii) The company had imported goods 5 years back and were placed in bonded warehouse
till the end of financial year under Audit. The company has not paid import duty as
goods have not been removed from such warehouse. The company has also not paid rent
and interest expenditure payable on the amount of custom duty.
(iii) The company has received income tax assessment order along with demand notice
from Assessing officer. The company has not paid dues payable as the same is not
acceptable to the company. The company has neither preferred appeal against the
order nor an application for rectification of mistake has been made. The company has
just merely represented to the Assessing Officer.
(iv) The company in view of voluminous pay-roll data consistently follows the method
of making lump sum deposit of estimated amount of ESI collections and adjust the
excess or deficit against next following months‟ deposit and the difference of the
said amount always remains insignificant. [Jan. 21 (5 Marks)]
Ans: Reporting under CARO:
Clause (vii)(a) of Para 3 of CARO, 2016 requires the auditor to state in his report whether
the company is regular in depositing undisputed statutory dues including provident
fund, Employees‟ State Insurance, Income-tax, Sales-tax, Services tax, Duty of Customs,
Duty of Excise, Value Added Tax, cess and any other statutory dues to the appropriate
authorities & if not, the extent of the arrears of outstanding statutory dues as on the last
day of the financial year concerned for a period of more than 6 months from the date they
became payable, shall be indicated.
It is important to mention that any sum, which is to be regularly paid to an appropriate
authority under a statute (whether Central, State or Local or Foreign) applicable to the
company, should be considered as a “statutory due” for the purpose of this clause. In other
words, obligation to pay a statutory due is created or arises out of a statute, rather than being
based on an independent contractual or legal relationship.
Conclusion: Based on the above stated provisions, following conclusions may be drawn:
(i) Any sum payable to an electricity company as electricity bill would not constitute a
statutory due as dues has arisen on account of contract of supply of goods or services
between the parties. Thus, reporting under CARO is not required for electricity dues.
(ii) In case of imported goods placed in a bonded warehouse, payment of import duty is
to be made when the goods are removed from the bonded warehouse. However, till the
time the importer opts to remove the goods from the warehouse, the importer is required
to incur the rent and interest expenditure on the amount of customs duty payable.
Since payment of custom duty is not due in the current case, the question of regularity
does not arise in respect of custom duty.
Interest and rent that are required to be incurred u/s 61 of the Customs Act, 1962 would
come under other statutory dues and the auditor would have to examine & comment
upon the regularity of the company in depositing such interest and rent.
(iii) In relation to income tax assessment order received by the company along with demand
notice, (iii the auditor is required to check whether time limit for filing the appeal or
application for rectification of mistake has expired or not. In case such time limit has

49
 expired, disputed amount will become undisputed statutory due (as mere representation
to the concerned Department shall not be treated as a dispute).
Auditor is also required to ascertain whether such dues are outstanding for a period of
more than 6 months from the date they became payable. Accordingly, after ensuring the
above, if the statutory dues are outstanding for more than 6 months the auditor is required
to report the same under clause (vii) (a) of CARO.
However, in case the statutory dues are not outstanding for a period of more than 6
months from the date they became payable the auditor is not required to report the same
under CARO.
(iv) If the method as stated in the question is consistently followed and the difference
between the total dues and the lumpsum deposit is not significant, it need not be
considered that dues have not been regularly deposited and no unfavourable comment is
necessary. Thus, no reporting is required for the same under CARO.

Q.63. Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a
Chartered Accountant Firm, for conducting statutory audit assignment of Sinwar Ltd.,
unlisted public company. Mr. Brijesh, one of the senior engagement team members, was
given the responsibility to audit the matters as per the requirements of CARO, 2020 and in
that connection, he made the following observations, that may be relevant for reporting as per
the said Order:
Sr. No. Observations
(a) One of the Plant and Equipment taken on a lease („right of use‟ asset) by
Sinwar Ltd. was revalued based on the valuation by a registered valuer and the
net carrying value of Plant and Equipment in aggregate was changed from
` 4 crore to ` 4.45 crore.
(b) During the year under consideration, cash credit limit of ` 5.5 crore was
sanctioned to Sinwar Ltd. by DMC Bank based on the security of current
assets which was reduced to ` 4.5 crore after 6 months. In this connection,
quarterly returns have been filed by the company with the DMC bank which
are in agreement with Books of Account.
You are required to examine the contention of Mr. Brijesh regarding reporting of the above
observations in accordance with CARO, 2020. [RTP-May 22]
Ans: Reporting requirements under CARO, 2020:
(a) As per Para 3(i) (d) of CARO, 2020, the auditor is required to report whether the
company has revalued its Property, Plant and Equipment (including Right of Use assets)
or intangible assets or both during the year and, if so, whether the revaluation is based on
the valuation by a Registered Valuer; specify the amount of change, if the change is 10%
or more in the aggregate of the net carrying value of each class of Property, Plant and
Equipment or intangible assets.
In the given situation, Sinwar Ltd. has revalued one of the Plant and Equipment taken on
a lease („right of use‟ asset) based on the valuation by a registered valuer. The amount of
change in the value of such Plant and Equipment is ` 45 lakh. As the net carrying value
of Plant and Equipment in aggregate was changed from ` 4 crore to ` 4.45 crore i.e.
change was 10% or more.

50
 Conclusion: Auditor is required to report the amount of change of ` 45 lakh in
accordance with Para 3(i) (d) of CARO, 2020.
(b) As per Para 3(ii) (b) of CARO, 2020, the auditor is required to report whether during
any point of time of the year, the company has been sanctioned working capital limits
in excess of ` 5 crores, in aggregate, from banks or financial institutions on the basis
of security of current assets; whether the quarterly returns or statements filed by
the company with such banks or financial institutions are in agreement with the books
of account of the Company, if not, give details.
In the given situation, Sinwar Ltd. has been sanctioned a cash credit limit of ` 5.5 crores
by DMC Bank during the year under consideration, which is exceeding the prescribed
limit of ` 5 crores based on the security of current assets. Further, quarterly returns
have also been filed by the company with the DMC bank in this connection which is
in agreement with Books of Account.
Conclusion: Auditor is required to report the working limit sanctioned to Sinwar Ltd.
and disagreement of quarterly statements with the books of account.

7.10 - Other Comprehensive Questions

Q.64. The audit report of Kolsi (P) Ltd. for F.Y. 2022-23 was issued by Bishnoi & Co. on 25th
July, 2023. However, a case was filed against Kolsi (P) Ltd. on 4th August, 2023, with
the Civil Court, with respect to an incident caused in its factory on 17th January, 2023,
the outcome of which may result in paying heavy penalty by Kolsi (P) Ltd.
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the
management and it was determined to amend the financial statements for F.Y.
2022-23. Further, Mr. Raj inquired how the management intended to address the said
matter in the financial statements to which he was told that the said matter was going to
be disclosed as a “Contingent Liability for a Court case” to the foot note in the balance
sheet with no additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would further
going a description of the said court case and its outcome in the „Emphasis of Matter‟
paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following questions:
(1) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to his
responsibilities in accordance with SA 560, on becoming aware of the court case
filed against Kolsi (P) Ltd.?
(2) Whether the contention of management of Kolsi (P) Ltd. is valid with respect to the
disclosure of the court case in the financial statements? [RTP-Nov. 21]
Ans: Auditor’s Responsibilities as per SA 560:
 As per SA 560, „Subsequent Events‟, auditor has no obligation to perform any audit
procedures regarding F.S. after date of auditor‟s report. However, when, after date of
auditor‟s report but before the date the F.S. issued, a fact becomes known to auditor that,
had it been known to auditor at date of the auditor‟s report, may have caused him to
amend auditor‟s report, the auditor shall:
(1) Discuss the matter with management and, where appropriate, TCWG.
(2) Determine whether the financial statements need amendment and, if so.
(3) Inquire how management intends to address the matter in the financial statements.

51
  In the given case, on becoming aware of the court case filed against the company,
Mr. Raj discussed the said matter with the management and it was determined to amend
the F.S. Also, he inquired how the management intended to address the said matter
in the F.S.
 However, if management does not take the necessary steps to ensure that anyone in
receipt of the previously issued F.S. is informed of the situation and does not amend the
F.S. in circumstances, auditor shall notify management and TCWG that the auditor will
seek to prevent future reliance on the auditor‟s report. If despite such notification
management or TCWG do not take these necessary steps, auditor shall take appropriate
action to seek to prevent reliance on the auditor‟s report in accordance with SA 560.
Disclosure of the court case in the financial statements
As per SA 706, „Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor‟s Report‟, an Emphasis of Matter paragraph is not a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the a
specific audit engagement; circumstances of
(b) Disclosures in the financial statements that the applicable financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair
presentation; or
(c) Reporting in accordance with SA 570 when a material uncertainty exists relating to
events or conditions that may cast significant doubt on an entity‟s ability to continue
as a going concern.
In the given case, management of company has presumed that as the auditor was going to
provide a description of the said court case and its outcome in the „EOM paragraph in his
amended audit report, there was no further need for it to provide additional disclosures about
the court case in the F.S.
Conclusion: Contention of management is not valid as „Emphasis of Matter‟ paragraph
cannot be used as a substitute for disclosures required to be made in the financial statements
as per the applicable financial reporting framework or that is otherwise necessary to achieve
fair presentation, which is the responsibility of the management.

PART- II MULTIPLE CHOICE QUESTIONS

1. During the conduct of audit, it was found that the management has intentionally made
material misstatements in the several items of the financial statements to deceive the users of
the financial statements, to reduce the pressures of meeting market expectations and to
increase the reputation of the company. What would be the implications on the auditor‟s
report if no adjustments are made to the financial statements regarding the misstatements
made by the management?
(a) The auditor would issue a qualified audit opinion stating that „except for‟ these
matters the financial statements are fairly presented. The auditor should also include a
„Basis for Qualified Opinion‟ paragraph below the opinion paragraph.
(b) The auditor would issue an adverse audit opinion stating that „except for these matters
the financial statements are fairly presented. The auditor should also include a „Basis for
Qualified Opinion‟ paragraph below the opinion paragraph.
(c) The auditor would issue an adverse audit opinion stating that financial statements „do not

52
 give a true and fair view‟. The auditor should also include a „Basis for Adverse Opinion‟
paragraph below the opinion paragraph.
(d) The auditor would issue an adverse audit opinion stating that financial statements „do
not give a true & fair view‟. The auditor should also include a „Basis for Qualified
Opinion‟ paragraph below the opinion paragraph.

2. While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed
company, using a fair presentation framework, M/s Pintu & Co., a Chartered Accountant
firm, discovered that the consolidated financial statements are materially misstated due to the
non-consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the
consolidated financial statements. The effects of the misstatement on the consolidated
financial statements have not been determined because it was not practicable to do so.
Thus, M/s Pintu & Co. decided to provide an adverse opinion for the same and further
determined that, there are no key audit matters other than the matter to be described in the
Basis for Adverse Opinion section. Comment whether M/s Pintu & Co. needs to report under
SA 701 „Communicating Key Audit Matters in the Independent Auditor‟s Report‟?
(a) M/s Pintu & Co. have the option to follow SA 701, thus, need not to report any key
audit matters.
(b) SA 701 is mandatory in the case of audit of listed entities, however, as there are no
key audit matters other than the matter to be described in the Basis for Adverse Opinion
section, no „Key Audit Matters‟ para needs to be stated under audit report.
(c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key
audit matters other than the matter to be described in the Basis for Adverse Opinion
section, M/s Pintu & Co. shall state, under „Key Audit Matters‟ para, that „except for the
matter described in Basis for Adverse Opinion section, we have determined that there are
no other key audit matters to communicate in our report.‟
(d) M/s Pintu & Co. is under compulsion to follow SA 701 as the audit is of a listed
company and shall report under „Key Audit Matters‟ para the matter same as stated in
„Adverse Opinion‟ para regarding non-consolidation of a subsidiary.

3. If the prior period financial statements were not audited, the auditor shall state the same in.
(a) Key audit matter section.
(b) Emphasis of matter paragraph.
(c) Going concern paragraph.
(d) Other matter paragraph.

4. In case of audits of listed entities, other information section is required in auditor‟s report
when at the date of auditor‟s report:
(a) Auditor has obtained some or all of the other information.
(b) Auditor has obtained all of the other information.
(c) Auditor has obtained or expects to obtain the other information.
(d) Auditor has obtained some of the other information.

5. In case of audits of unlisted corporate entities, other information section is required in

auditor‟s report when at the date of auditor‟s report:

53
 (a) Auditor has obtained some or all of the other information.
(b) Auditor has obtained all of the other information.
(c) Auditor has obtained or expects to obtain the other information.
(d) Auditor has obtained some of the other information.

6. VBN & Associates, chartered accountants are Statutory auditors of Gold Ltd. for the
year ended 31st March, 2024. While conducting audit for the year, the auditor have come to
know that the fraud amounting to ` 2 crore was done by one of the employees. Under
Sec. 143(12) of Companies Act, 2013, you are required to suggest whether as a statutory
auditor, VBN & Associates is required:
(a) To report fraud to Audit Committee/Board of Directors of Gold Ltd. and in
Auditor‟s Report.
(b) To report fraud to shareholders of Gold Ltd. and no further reporting.
(c) To report fraud only in Auditor‟s Report.
(d) To report fraud to Central Government and in Auditor‟s Report.

7. SKJ Private Ltd. has annual turnover of INR 200 crore and profits of INR 25 crore. Company
is engaged in the business of textiles and has fairly stable operations over the years. There has
not been much growth in the company in the last few years despite the attempts of the
management. Currently the management is more focused towards cost cutting and has been
considering all the options to achieve that objective.
Statutory auditors of company have been auditing the F.S. for the last 3 years and have issued
clean reports over these years.
During financial year ended 31 March 2023, management got a large project from a new
customer which resulted in significant increase in the turnover of the company. However, the
profitability of the company did not improve much because the margins in the contract were
not high.
Statutory auditors during the course of their audit of F.S. for the year ended 31 March 2023
(their fourth year of audit) did not agree with the revenue recognition criteria followed by the
company. Since the matter was significant, lot of discussions/ debates happened between the
auditor and the management. But it was finally agreed that the auditors would qualify their
audit report.
Auditors wanted that the management should explain this matter in detail in the notes to
accounts to the financial statement over which the auditors are qualifying the audit report.
However, the management had a different view. Management said that if the auditor is
qualifying his report then why should the management also highlight that matter in the
financial statement and hence refused to include any note for the same.
On account of the conflict, since audit is not getting concluded. You are required to suggest
how the matter get resolved?
(a) In the given situation, if the management does not agree to give a note in the financial
statements then the auditor should not hold the audit report. However, in such a case, the
auditor would need to give disclaimer of opinion in his report instead of qualification.
(b) The argument of the management seems correct. Auditor cannot do both the things i.e. to
qualify and then also get that highlighted in the financial statements. That note would not
be beneficial for the users of the financial statements.

54
 (c) In case of such matters related to revenue recognition, it is always better to give detailed
explanation in the notes to accounts to the financial statements. If the explanation is
satisfactory then the auditor should also consider giving emphasis of matter instead of
qualification.
(d) The requirement of the auditor is beneficial for the company because by giving an
explanation of the matter, on which auditor has given a qualification, in the notes to
accounts, the management would be able to explain their perspective/ point of view to the
users of the financial statements. In that case, auditor while giving the qualification can
give reference to the notes to accounts otherwise the entire matter would form part of the
audit report. However, the auditor should not hold his report if the management does not
want to give any explanation in the notes to accounts.

8. M/s ABC & Associates, a firm of chartered accountants was appointed as statutory auditors
by IRCON Ltd. for the audit of their financial statements for the financial year 2022-23.
During the course of audit, the auditors noticed a fraud of ` 1.36 Crores done by an officer of
the company. The officer sanctioned and made the payment to fake vendors for purchase of
fixed assets; however, the assets were not entered in the Fixed Assets Register. The auditor
reported the fraud in his audit report to the shareholders of the company presented in the
AGM, but did not mentioned the name of the parties involved.
The Board of Directors of the company are complaining against the auditor as he has not
complied with his duty to report fraud as per Sec. 143(12) of the Companies Act, 2013.
Advise on the duty of the auditor as per Companies Act in relation to reporting of the fraud
done by officers or employees of the company?
(a) If the auditor has reason to believe that a fraud has been conducted by the officers
or employees of the company, the auditor shall report the matter to the Central
Government immediately.
(b) If the amount of fraud is more than 100 lacs; the auditor should have reported the matter
within 2 days of his knowledge to the Board of Directors/Audit committee of the
company seeking their reply or observations within 45 days. After completion of 45 days
the auditor should forward his report to the Central Government along with the reply if
any received from Board/Audit Committee.
(c) The auditor‟s duty is restricted to reporting the fraud to shareholders and he is not
required to report the matter to Board of Directors/Audit Committee/Central
Government.
(d) The auditor can submit his report on fraud to shareholders but is required to mention
the name of the parties involved in fraud, as per Section 143(12) of the Companies
Act, 2013. [MTP-April-19]

9. ABC Pvt. Ltd. had turnover of ` 39 crores as at 31 March 2023. The Company had taken a
loan of ` 39 crores from various banks and financial institutions during the year ended
31 March 2023. These loans were paid by the Company before 31 March 2023.
The Company is of the view that the auditors‟ reporting on adequacy & operating
effectiveness of internal financial controls (IFC) u/s 143(3)(i) of the Companies Act, 2013
would not be required. The auditors of the Company have a different view. Choose the
correct answer?

55
 (a) The turnover of ABC Pvt. Ltd. is below required threshold and hence reporting on
adequacy and operating effectiveness of IFC will not be applicable.
(b) The turnover of ABC Pvt. Ltd. is below required threshold and loan amount was fully
paid before year end i.e. 31 March 2023. Hence reporting on adequacy and operating
effectiveness of IFC will not be applicable.
(c) The borrowings of the company are above threshold, hence reporting on adequacy &
operating effectiveness of IFC would be applicable.
(d) The turnover of ABC Pvt. Ltd. is below required threshold & loans were repaid before
year end i.e. 31 March 2023, applicability of IFC becomes optional. [RTP-May 19]

10. KJA Ltd. is in the business of manufacturing of tiles and sanitaryware. The company
has a large inventory every year. Annual turnover of the company is INR 3000 crores.
The company has 7 plants across India. The management of the company carries out
physical verification of inventory every year at the time of reporting date. During the year
ended 31 March 2023, it was found by the management that the inventory sheets of 31 March
2022 did not include five pages containing details of inventory worth INR 24.5 crores.
Management has included this inventory in the valuation of inventory as of 31 March 2023.
Management has also explained that considering the size of the company this may happen
at times as the inventory is huge and lying at various locations. Moreover, the amount of
the inventory is insignificant if considered as a percentage of revenue or inventory. State
how you will deal with this matter as an auditor in the accounts of the company (towards
substantive audit procedures and excluding the impact on auditor‟s assessment under
Internal Financial Control Framework) for the year ended 31 March 2023.
(a) Since the matter is not relevant/material to current period figures, no reporting in
respect of this matter would be required in the auditor‟s report for the year ended
31 March 2023.
(b) Management should restate the financials to adjust the error. Otherwise auditor
may modify his opinion on current year‟s financial statements considering the
materiality.
(c) Considering the matter is not relevant/material to current period figures, the
management may include a note in the financial statements and basis that no reporting in
respect of this matter would be required in the auditor‟s report for the year ended
31 March 2023.
(d) Include an emphasis of matter because of the effects or possible effects of the error in
the auditor‟s report for the year ended 31 March 2023. [RTP-May 19]

11. While conducting the current year audit of Finolex Ltd, the auditor obtains audit evidence that
a material misstatement exists in the prior period financial statements. This misstatement was
related to recognition of research and development expenditure. The provisions of Ind AS 38
Intangible Assets relating to capitalisation of development expenditure was not applied
properly. On this, unmodified opinion had been previously issued. The current auditor
verified that the misstatement had not been dealt with as required under Ind AS 8 Accounting
Policies, Changes in Accounting Estimates and Errors. Accordingly, the current auditor will:
(a) Express a qualified or an adverse opinion in the auditor‟s report on the current period
financial statements modified with respect to the corresponding figures included therein.

56
 (b) Express an unmodified opinion in the auditor‟s report on the current period financial
statements since it was related to the prior year.
(c) Express a qualified opinion in the auditor‟s report on the current period financial
statements, modified with respect to the corresponding figures included therein.
(d) Express an adverse opinion in the auditor‟s report on the current period financial
statements, modified with respect to the corresponding figures included therein.
[MTP-Oct. 19]

12. ABC Ltd. is a listed company engaged in the business of software and is one of the largest
company operating in this sector in India. The company‟s annual turnover is ` 10,000 crores
with profits of ` 2,000 crores.
During the course of the audit, the audit team spends significant time on audit of revenue - be
it planning, execution or conclusion. The audit team for this engagement comprises of approx.
70-80 members. The company‟s contracts with its various customers are quite complicated
and different. The efforts towards audit of revenue also involve significant involvement of
senior members of the audit team including the audit partner.
After completion of audit for the year ended 31 March 2023, the audit partner was discussing
significant matters with the management wherein he also communicated to the management
that he plans to include revenue recognition as key audit matter in his audit report. The
management was quite surprised to understand this from the auditor and did not agree with
revenue recognition to be shown as key audit matter in the audit report. As per the
management, the auditors didn‟t have any modification and such a matter getting reported as
key audit matter would not go down well with various stakeholders and would significantly
impact the financial positions of the company in the market. The auditors were not able to
convince the management in respect of this point and there was a difference of opinion.
You are requested to give your view in respect of this matter.
(a) The concern of the management is valid. For such a large sized company, such type of
matter getting reported as key audit matter is not appropriate.
(b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter
and hence should be reported accordingly by the auditor in his audit report.
(c) Reporting revenue as key audit matter when the auditor does not have observation in that
area leading to any modification in his report, would not be appropriate.
(d) This being the first year of reporting of key audit matters, the auditor should take a soft
stand and should avoid reporting such controversial matters in his report. [RTP-Nov. 19]

13. A Ltd. is engaged in the business of providing management consultancy services and have
been in operation for the last 15 years. The company‟s financial reporting process is very
good and its statutory auditors always issued clean report on the audit of the financial
statements of the company. The auditors were required to be rotated due to mandatory audit
rotation requirement of the Companies Act, 2013.
MN & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the
company for a term of 5 years and have to start their first audit for the financial year ended
31 March 2023. The auditors had a detailed and clear discussion with the management that
they will perform their audit procedures in respect of opening balances along with the audit
procedures for the financial year ended 31 March 2023. Management agreed with that & the

57
 audit was completed as per the plan.
The auditors did not have any significant observations and hence they communicated to the
management that their report will be clean. Management was quite happy with this & also
requested the auditors to share draft report before issuing the final report.
In the draft audit report, all the particulars were fine except „other matters paragraph‟ wherein
the auditors gave a reference that the financial statements for the comparative year ended
31 March 2022 was audited by another auditor. Management asked the audit team to remove
this paragraph as the auditors had performed all the audit procedures on opening balances
also. But the auditors did not agree with the management.
Please advise the auditor or the management whoever is incorrect with the right guidance.
(a) Contention of the management is valid. After performing all the audit procedures, an
auditor should not pass on the responsibility to another auditor by including such
references in his audit report.
(b) Any auditor has two options, either to perform audit procedures on opening balances or
given such reference of another auditor in his report. Auditor cannot mix up the things
like this auditor has done. It is completely unprofessional.
(c) In the given situation even if the auditor wants to give such reference, the management
and the auditor should have taken approval from the previous auditor at the time of
appointment of new auditor. In this case, it cannot be done.
(d) The report of the auditor is absolutely correct and is in line with the auditing standards.
An auditor is required to include such reference in his report as per the requirements of
the auditing standard. [RTP-Nov. 19]

14. The auditor shall express opinion when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually or in the aggregate, are both
material and pervasive to the financial statements
(a) Adverse
(b) Qualified
(c) Disclaimer of opinion
(d) Clean [MTP-May 20]

15. Before concluding the audit, there was a difference of opinion between the audit committee
and the auditors as to which among the following are the areas which the auditor should take
into account to determine “Key Audit Matter” as per SA 701:
(I) The effect on audit of significant transactions that took place in the FY.
(II) Areas of high risk as assessed and reported by management‟s expert.
(III) Significant auditor judgment relating to areas in the financials that involved significant
management judgment.
As per SA 701- Communicating Key audit matters in the Independent auditor‟s Report, which
among the above-mentioned areas should CA & Co. take into account to determine “Key
Audit Matter”?
(a) (I) & (III)
(b) (II) only
(c) (I) & (II)
(d) (I), (II) & (III) [RTP-Nov. 20]

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16. NIC Chartered Accountants was appointed as statutory auditors by PNG Ltd. for the audit
of their financial statements. During the course of audit, the auditors noticed a fraud of
` 101 lac committed by an officer of the Company. The officer sanctioned and made
the payment to fake vendors for purchase of fixed assets; however, the assets were not entered
in the Fixed Assets Register. The auditor reported the fraud in his audit report to
the shareholders of the Company presented in the Annual General Meeting, but did not
mention the name of the parties involved. The Board of Directors of the Company asked
ICAI to take necessary action against the auditor as he did not comply with his duty to report
fraud as per Section 143(12) of the Companies Act, 2013. What is the duty of the auditor
as per the Companies Act, 2013 in reporting the fraud committed by officers/ employees of
the Company?
(a) As per the Companies Act, 2013, since the amount of fraud is more than ` 100 lac;
auditor should have reported the matter within 2 days of his knowledge to the
BOD/Audit committee of the Company seeking their reply or observations within 45
days. After completion of 45 days, auditor should forward his report to the C.G. along
with the reply, if any, received from Board/Audit Committee.
(b) As per the Companies Act, 2013, during the course of audit if the auditor has reason to
believe that a fraud has been committed by the officers or employees of the Company,
the auditor shall report the matter to the Central Government immediately.
(c) The auditor‟s duty is restricted to reporting the fraud to shareholders and he is not
required to report the matter to the Board of Directors/Audit Committee/Central
Government.
(d) The auditor can submit his report on fraud to shareholders but is required to mention
the name of the parties involved in fraud, as per Section 143(12) of the Companies
Act, 2013. [RTP-Nov. 20]

17. CA Ram identified that there was a misstatement last year and the same is still not corrected.
Although unmodified audit report was issued last year by CA Ram. Guide CA Ram on the
audit opinion considering the fact that the last year‟s misstatement has been identified in the
current year and unmodified opinion was issued in the last year?
(a) In accordance with SA 710, CA Ram should give unmodified opinion, but include other
matters paragraph in the audit report as last year‟s profit is being reflected in reserve &
surplus.
(b) In accordance with SA 710, CA Ram should seek legal opinion.
(c) In accordance with SA 710, CA Ram should qualify current period audit report with
respect to corresponding figures only.
(d) In accordance with SA 710, CA Ram should give unmodified opinion, but last period‟s
modified opinion should be highlighted in Emphasis of matter paragraph.
[MTP-March 21]

18. CA Kamal is the statutory auditor of Autocover Ltd. for the FY 2023-24. The company is
engaged in the business of manufacture of car accessories. CA Kamal noticed that the
inventories of the company amounting to ` 46 crores (equal to 25% of the total assets of the
company) at the end of the year do not exist. Also, sales amounting to ` 33 crores (equal to
10% of the total sales during the year) have not actually occurred. CA Kamal noticed both the

59
 material discrepancies just before the finalisation of the audit report for the year ending
31.03.2024. CA. Kamal considers that the above misstatement would distort the true and fair
view to a greater extent.
What is correct course of action that CA Kamal should consider in such a situation?
(a) CA Kamal should consider withdrawing from the audit engagement or issuing a
disclaimer of opinion for the FY 2023-24.
(b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
discrepancies in the basis for adverse opinion paragraph of the auditor‟s report.
(c) CA Kamal should ask the management to explain both the discrepancies in the notes to
accounts and he himself should highlight the matter in the Key Audit matter paragraph
of the auditor‟s report.
(d) CA Kamal should give a qualified opinion along with the specific mention of the matters
in the Emphasis of matter paragraph in the auditor‟s report along with appropriate
disclosure in the notes to accounts to be made by the management of Autocover Ltd.
[MTP-March 21]

19. Preparing the financial statements in accordance with the applicable financial reporting
framework is the responsibility of the management of ABC Ltd. Which of the following is
correct in regard to the disclosure of such management responsibility?
(a) This is implied responsibility of management and is presumed in an audit of financial
statements and therefore need not be specifically mentioned anywhere.
(b) The management may undertake to accept such responsibility through an engagement
letter itself.
(c) The auditor‟s report should describe the management responsibility in a section with
heading “responsibility of management for financial statements”.
(d) The auditor‟s report should refer to the responsibility of auditors and not that of the
management as the same is obvious. [MTP-March 21]

20. During the conduct of audit, it was found that the management has intentionally made
material misstatements in the several items of the financial statements to deceive the users of
the financial statements, to reduce the pressures of meeting market expectations and to
increase the reputation of the company. What would be the implications on the auditor‟s
report if no adjustments are made to the financial statements regarding the misstatements
made by the management?
(a) The auditor would issue a qualified audit opinion stating that „except for‟ these matters
the financial statements are fairly presented. The auditor should also include a „Basis for
Qualified Opinion‟ paragraph below the opinion paragraph.
(b) The auditor would issue an adverse audit opinion stating that „except for‟ these matters
the financial statements are fairly presented. The auditor should also include a „Basis for
Qualified Opinion‟ paragraph below the opinion paragraph.
(c) The auditor would issue an adverse audit opinion stating that financial statements „do not
give a true and fair view‟. The auditor should also include a „Basis for Adverse Opinion‟
paragraph below the opinion paragraph.
(d) The auditor would issue an adverse audit opinion stating that financial statements „do not
give a true ( and fair view‟. The auditor should also include a „Basis for Qualified
Opinion‟ paragraph below the opinion paragraph. [MTP-April 21]

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21. While verifying the salary expense of employees, the auditor has been asked to rely
on the values as per SAP software and some hard copy reports and documents as the HRMS
package (source software) has become corrupt during the year and the management is
not having any data backup.
How should the auditor deal with this issue?
(a) The auditor should issue a disclaimer of opinion as records are destroyed and he is
unable to obtain sufficient appropriate audit evidence.
(b) The auditor should perform alternative procedures to obtain sufficient & appropriate
audit evidence before disclaiming the opinion.
(c) The auditor should issue an adverse opinion stating that it is deficiency in internal
controls.
(d) The auditor can rely on the SAP data & there is no need for qualification of report.
[MTP-April 21, April 22]

22. Description of each key audit matter in the “key audit matters section” needs to cover except
following aspects:
(a) Reference to related disclosures, if any, in the financial statements.
(b) Explanation on the matter given by management
(c) How the matter was addressed in the audit.
(d) Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter. [MTP-Nov. 21]

23. M/s Brahmi and Associates have been appointed as the statutory auditor of Prompton
Leaves Limited, a manufacturer of gas geysers for the FY 2022-23. During the course
of audit, the auditor found that two customer complaints have been filed against the company
in the FY 2022-23, for the use of sub-standard pipes and wires in manufacture of gas
geysers. The gas geyser blasted at high temperature leading to severe injuries to the family of
complainant along with damage to their property. They have sought a demand of
rupees 10 crore. However, the lawyer of Prompton Leaves Limited believes that such claim is
unsustainable as the incident occurred due to short circuit at both the complainants place.
The management of Prompton Leaves Limited accordingly did not include any reference to
the litigation in the financial statements. The auditor obtained legal advice from some
independent lawyer according to whom the outcome of the case is not ascertainable
as of now.
(a) The statutory auditor should give an unqualified opinion.
(b) The statutory auditor should give an unqualified opinion with Emphasis of Matter
paragraph.
(c) The statutory auditor should withdraw from the audit engagement.
(d) The statutory auditor should give a qualified opinion.

24. As per SA 701- Communicating Key audit matters in the Independent auditor‟s Report,
which among the following areas should CA & Co. take into account to determine
“Key Audit Matter”?
(i) The effect on audit of significant transactions that took place in the financial year.
(ii) Areas of high risk as assessed and reported by management‟s expert.

61
 (iii) Significant auditor judgment relating to areas in the financials that involved significant
management judgment.
(a) (i) & (ii)
(b) (ii) only
(c) (i) & (iii)
(d) (i), (ii) & (iii)

25. Moon Ltd. is a company engaged in the manufacture of iron and steel bars. VP & Associates
are the statutory auditors of Moon Ltd. for the FY 2022-23. During the course of audit,
CA Vikash, the engagement partner, found that the Company‟s financing arrangements have
expired, and the amount outstanding was payable on March 31, 2023. The Company has
been unable to re-negotiate or obtain replacement financing and is considering filing for
bankruptcy. These events indicate a material uncertainty that may cast significant doubt
on the Company‟s ability to continue as a going concern and therefore it may be unable to
realize its assets and discharge its liabilities in the normal course of business. The
financial statements (and notes thereto) do not disclose this fact. What opinion should
CA Vikash express in the case of Moon Ltd.?
(a) Unmodified opinion.
(b) Qualified opinion.
(c) Adverse opinion.
(d) Disclaimer of opinion. [RTP-May 22]

MCQs on CARO, 2020

26. One of your team members has recently qualified as a chartered accountant and joined your
team to audit a portfolio of audit clients who are private companies. One of the clients Surrey
Pvt. Ltd. is a hotel in the small town near Jaipur. The revenue generated for the current year
ended is ` 10.5 crores and the entity is not a holding or subsidiary of any public company.
The owner of the business Mr. Hazelwood runs this family business from last 10 years. Your
team member is keen to know whether Surrey Pvt. Ltd. is required to comment on the matter
prescribed under CARO 2020. Which of your explanations to him are correct?
(a) The entity‟s revenue exceeds ` 10 crores. Hence, no need to comment on the matter
prescribed under CARO, 2020.
(b) The entity is not a holding or subsidiary of any public company, hence no need to
comment on the matter prescribed under CARO, 2020
(c) The entity‟s revenue for the year is ` 10.5 cr. which exceed the limit of ` 10 cr. Hence,
the entity has to provide the comment on the matter prescribed under CARO, 2020.
(d) The entity is not a holding or subsidiary of any public company, hence there is a need to
comment on the matter prescribed under CARO, 2020. [MTP-March 19]

27. Kinfin Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C)
with a limit of ` 40 lacs each against the security of fixed deposit it had with those banks &
an unsecured overdraft from a financial institution (Financial Institution X) of ` 36 lacs. As
on 30th October 2022, the management used the overdraft fully of the A & C bank to the
tune of ` 40 lacs each. However, the overdraft of second bank (Bank B) was not used until
31st December, 2022. On 31st December, 2022, Management took overdraft of B bank &

62
 very next day management paid the overdraft of C bank as the rate of interest charged by
Bank C on overdraft facility was 15% whereas, the rate of interest charged by Bank B was
12%. As at 31st March 2023 only overdraft of Bank A and Bank B were used fully,
overdrafts of Bank C and Financial Institution X were unused. The paid-up capital and
reserves of the company as at that date was 85 lacs and its revenue for the financial year
ended on 31st March 2023 was ` 8.95 crores. The management of the company is of the
opinion that CARO, 2020 is not applicable to it because turnover and paid-up capital were
within the limits prescribed. With respect to the loans, management was of the view that the
total outstanding as at 31 March 2023 is less than the prescribed limit. The company further
contended that loan limit is to be reckoned per bank or financial institution and not
cumulatively. Comment.
(a) The CARO, 2020 is applicable to the company as the turnover of the company exceeds
the prescribed limit.
(b) The CARO, 2020 is not applicable to the company as the turnover of the company does
not exceeds the prescribed limit.
(c) The CARO, 2020 is not applicable to the company as the borrowing of the company does
not exceeds the prescribed limit.
(d) The CARO, 2020 is applicable to the company as the borrowing of the company exceeds
the prescribed limit. [MTP-Nov. 21]

28. While reporting under clause (ii) of Paragraph 3 of CARO, 2020, which of the following
is correct:
(a) The 10% threshold for reporting must be applied on a gross basis before adjusting
excesses and shortages within the class of an inventory and must be based on value for
each class of Inventory.
(b) The 10% threshold for reporting must be applied on a gross basis before adjusting
excesses and shortages within the class of an inventory and must be based on value for
all classes of Inventory.
(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses
and shortages within the class of an inventory and must be based on value for each class
of Inventory.
(d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses
and shortages within the class of an inventory and must be based on value for all classes
of Inventory. [MTP-April 22]

29. KFintech Pvt Ltd was having paid-up share capital and reserves of ` 150 lakh including
paid-up share capital of ` 90 lakh at the end of FY 21-22. During FY 22-23, KFintech
borrowed ` 80 Lakh from Bank A and ` 140 Lakh from Bank B. The amount borrowed from
Bank B was repaid during the same FY. For FY 21-22 the turnover of the company was
` 1,850 lakh. Select the appropriate option with respect to the applicability of CARO 2020:
(a) CARO, 2020 will be applicable as the paid-up capital and reserves exceeding the limit
specified in the Order i.e., one crore rupees.
(b) CARO, 2020 will be applicable as the company has paid-up capital and reserves
exceeding the limit specified in the Order i.e., one crore rupees and have total borrowings
exceeding one crore rupees from any bank or financial institution at any point of time
during the financial year.

63
 (c) CARO, 2020 will not be applicable as the company repaid the amount borrowed from
bank B before the end of the financial year and hence, the borrowings do not exceed the
limit specified in the Order.
(d) CARO, 2020 will not be applicable as the company will fall under the exemption
provided in the order for Small Company as per section 2(85) of the Companies
Act 2013. [MTP-Sep. 22)

30. CA. A, the auditor of XYZ Limited resigned from the post due to his personal reasons.
CA. B was appointed as the subsequent auditor of the company by the Board of Directors.
During the conclusion of the audit for the FY, should CA. B mention about CA. A‟s
resignation in the Companies (Auditor‟s Report) Order 2020?
(a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA.
A and state if he has taken into consideration the issues or objections raised by CA. A.
(b) No. Since the resignation of CA. A is due to his own personal reason, the same need not
be reported under CARO.
(c) Yes. As per clause (xxi) of para 1 of CARO, CA. B should report the resignation of CA.
A and state if he has taken into consideration the issues or objections raised by CA. A.
(d) No. CARO 2020 does not state any requirements to report resignation of auditor.
However, the same needs to be mentioned by CA. B in the Audit Report under Other
Matter Paragraph, as per SA 706. [MTP-Oct. 22]

31. While auditing with respect to compliance with CARO, 2020, Mr. Omprakash, for additional
reporting purpose, observed the following, relevant to Para 3(vii) of CARO, 2020:
Statutory Dues Undisputed Date Payable Date Paid
Amount (` in lakh)
Provident Fund 1.50 24 September, 2022 27 March, 2023
GST 2.45 23 October, 2022 24 April, 2023
Customs Duty 0.65 20 September, 2022 10 April, 2023
Income Tax Demand 0.55 23 October, 2022 Not paid till date
for A.Υ. 20-21
Also, a representation was made to GST Department for waiving a penalty of 1 lakh for late
payment of GST demand. What total amount of statutory dues need to be reported by Mr.
Omprakash as per Para 3 of CARO?
(a) ` 3.10 lakh.
(b) ` 0.65 lakh.
(c) ` 3.65 lakh.
(d) ` 2.70 lakh.

Answer Key

1. (c) The auditor would issue an adverse audit opinion stating that financial statements
„do not give a true and fair view‟. The auditor should also include a „Basis for Adverse
Opinion‟ paragraph below the opinion paragraph.

2. (c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key

64
 audit matters other than the matter to be described in the Basis for Adverse Opinion
section, M/s Pintu & Co. shall state, under „Key Audit Matters‟ para, that „except for the
matter described in the Basis for Adverse Opinion section, we have determined that there
are no other key audit matters to communicate in our report.

3. (d) Other matter paragraph.

4. (c) Auditor has obtained or expects to obtain the other information.

5. (a) Auditor has obtained some or all of the other information.

6. (d) To report fraud to Central Government and in Auditor‟s Report.

7. (d) The requirement of the auditor is beneficial for the company because by giving an
explanation of the matter, on which auditor has given a qualification, in the notes to
accounts, the management would be able to explain their perspective/ point of view to the
users of the financial statements. In that case, auditor while giving the qualification can
give reference to the notes to accounts otherwise the entire matter would form part of the
audit report. However, the auditor should not hold his report if the management does not
want to give any explanation in the notes to accounts.

8. (b) If the amount of fraud is more than 100 lacs; the auditor should have reported the matter
within 2 days of his knowledge to the Board of Directors/Audit committee of the
company seeking their reply or observations within 45 days. After completion of 45 days
the auditor should forward his report to the C.G. along with the reply if any received
from Board/Audit Committee.

9. (c) The borrowings of the company are above threshold, hence reporting on adequacy &
operating effectiveness of IFC would be applicable.

10. (b) Management should restate the financials to adjust the error. Otherwise, auditor may
modify his opinion on current year‟s financial statements considering the materiality.

11. (a) Express a qualified or an adverse opinion in the auditor‟s report on the current period
financial statements modified with respect to the corresponding figures included therein.

12. (b) The assessment of the auditor is valid. Such a matter qualifies to be a key audit matter
and hence should be reported accordingly by the auditor in his audit report.

13. (d) The report of the auditor is absolutely correct and is in line with the auditing standards.
An auditor is required to include such reference in his report as per the requirements of
the auditing standard.

14. (a) Adverse

15. (a) (I) & (III)

16. (a) As per the Companies Act, 2013, since the amount of fraud is more than 100 lac; the
auditor should have reported the matter within 2 days of his knowledge to the Board of
Directors/Audit committee of the Company seeking their reply or observations within 45

65
 days. After completion of 45 days, the auditor should forward his report to the Central
Government along with the reply, if any, received from Board/ Audit Committee

17. (c) In accordance with SA 710, CA Ram should qualify current period audit report with
respect to corresponding figures only.

18. (b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
discrepancies in the basis for adverse opinion paragraph of the auditor‟s report.

19. (c) The auditor‟s report should describe the management responsibility in a section with
heading “responsibility of management for financial statements”.

20. (c) The auditor would issue an adverse audit opinion stating that financial statements
„do not give a true and fair view‟. The auditor should also include a „Basis for Adverse
Opinion‟ paragraph below the opinion paragraph.

21. (b) The auditor should perform alternative procedures to obtain sufficient and appropriate
audit evidence before disclaiming the opinion.

22. (b) Explanation on the matter given by management.

23. (d) The statutory auditor should give a qualified opinion.

24. (c) (i) & (iii)

25. (c) Adverse opinion.

26. (c) The entity‟s revenue for the year is 10.5 Cr. which exceed the limit of 10 cr. Hence, the
entity has to provide the comment on the matter prescribed under CARO, 2020.

27. (d) The CARO, 2020 is applicable to the company as the borrowing of the company exceeds
the prescribed limit.

28. (c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses
and shortages within the class of an inventory and must be based on value for each class
of Inventory.

29. (d) CARO, 2020 will not be applicable as the company will fall under the exemption
provided in the Order for Small Company as per section 2(85) of the Companies
Act, 2013.

30. (a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA.
A and state if he has taken into consideration the issues or objections raised by CA. A.

31. (b) ` 0.65 lakh.

PART- III INTEGRATED CASE SCENARIO

CA. Raghav is in midst of finalizing audit reports of five clients. On reviewing each file, it is noticed
as under:

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(A) In case of a company engaged in business of selling of agricultural products which are outside
ambit of GST, engagement team has found that substantial part of revenues of the company
(about 80%) is generated through cash sales. However, there is no proper system and internal
control to verify accuracy of revenues generated through cash sales. Therefore, team has been
unable to verify such revenues generated through cash sales.
(B) TS Limited has been dragged to court by BS Limited for stealing its trade secrets using cyber
theft and filed a claim for ` 50 crore. On reviewing audit file of TS Limited, CA Raghav finds
that legal opinion of company‟s standing counsel is ambiguous. There are precedent case laws
bot h in favour and against on such issue. The financial statements of TS Limited are silent on
this litigation matter.
(C) It is noticed on review of audit file of a client that net profit before tax was ` 2 crore on a
turnover of `100 crore. There is an export receivable from a chain of stores outstanding in
financial statements of ` 3 crore for which there is no chance of recovery. The said chain of
stores has gone bankrupt. There is also no hope of recovering money through ECGC (Export
credit Guarantee Corporation) due to certain technical issues. Debt has not been written off by
the client despite being communicated to client.
(D) On reviewing file of a small finance bank, it was noticed that team has drafted following para
proposed to be included under Emphasis of Matter paragraph:
“Concerns are raised regarding “Going Concern” status of the Bank. However, the Bank feels
that it continues to remain a “Going Concern” in view of reasons stated in note 10.
Our opinion is not modified in respect of this matter.”
(E) On reviewing file of a client, it is noticed that team was not informed about finished goods of
Rs. 1 crore lying at a location taken on rent in February 2023. The said issue was flagged at time
of reconciling inventories by the team. Hence, team could not attend physical inventory
counting. The alternative procedures cannot be performed in absence of adequate records
pertaining to above location. Total inventories reflected in financial statements is Rs. 8 crores.
PBT of client is ` 10 crores.
Q.1. As regards description regarding revenues generated through cash sales of a company, which
of the following statements is most appropriate in terms of SA 705?
(a) Qualified opinion will be issued and basis for qualified opinion will also be provided.
(b) Adverse opinion will be issued and basis for adverse opinion will also be provided.
(c) A disclaimer of opinion will be issued and basis for disclaimer of opinion will also be
provided. Besides, statement in audit report will be changed from “financial statements
have been audited” to “auditor was engaged to audit financial statements.”
(d) A disclaimer of opinion will be issued and basis for disclaimer of opinion will also be
provided. Besides, statement in audit report will be changed from “financial statements
have been audited” to “financial statements have not been audited.”

Q.2. Considering litigation matter of TS Limited, which of the following statements is most
appropriate in this regard?
(a) Unmodified opinion needs to be expressed by auditor.
(b) It amounts to non-disclosure of a material contingent liability by the company. Adverse
opinion needs to be expressed by auditor.
(c) It amounts to non-disclosure of a material contingent liability by the company. Qualified
opinion needs to be expressed by auditor.

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 (d) The company has not made a material provision resulting in material misstatement.
Adverse opinion

Q.3. Considering description of issue regarding non-recoverability of export receivable of

Rs. 3 crore from a chain of stores, which type of opinion is appropriate to be issued in audit
report?
(a) Disclaimer of opinion
(b) Unmodified opinion
(c) Qualified opinion
(d) Adverse opinion

Q.4. As regards matter of going concern in respect of a small finance Bank, which of the
following statements is most appropriate?
(a) The para drafted by team is proper and in accordance with SA 570 since auditor has
decided to give unmodified opinion.
(b) The para drafted by team is proper and in accordance with SA 570 since matter has been
disclosed in notes to accounts by bank management.
(c) Instead of giving emphasis of matter paragraph, separate paragraph on „Material
Uncertainty Related to Going Concern‟ in report should be given in accordance with
SA 570.
(d) Separate paragraph on „Material Uncertainty Related to Going Concern‟ under the
heading “Emphasis of matter” paragraph in report should be given in accordance with
SA 570.

Q.5. Regarding issue of not informing team regarding inventory of finished goods lying at a
location taken on rent in February 2023, which type of opinion is appropriate to be issued in
case of this client?
(a) Modified opinion
(b) Qualified opinion
(c) Unmodified opinion
(d) Either Modified or Qualified opinion

Answer Key
1. (c) A disclaimer of opinion will be issued and basis for disclaimer of opinion will also be
provided. Besides, statement in audit report will be changed from “financial statements
have been audited” to “auditor was engaged to audit financial statements.”
2. (c) It amounts to non-disclosure of a material contingent liability by the company. Qualified
opinion needs to be expressed by auditor.
3. (d) Adverse opinion
4. (c) Instead of giving emphasis of matter paragraph, separate paragraph on „Material
Uncertainty Related to Going Concern‟ in report should be given in accordance with
SA 570.
5. (b) Qualified opinion

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 8. “Specialised Areas”
PART- I DESCRIPTIVE QUESTIONS
8.1 –SA 800 “Special Considerations – Audit of F.S. Prepared in accordance with Special
Purpose Frameworks”
Q.1. There are certain its statement in the light of mandatory requirements of matters that are to be
emphasised in auditor's Report when the Audit Report is on Financial Statements prepared in
accordance with special purpose Framework. [Nov. 18 (5 Marks)]
Ans: Circumstances in which Emphasis of Matter Paragraph in Auditor's Report is
mandated in case of Financial Statements prepared in accordance with a Special
Purpose Framework:
 As per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent. Auditor's Report” and/or SA 800, “Special Considerations Audits of
Financial Statements Prepared in Accordance with Special Purpose Frameworks”, the
auditor's report on special purpose financial statements shall include an Emphasis of
Matter paragraph alerting users of the auditor's report that the financial statements are
prepared in accordance with a special purpose frame work and that, as a result, the
financial statements may not be suitable for another purpose.
 The auditor shall include this paragraph under an appropriate heading. The special
purpose financial statements may be used for purposes other than those for which they
were intended. For example, a regulator may require certain entities to place the special
purpose financial statements on public record. To avoid misunderstandings, the auditor
alerts users of the auditor's report that the financial statements are prepared in accordance
with a special purpose frame work and, therefore, may not be suitable for another
purpose.
Restriction on Distribution or Use:
 In addition to the alert required above, the auditor may consider it appropriate to indicate
that the auditor's report is intended solely for the specific users.
 Depending on the law or regulation of the particular jurisdiction, this may be achieved by
restricting the distribution or use of the auditor's report. In these circumstances, the
emphasis of matter paragraph given above may be expanded to include these other
matters, and the heading may be modified accordingly.

Q.2. The financial statements of TC & Co. have been prepared by management of an entity in
accordance with the financial reporting provisions of a contract (that is, a special purpose
framework) to comply with provisions of the contract. Based on the contract, management
does not have a choice of financial reporting frameworks. As an auditor what considerations
would be undertaken while planning and performing audit?
Ans: Consideration while planning and performing audit of Special purpose financial
statements:
As per SA 800 “Special Considerations - Audit of Financial Statements prepared in
accordance with Special Purpose frameworks” auditor should consider the following while
planning and performing audit of financial statements prepared in accordance with special
purpose framework:

1
  In planning and performing an audit of special purpose F.S., auditor shall determine
whether application of the SAs requires special consideration in the circumstances of
the engagement. For example, in SA 320, judgments about matters that are material to
users of the F.S. are based on a consideration of the common financial information needs
of users as a group. In the case of an audit of special purpose F.S., however, those
judgments are based on a consideration of the financial information needs of the intended
users.
 While determining the application of SA, auditor is required to consider the requirement
of SA 200 on applicability of SAs. SA 200 requires the auditor to comply with
(a) relevant ethical requirements, and
(b) all SAs relevant to the audit.
Auditor is required to comply with each requirement of an SA unless entire SA is not
relevant or the requirement is not relevant because it is conditional and the condition
does not exist.
 In the case of special purpose F.S., such as those prepared in accordance with the
requirements of a In contract, management may agree with the intended users on a
threshold below which misstatements identified during the audit will not be corrected or
otherwise adjusted. Existence of such a threshold does not relieve the auditor from the
requirement to determine materiality in accordance with SA 320 for purposes of planning
and performing the audit of the special purpose F.S.
 In the case of special purpose F.S., persons responsible for the oversight of its
preparation may not be the same as TCWG responsible for the oversight of the
preparation of general purpose F.S. In such cases, requirements of SA 260 may not be
relevant to the audit of the special purpose F.S.

Q.3. SA 800 deals with special considerations applicable in respect of audit of financial statements
prepared in accordance with special purpose framework. Explain, by giving examples,
meaning of special purpose framework.
Ans: Meaning of Special Purpose Framework:
SA 800 “Special Considerations – Audit of F.S. Prepared in accordance with Special Purpose
Frameworks” defines special purpose framework as a FRF designed to meet the financial
information needs of specific users. The FRF may be a fair presentation framework or a
compliance framework. The requirements of the applicable FRF determine the form and
content of the financial statements and what constitutes a complete set of financial statements.
Examples of Special purpose frameworks:
(i) The cash receipts and disbursements basis of accounting for cash flow information that
an entity may be requested to prepare for creditors.
(ii) The financial reporting provisions established by a regulator to meet the requirements of
that regulator.
(iii) The financial reporting provisions of a contract, such as a bond indenture, a loan
agreement, or a project grant.

8.2 - SA 805 “Special Considerations - Audits of Single F.S. and Specific Elements,
Accounts or Items of a F.S.”
Q.4. CA P is auditor of a company responsible for auditing complete set of financial statements.
He intends to express adverse opinion on complete set of financial statements considering

2
 conclusions drawn by him during course of audit. He is also auditing trade receivables of
company for the same period in a separate engagement. Can he express unmodified opinion
in respect of trade receivables? If so, discuss those circumstances.
Ans: Circumstances in which unmodified opinion can be expressed on a Specific Element:
As per SA 805 “Special Considerations - Audits of Single F.S. and Specific Elements,
Accounts or Items of a F.S.”, if auditor concludes that it is necessary to express an adverse
opinion or disclaim an opinion on the entity's complete set of F.S. but, in the context of a
separate audit of a Specific Element, auditor nevertheless considers it appropriate to express
an unmodified opinion on that element, the auditor shall only do so if:
(a) Not prohibited by Law and Regulation;
(b) Audit report on Specific Element is not published together with audit report on complete
F.S; and
(c) Specific element does not constitute a major portion of entity's complete F.S.

8.3 - SA 810 “Engagements to Report on Summary Financial Statements (SFS)”

Q.5. List out few factors affecting auditor's determination of the acceptability of the applied
criteria before accepting audit of summary financial statements.

Ans: Factors affecting the auditor's determination of the acceptability of the applied criteria:
As per SA 810 “Engagements to Report on Summary Financial Statements”, before accepting
an engagement to report on summary financial statements, the auditor shall determine
whether the applied criteria are acceptable. Applied criteria refer to the criteria applied by
management in the preparation of the summary financial statements. If the auditor concludes
that the applied criteria are unacceptable, auditor shall not accept the engagement to report on
the summary financial statements, unless required by law or regulation to do so.
Factors that may affect auditor's determination of the acceptability of the applied criteria
before accepting audit of summary financial statements includes the following:
(a) Nature of the entity
(b) Purpose of the Summary F.S.
(c) Information needs of the intended users of the Summary F.S.; and
(d) Whether the applied criteria will result in Summary F.S. that are not misleading in the
circumstances.

Q.6. The management of Zuchi Ltd. has prepared its summary financial statements for the year
2023-24 to be provided to its investors. Consequently, the company wants to appoint you for
conducting audit of such summary financial statements. Mention the factors you would
consider before accepting such engagement to report on summary financial statements.
Ans: Factors to be considered before accepting engagement to report on Summary Financial
statements:
As per SA 810 “Engagements to Report on Summary Financial Statements” the auditor shall,
ordinarily, accept an engagement to report on summary financial statements in accordance
with this SA only when the auditor has been engaged to conduct an audit in accordance with
SAs of the financial statements from which the summary financial statements are derived.
Before accepting Engagement, auditor shall:

3
 (1) Determine whether the applied criteria are acceptable.
(2) Obtain the agreement of management that acknowledges and understands its
responsibilities:
 For the preparation of Summary F.S. in accordance with the applied criteria:
 To make the audited FS available to the intended users of Summary F.S. without
undue difficulty; and
 To include the auditor's report on Summary F.S. in any document that contains the
Summary F.S. and that indicates that the auditor has reported on them.
(3) Agree with management the form of opinion to be expressed on the summary
financial statement.

Q.7. The management of CSITA Ltd. has prepared its summary financial statements for the year
2023-24 to be provided to its investors. Consequently, the company wants to appoint you for
conducting audit of summary financial statements. What are the procedures that you will
perform and consider necessary as the basis for forming an opinion on the summary financial
statements? [MTP-April 18]
Ans: Procedures to be performed on Summary Financial Statements:
As per SA 810 “Engagements to Report on Summary Financial Statements” the auditor shall
perform the following procedures, and any other procedures that the auditor may consider
necessary, as the basis for the auditor's opinion on the summary financial statements:
A. EVALUATE:
(a) Whether Summary F.S. adequately:
 Disclose their summarised nature; &
 Identify the audited FS.
(b) If Summary F.S. are not accompanied by audited FS, whether they clearly describe:
 From whom or where audited FS are available; OR
 Law & Regulation that specifies that audited F.S. need not be made available to
intended users of Summary F.S. & establishes criteria for preparation of
Summary F.S.
(c) Whether Summary F.S. adequately disclose the applied criteria.
(d) Whether Summary F.S. are prepared in accordance with applied criteria.
(e) Whether Summary F.S. contain necessary info & are appropriately aggregated so as
not to be misleading.
(f) Whether audited F.S. are available to intended users without undue difficulty.
B. COMPARE:
Summary F.S. with related information in audited F.S. to determine whether Summary
FS agree with or can be re-calculated from related information in audited F.S.

Q.8. CA Y is auditor of a company. He has expressed adverse opinion on audited financial

statements. What additional points he has to keep in mind while expressing opinion on
summary financial statements derived from such audited financial statements?
Ans: Additional points to be kept in mind while expressing opinion on Summary F.S. derived
from audited financial statements on which adverse opinion was expressed:
As per SA 810 “Engagements to Report on Summary Financial Statements” when the
auditor's report on the audited F.S. contains an adverse opinion, the auditor's report on the
Summary F.S. shall, include the following:

4
 (1) Statement that auditor's report on audited F.S. contains adverse opinion;
(2) Description of basis of adverse opinion; and
(3) Statement that as a result of adverse opinion it is inappropriate to express an opinion
on Summary F.S.
PART- II MULTIPLE CHOICE QUESTIONS

1. If the auditor expresses an adverse opinion or disclaim an opinion on the entity's complete set
of financial statements as a whole, what type of audit opinion the auditor may issue for single
financial statement that forms part of those financial statements or on a specific element that
forms part of those financial statements.
(I) Disclaimer of opinion
(II) Unmodified opinion
(III) Modified opinion
(IV) Adverse opinion
(a) Only I
(b) Only 11
(c) Only IV
(d) I or III or IV

2. Distribution and use of the auditor's report on special purpose financial statements are:
(a) Not restricted
(b) Restricted
(c) Limited
(d) Confined

3. An interpretation is ______ when adoption of another reasonable interpretation would have

produced a material difference in the information presented in the financial statements.
(a) Not significant
(b) Significant
(c) Material
(d) Non-material

4. In the case of an auditor's report on special purpose financial statements, the auditor's report
shall also describe the______ for which the financial statements are prepared.
(a) Objective
(b) Purpose
(c) Intend
(d) Applicable standard

5. Historical financial information that is derived from financial statements but that contains less
detail than the financial statements, while still providing a structured representation consistent
with that provided by the financial statements of the entity's economic resources or
obligations at a point in time or the changes therein for a period of time is called:
(a) Summary Financial Statements
(b) Elements of Financial Statements
(c) Special Purpose Financial Statements
(d) General Purpose Financial Statements

5
6. Financial statements prepared in accordance with a special purpose framework may be the
only financial statements an entity prepares. In such circumstances, those financial statements
may be used by users other than those for whom the financial reporting framework is
designed. Despite the broad distribution of the financial statements in those circumstances,
the financial statements are still considered to be:
(a) Applicable financial reporting framework
(b) General purpose financial statements
(c) Special purpose financial statements
(d) Regular purpose financial statements

7. In case the auditor does not accept the engagement to report on summary financial statements
due to applied criteria being unacceptable or inability to obtain agreement of management, is
he still required to accept and report on the summary financial statements?
(a) Yes, if required by the intended users of the summary financial statements
(b) Yes, if required by those charged with governance
(c) Yes, if required by law or regulation
(d) No, he is not required to accept the engagement

8. Who is eligible to be appointed as the auditor for summary financial statements:

(a) Chartered Accountant eligible to be appointed as auditor
(b) Auditor of the historical financial statements
(c) Any professional
(d) Any person

Answer Key

1. (d) I or III or IV

2. (b) Restricted

3. (b) Significant

4. (b) Purpose

5. (a) Summary Financial Statements

6. (c) Special purpose financial statements

7. (c) Yes, if required by law or regulation

8. (b) Auditor of the historical financial statements

6
 PART- III INTEGRATED CASE SCENARIO

Given below is an extract of abridged financial statement of schemes of “Smart Investment Mutual
Fund” The abridged financial statements have been derived from audited financial statement of the
schemes of “Smart Investment Mutual Fund” as at 31st March 20XX and for year ended 31st March,
20XX.
Abridged Balance sheet as at 31st March 20XX
(in Lacs)
Liabilities Smart investment Smart investment
equity and debt fund equity savings fund
Unit Capital 20000.00 15000.00
Reserve and Surplus 160000.00 80000.00
Other current liabilities & provisions 100.00 100.00
Total 180100.00 95100.00
Assets
Investments 170000.00 90000.00
Deposits 100.00 100.00
Other Current assets 10000.00 5000.00
Total 180100.00 95100.00

Abridged revenue account for year ended 31st March 20XX

(in Lacs)
Income Smart investment Smart investment
equity and debt fund equity savings fund
Income 34000.00 1000.00
Expenses and losses 3400,00 1500.00
Net realized gains 30600.00 (500.00)
Add: Change in unrealized appreciation in value 2000.00 700.00
of Investments
Net Surplus 32600.00 200.00
Dividend appropriation 3000.00 50.00
Retained Surplus 29600.00 150.00
The abridged financial statements of the Schemes of the Fund have been prepared by Board of
Trustees of Fund pursuant to SEBI regulations and in accordance with format prescribed by SEBI.
Previous year figures have been ignored for purpose of case.
Unmodified opinion has been expressed by auditor in audited financial statements of the schemes of
“Smart Investment Mutual Fund” as at 31st March 20XX and for year ended 31st March, 20XX.
Keeping in view above, answer the following questions:
Q.1. Given the above extract of bridged financial statements and description, which of the
following statements is most appropriate?
(a) The auditor may presume that criteria applied by the Board of Trustees in the preparation
of the abridged financial statements are acceptable.
(b) The auditor cannot presume that criteria applied by the Board of Trustees in preparation
of abridged financial statements are acceptable.
(c) The abridged financial statements have been prepared by the Board of Trustees. The
auditor cannot ordinarily accept criteria applied by them for the preparation of such

7
 abridged financial statements before detailed evaluation.
(d) The auditor is duty bound to accept the criteria applied by the Board of Trustees in the
preparation of abridged financial statements.

Q.2. Which of the following statements in reference to abridged financial statements is not in
accordance with the requirements of SA 810?
(a) The notes to accounts should specifically disclose that these abridged financial statements
have been derived from audited financial statements.
(b) The Board of Trustees has disclosed that audited financial statements are available on the
website o the company.
(c) It should be stated in the auditor's report that abridged financial statements have been
compared with the related information in the audited financial statements to determine
whether the abridged financial statements agree with or can be recalculated from the
related information in the audited financial statements.
(d) It should be stated in auditor's report that reading the abridged financial statements is not
a substitute for reading the audited financial statements of the Schemes of the Fund.

Q.3. Which of the following paras is most appropriate to be included under heading “Auditor’s
responsibility” in the auditor’s report?
(a) Our responsibility is to express an opinion on the abridged financial statements based on
our procedures, which were conducted in accordance with Standards on Auditing issued
by the Institute of Chartered Accountants of India.
(b) Our responsibility is to express an opinion on the Abridged financial statements based on
our procedures, which were conducted in accordance with Standard on Auditing (SA)
810, “Engagements to Report on Summary Financial Statements” issued by the Institute
of Chartered Accountants of India.
(c) Our responsibility is to express an opinion on the Abridged financial statements based on
our procedures, which were conducted in accordance with Standards on Auditing adapted
in circumstances including (SA) 810, “Engagements to Report on Summary Financial
Statements” issued by the Institute of Chartered Accountants of India.
(d) Our responsibility is to express an opinion on the Abridged financial statements based on
our procedures, which were conducted in accordance with SEBI regulations and
Standards on Auditing adapted in circumstances including (SA) 810, “Engagements to
Report on Summary Financial Statements” issued by the Institute of Chartered
Accountants of India.

Q.4. Which of the following paras is most appropriate to be included under heading “Opinion” in
auditor's report?
(a) In our opinion, the abridged financial statements, derived from the audited financial
statements of the Schemes of the Fund as at March 31, 20XX and for the year ended
March 31, 20XX are a fair summary of those financial statements, and are in accordance
with the accounting policies and standards specified in SEBI regulations and generally
accepted accounting principles in India to the extent applicable.
(b) In our opinion, the abridged financial statements, as at March 31, 20XX and for the year
ended March 31, 20XX are a fair summary of those financial statements.
(c) In our opinion, the abridged financial statements, derived from the audited financial
statements of the Schemes of the Fund as at March 31, 20XX and for the year ended

8
 March 31, 20XX are consistent with audited financial statements and are in accordance
with the accounting policies and standards specified in SEBI regulations and generally
accepted accounting principles in India to the extent applicable.
(d) In our opinion, the abridged financial statements, derived from the audited financial
statements of the Schemes of the Fund as at March 31, 20XX and for the year ended
March 31, 20XX are consistent with audited financial statements.

Q.5. Which of the following is usually not an element of audit report on abridged financial
statements in accordance with SA 8107?
(a) Emphasis of matter paragraph.
(b) Other matter paragraph.
(c) Management's responsibility for abridged financial statements.
(d) Key audit matters.

Answer Key
1. (a) The auditor may presume that criteria applied by the Board of Trustees in the preparation
of the abridged financial statements are acceptable.

2. (c) It should be stated in the auditor's report that abridged financial statements have been
compared with the related information in the audited financial statements to determine
whether the abridged financial statements agree with or can be recalculated from the
related information in the audited financial statements.

3. (b) Our responsibility is to express an opinion on the Abridged financial statements based on
our procedures, which were conducted in accordance with Standard on Auditing (SA)
810, “Engagements to Report on Summary Financial Statements” issued by the Institute
of Chartered Accountants of India.

4. (a) In our opinion, the abridged financial statements, derived from the audited financial
statements of the Schemes of the Fund as at March 31, 20XX and for the year ended
March 31, 20XX are a fair summary of those financial statements, and are in accordance
with the accounting policies and standards specified in SEBI regulations and generally
accepted accounting principles in India to the extent applicable.

5. (d) Key audit matters.

9
GROUP AUDITS
Q.1 You are appointed as an auditor of Maharaja Ltd., a listed company which is a main
supplier to the UK building and construction market. With a turnover of ` 2.9 billion,
the company operates through 11 business units and has nearly 180 branches across
the countries.
As an auditor, how will you draft the report in case:
(i) When the Parent‟s Auditor is also the Auditor of all its Components?
(ii) When the Parent‟s Auditor is not the Auditor of all its Components?
(iii) When the Component(s) Auditor Reports on Financial Statements under an
Accounting Framework Different than that of the Parent?
(iv) When the Component(s) Auditor Reports under an Auditing Framework Different
than that of the Parent?
(v) Where the financial statements of one or more components are not audited?
[MTP-April 18, May 20, Nov. 21; RTP-Nov. 18, May 22]
Ans.: Reporting Considerations
(i) Parent Auditor is also the auditor of all of its components
 Auditor should issue an audit report expressing opinion whether CFS give a true
and fair view of the state of affairs of the Group as on balance sheet date and as to
whether consolidated profit and loss statement gives true and fair view of the
results of consolidated profit or losses of the Group for the period under audit.
 Where CFS also include a cash flow statement, the auditor should also give his
opinion on the true and fair view of the cash flows presented by the consolidated
cash flow statements.
 Auditor of Parent should report whether principles and procedures for preparation
and presentation of CFS as laid down in the relevant AS(s) have been followed. In
case of any deviation, the auditor should make adequate disclosure in the audit
report so that users of the CFS are aware of such deviation.
(ii) Parent‟s Auditor is not the Auditor of all of its components
 If the parent‟s auditor is not the auditor of the components included in the CFS,
auditor of should also consider the requirement of SA 600.
 If the parent‟s auditor decides that he will make reference to the audit of the other
auditors in the report as required by SA 706, he should disclose clearly the portion
of the F.S. audited by the other auditor(s). This may be done by stating the amount
or % age of total assets and total revenue of subsidiary(s) included in consolidated
F.S. not audited by him.
 It is to be noted that reference in the report of the auditor of CFS to the fact that
part of the audit of the group was made by other auditor(s) is not to be construed
as a qualification of the opinion but rather as an indication of the divided
 responsibility between the auditors of the parent and its subsidiaries.
(iii) Component Auditor Reports on F.S. under an Accounting Framework different
than that of the Parent
 When a component‟s F.S. are prepared under an accounting framework that is
different than that of the framework used by the parent in preparing group‟s CFS,
parent‟s management perform a conversion of the components‟ audited F.S. from
the framework used by the component to the framework under which the
consolidated F.S. are prepared.
 Conversion adjustments are audited by principal auditor to ensure that financial
information of component(s) is suitable and appropriate for the purposes of
consolidation.
 Alternatively, component may prepare F.S. on basis of the parent‟s accounting
policies, as outlined in the group accounting manual. Local component auditor
can then audit and issue audit report on components F.S. prepared in accordance
with “group accounting policies”.
 Principal auditor can then decide whether or not to rely on the components‟ audit
report and make reference to it in the auditor‟s report on the CPS.
(iv) Component Auditor Reports under an Auditing Framework Different than that of
the Parent
 Audits of F.S., Including CFS are performed under auditing standards generally
accepted in India.
 In order to maintain consistency of the auditing framework and to enable the
parent auditor to rely and refer to the other auditor‟s audit report in their audit
report on the CFS, the components‟ F.S. should also be audited under a framework
that corresponds to Indian Auditing Standards.
(v) Components Not Audited
 F.S. of all components included in CFS should be audited or subjected to audit
procedures. Such audits and audit procedures can be performed by the auditor
reporting on the consolidated F.S. or by the components‟ auditor.
 Where the F.S. of one or more components continues to remain unaudited, the
auditor reporting on the CFS should consider unaudited components in evaluating
a possible modification to his report on the consolidated F.S.
 Evaluation is necessary because the auditor has not been able to obtain sufficient
appropriate audit evidence in relation to such consolidated amounts/balances.
 Auditor should evaluate both qualitative and quantitative factors on the possible
effect of such amounts remaining unaudited when reporting on the CFS using the
guidance provided in SA 705, “Modifications to the Opinion in the Independent
Auditor‟s Report”.
Q.2 CA Vivek is the auditor of Supreme Ltd., a parent company which presents
Consolidated Financial Statements. The management of Supreme Ltd. Has provided
the list of the components included in the Consolidated Financial Statements. As an
auditor of Consolidated Financial Statements, CA Vivek has to verify that all the
components have been included in the Consolidated Financial Statements and review
the information provided by the management in identifying the components. State the
procedures to be followed by CA Vivek in respect of completeness of this information.
[Nov. 20 (5 Marks); RTP-May 23]
OR
CA Krishna is in the second year of his term as statutory auditor of Nike Limited
(Holding company), its subsidiaries and joint ventures. At the time of planning audit,
he wants to be sure that all the components have been included in the CFS. List out
some procedures he should perform to verify completeness of this information.
Ans.: Auditor‟s procedures in Auditing the consolidation:
A parent which presents CFS is required to consolidate all its components in the CFS other
than those for which exceptions have been provided in the relevant Ass under the applicable
FRF.
Auditor should obtain a list of all the components included in the CFS and review the
information provided by the management of the parent identifying the components. Auditor
should verify that all components have been included in the CFS unless these components
meet criterion for exclusion.
In the given case, Supreme Ltd. has provided the list of components included in the CFS.
CA Vivek shall verify that all the components have been included in the CFS. In respect of
completeness of this information, CA Vivek should perform the following procedures:
1. review his working papers for the prior years for the known components;
2. review the parent‟s procedures for identification of various components;
3. make inquiries of the management to identify any new components or any component
which goes out of consolidated financial statements;
4. review the investments of parent as well as its components to determine the
shareholding in other entities;
5. review the joint ventures and joint arrangements as applicable;
6. review the other arrangements entered into by the parent that have not been included
in the consolidated financial statements of the group;
7. review the statutory records maintained by the parent, for example registers under
section 186, 190 of the Companies Act, 2013;
8. identify the changes in the shareholding that might have taken place during reporting
period.
Q.3 Write short note on: Responsibility of holding company for preparation of CFS.
[RTP-Nov. 21]
Ans.: Responsibility of holding company for preparation of Consolidated Financial
Statements:
The responsibility for the preparation and presentation of consolidated financial statements,
among other things, is that of the management of the parent. This includes:
1. identifying components, and including the financial information of the components to
be included in the consolidated financial statements;
2. where appropriate, identifying reportable segments for segmental reporting;
3. identifying related parties and related party transactions for reporting;
4. obtaining accurate and complete financial information from components;
5. making appropriate consolidation adjustments;
6. Harmonisation of accounting policies and accounting framework; and
7. GAAP conversion, where applicable.
Apart from the above, the parent ordinarily issues instructions to the management of the
component specifying the parent‟s requirements relating to financial information of the
components to included in the consolidated financial statements.
The instructions ordinarily cover the accounting policies to be applied, statutory & other
disclosure requirements applicable to the parent, including the identification of and
reporting on reportable segments, and related parties & related party transactions, and a
reporting timetable.

Q.4 Akash Associates has been appointed as auditor of M/s Potter Ltd. which acquired
55% shares in M/s Samarth Ltd. On 15th October, 2022. During audit of Potter Ltd.
The auditors found that the company have not prepared consolidated financial
statements because on the date of acquisition the fair value of certain assets &
liabilities has not been ascertained which is significant and are accounted for on
estimated basis only. Help Akash Associates in framing opinion paragraph of audit
report. [May 19 (4 Marks)]
Ans.: Consolidation of financial statements:
 As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated
F.S. of the company and of all the subsidiaries in the same form and manner as that of
its own which shall also be laid before the AGM of the company along with the laying
of its F.S. u/s 129(2).
 As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of
Schedule III to the Act and the applicable AS. However, a company which is not
required to prepare consolidated financial statements under the Accounting Standards,
 it shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act.
 In the present case, during audit, auditors found that the company have not prepared
consolidated financial statements because on the date of acquisition the fair value of
certain assets & liabilities has not been ascertained which is significant and are
accounted for on estimated basis only.
Conclusion: Consolidation is mandatory, auditor is required to state the fact in auditor
report on standalone financial statements.
NOTE
Answer given in the Suggested answer of ICAI is entirely different covering therein the
draft of Adverse opinion and Basis for Adverse opinion.
Author‟s view: It is not necessary that auditor of standalone financial statements should be
appointed as auditor of consolidated financial statements, so while auditing standalone
financial statements, auditor is not required to modify the opinion on standalone financial
statements on the ground of non-consolidation. Further, when consolidated F.S. are not
available, how the auditor is issuing report on consolidated financial statements (It is
specified in the suggested answer – Opinion Section – the accompanying consolidated
financial statements do not give a true and fair view)

Q.5 CPS Limited is an investment company preparing its Financial Statements in

accordance with Ind AS. The company obtains funds from various investors and
commits its performance for fair return and capital appreciation to its investors.
During the year under audit, it had been observed that the company had invested 25%
in Reliance Ltd., 50% in Tata Ltd. And 60% in Adani Ltd. Of the respective share
capitals of the Investee Companies. When checking the investment schedule of the
company, an issue cropped as to whether there would arise any need to consolidate
accounts of any such investee companies with those of CPS Limited in accordance with
Section 129(3) of the companies Act, 2013 which contains no exclusion from
consolidation. Analyse the issues involved and give your views.
[Nov. 18 (5 Marks)]
Ans.: Auditor‟s duties in case of exclusion of subsidiaries/associates in consolidation:
 As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated
F.S. of the company and of all the subsidiaries in the same form and manner as that of
its own which shall also be laid before the AGM of the company along with the laying
of its F.S. u/s 129(2).
 As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of
Schedule III to the Act and the applicable AS. However, a company which is not
required to prepare consolidated financial statements under the Accounting Standards,
it shall be sufficient if the company complies with provisions on consolidated financial
 statements provided in Schedule III of the Act.
 As per Para 31 of Ind-AS 110, an investment entity shall not consolidate its
subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary
at fair value through profit or loss in accordance with Ind AS 109 (Financial
Instruments).
 An investment entity is an entity that(a) obtains funds from one or more investors for
the purpose of providing those investor(s) with investment management services; (b)
commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both; and (c) measures and evaluates
the performance of substantially all of its investments on a fair value basis.
 In the given case CPS Limited is an investment company preparing its Financial
Statements in accordance with Ind AS. Company had invested 25% in Reliance Ltd.,
50% in Tata Ltd. and 60% in Adani Ltd. of the respective share capitals of the Investee
Companies.
Conclusion: CPS Ltd. Is not required to consolidate accounts of investee companies as
provided under Para 31 of Ind-AS 110. However, company is required to comply with the
provisions on consolidated financial statements as provided in Schedule III.

Q.6 CA H was appointed as a Statutory Auditor of MNL Limited, a listed company, which
has three subsidiaries namely M Ltd., N Ltd., L Ltd. And also 15 branches across
India. Auditors are duly appointed for the subsidiaries and branches as well. With
regard to the determination of materiality during the audit of consolidated financial
statements, what should be the considerations of CA H? How he should deal in his
report if there are observations (for instance modification and/or emphasis of matter
in accordance with SA 705/706) made by component auditors? [May 22 (5 Marks)]
OR
Tanish Ltd. is holding 68% share of Banish Ltd, 51% share of Aayush Ltd. RTS & Co.
Chartered Accountants are the statutory auditors of Tanish Ltd. MTM & Co.
Chartered Accountants are the statutory auditors of Bimal Ltd. and Aayush Ltd.
MTM & Co have qualified the report of Banish Ltd. Due to material discrepancies in
standalone financial statement. While framing the opinion on Consolidated Financial
Statement of Tanish Ltd., RTS & Co. (Principal Auditor) have ignored the
qualification of Bimal Ltd. considering it not material at Group Level. Comment.
[MTP-Oct. 22]
Ans.: Considerations with regard to determination of Materiality during audit of CFS:
In carrying out the audit of the standalone financial statements, the computation of
materiality for the purpose of issuing an opinion on the standalone financial statements of
each component would be done component-wise on a standalone basis. However, with
regard to determination of materiality during the audit of Consolidated Financial Statements
(CFS), the auditor should consider the following:
1. Auditor is required to compute the materiality for the group as a whole. This
materiality should be used to assess the appropriateness of the consolidation
adjustments (i.e. permanent consolidation adjustments and current period
consolidation adjustments) that are made by the management in the preparation of
CFS.
2. The principal auditor can also use the materiality computed on the group level to
determine whether the component‟s financial statements are material to the group to
determine whether they should scope in additional components, and consider using
the work of other auditors as applicable.
3. The principal auditor also computes materiality for each component and
communicates to the component auditor, if he believes is required for true and fair
view on CFS.
4. The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain information required for consolidation and
disclosure requirements etc.
While considering the observations (for instance modification and/or EOM/other matter in
accordance with SA 705/706) of the component auditor in his report on the standalone
financial statements, the parent auditor should comply with the requirements of SA 600.
Therefore, the concept of materiality would be considered while considering the
observations of the component auditor.

Q.7 Mayank Ltd. is the Subsidiary company of Vansh Ltd. Unite & Associates has been
appointed as auditor of Vansh Ltd. For the Financial year 2022-23 and Zykaa &
Associates has been appointed as auditor of Mayank Ltd. For the year 2022-23.
Explain the role of Unite & Associates and Zykaa & Associates as auditors of the
parent company and subsidiary respectively. [MTP-March 23]
Ans.: (i) Role of Auditor of Parent Company and Subsidiary company:
SA 600 “Using the work of Another Auditor” establishes the standard when an auditor,
reporting on the financial statements of a group (consolidated financial statements),
uses the work of another auditor on the financial information of one or more
components included in the financial statements of the entity. SA 600 requires that
there should be sufficient liaison between the principal auditor and the other auditor.
Accordingly, role of auditor of parent company and subsidiary are as follows:
(ii) Role of Auditor Parent : (Unite & Associates- Auditor of Parent Company):
  It is necessary to issue written communication(s) as a principal auditor to the
other auditor
 The principal auditor should advise the other auditor of any matters that come to
his attention that he thinks may have an important bearing on the other auditor‟s
work.
 When considered necessary by him, the principal auditor may require the other
auditor to answer a detailed questionnaire regarding matters on which the
principal auditor requires information for discharging his duties.
(iii) Role of Other Auditor (Zykaa & Associates- Auditor of Subsidiary Company):
 The other auditor, knowing the context in which his work is to be used by the
principal auditor, should co-ordinate with the principal auditor. For example, by
bringing to the principal auditor‟s immediate attention to any significant findings
requiring to be dealt with at entity level, adhering to the time-table for audit of the
component, etc.
 He should ensure compliance with the relevant statutory requirements.
 The other auditor should respond to the questionnaire sent by Principal Auditor on
a timely basis.

Q.8 Before commencing an audit of consolidated financial statements, the auditor should
plan his work to enable him to conduct and effective audit in an efficient and timely
manner. What are the important aspects that an auditor should consider in audit
plan? [Jan. 21 (5 Marks)]
Ans.: Planning the audit of CFS:
 Before commencing an audit of consolidated financial statements, the auditor should
plan his work to enable him to conduct an effective audit in an efficient and timely
manner.
 The auditor should make plans, among other things, for the following:
1. understanding of the group structure and group-wide controls including
assessment of Information Technology (IT) system and related general and
applications IT related controls (manual and automated) for consolidation process;
2. understanding of accounting policies of the parent and its components as well as
of the consolidation process including the process of translation of F.S. of foreign
components;
3. determining and programming the NTE of the audit procedures to be performed
based on the assessment of the risk of material misstatement in the consolidation
process;
4. determining the extent of use of other auditor‟s work in the audit; and
5. coordinating the work to be performed.

Q.9 Whether preparation of consolidated financial statements is mandatory? If yes, please

 elaborate on the requirements under the statute.
Ans.: Mandatory requirements of CFS:
 As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated
financial statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the AGM of the company
along with the laying of its F.S. u/s 129(2).
 As per Sec. 129(4), provisions applicable to preparation, adoption & audit of F.S. of a
holding company shall, mutatis mutandis, also apply to it‟s the CFS.
 CFS shall also be approved by the Board of Directors before they are signed on behalf
of the Board, along with its standalone financial statements and shall also be laid
before the AGM of the company along with the laying of its standalone financial
statement.
 Company shall also attach along with its F.S., a separate statement containing the
salient features of the financial statement of its subsidiaries in Form AOC-1.
 As per Rule 6 of the Companies (Accounts) Rules, 2014, consolidation of F.S. of the
company shall be made in accordance with the provisions of Schedule III to the Act
and the applicable ASS. However, a company which is not required to prepare CFS
under the ASS, it shall be sufficient if the company complies with provisions of CFS
provided in Schedule III of the Act.

Q.10 Union Limited holds 51% equity of MRF Ltd., 63% equity of HCL Ltd. There are
different information and explanations which are disclosed by the respective
companies in the notes to their financial statements. At time of consolidation,
management of Union Limited has consolidated all the information and explanations
disclosed in the notes as well. The principal auditor is of the view that only those
information and explanations should form part of the notes to the consolidated
financial statements which are relevant at group level. Please mention any five aspects
which are given in the notes to the separate financial statements of the parent and the
subsidiaries, need not be included in the consolidated financial statements.
[Nov. 22 (5 Marks)]
Ans.: Aspects given in the notes to the separate F.S. of the parent and the subsidiaries that
need not be included in the consolidated F.S.:
In case of companies, certain information given in the notes to the separate financial
statements of the parent and/or the subsidiary, need not be included in the consolidated
financial statements:
 Source from which bonus shares are issued, e.g., capitalisation of profits or reserves or
from securities premium account.
 Disclosure of all unutilised monies out of the issue indicating the form in which such
unutilised funds have been invested.
  Disclosure required under MSME Development Act, 2006.
 A statement of investments (whether shown under “financial assets or non-financial
assets as stock-in-trade) separately classifying trade investments and other
investments, showing the names of the bodies corporate (indicating separately the
names of the bodies corporate under the same management) in whose shares or
debentures, investments have been made (including all investments, whether existing
or not, made subsequent to the date as at which the previous balance sheet was made
out) and the nature and extent of the investment so made in each such body corporate.
 Value of imports calculated on C.I.F. basis by the company during the financial year in
respect of:
1. raw materials;
2. components and spare parts;
3. capital goods.
 Expenditure in foreign currency during the financial year on account of royalty, know-
how, professional and consultation fees, interest, and other matters.
 Value of all imported raw materials, spare parts and components consumed during the
financial year and the value of all indigenous raw materials, spare parts and
components. Similarly consumed and the percentage of each to the total consumption.
 The amount remitted during the year in foreign currencies on account of dividends,
with a specific mention of the number of non-resident shareholders, the number of
shares held by them on which the dividends were due and the year to which the
dividends related.
 Earnings in foreign exchange classified under the following heads, namely:
1. export of goods calculated on F.O.B. basis;
2. royalty, know-how, professional and consultation fees;
3. interest and dividend;
4. other income, indicating the nature thereof. However, notwithstanding the above,
the auditor needs to ensure compliance with disclosure requirements of applicable
accounting standards and other applicable laws for consolidated financial
statements.

Q.11 CA Manish is auditor of CFS of “PTM Ltd.” for year 2023-24. CFS consist of financial
statements and financial information of 8 subsidiaries audited by other auditors. Such
F.S., financial information and auditor‟s reports of subsidiaries have been furnished
by management of the “PTM Ltd” to him. Following further information is also
available in respect of these 8 subsidiaries for year 2023-24:

Total assets ` 1500 crores

Total revenues ` 1000 crores
Net cash outflows ` 10 crores
 Two of these subsidiaries are located outside India whose F.S. have been prepared in
accordance with accounting principles generally accepted in their respective countries
and which have been audited by other auditors under generally accepted auditing
standards applicable in their respective countries.
Where and how such information should be included in independent auditor‟s report
on CFS of company? Also draft a suitable para by making necessary assumptions.
Ans.: Reporting Consideration – Parent‟s Auditor is not the Auditor of all of its components:
 In a case where the parent‟s auditor is not the auditor of all the components included in
the CFS, then as per SA 706, if the auditor considers it necessary to make reference to
the audit of the other auditors, the auditor‟s report on the CFS should disclose clearly
the magnitude of the portion of the F.S. audited by the other auditors.
 This may be done by stating aggregate rupee amounts or %age of total assets,
revenues and cash flows of components included in the CFS not audited by the
parent‟s auditor.
 It should be included in Other Matter paragraph of independent auditor‟s report.
 The draft “Other Matter Paragraph” is as under:
Other Matter Paragraph
We did not audit the financial statements and other financial information, in respect of eight
(8) subsidiaries, whose financial statements include total assets of ` 1500 crores as at March
31, 2024, and total revenues of ` 1,000 crores and net cash outflow of ` 10 crores for the
year ended on that date. These financial statements and other financial information have
been audited by other auditors and such financial statements, other financial information and
auditor‟s reports have been furnished to us by the management of the Holding Company.
Our opinion on the consolidated financial statements, in so far as it relates to the amounts
and disclosures included in respect of these subsidiaries and joint ventures, and our report in
terms of sub-sections (3) of Section 143 of the Act, in so far as it relates to the aforesaid
subsidiaries is based solely on the reports of such other auditors.
Two of these subsidiaries are located outside India whose financial statements and other
financial information have been prepared in accordance with accounting principles generally
accepted in their respective countries and which have been audited by other auditors under
generally accepted auditing standards applicable in their respective countries. The Holding
Company‟s management has converted the financial statements of such subsidiaries from
accounting principles generally accepted in their respective countries to accounting
principles generally accepted in India.
We have audited these conversion adjustments made by the Holding Company‟s
management. Our opinion in so far as it relates to the balances and affairs of such
subsidiaries is based on the report of other auditors and the conversion adjustments prepared
by the management of the Holding Company and audited by us. Our opinion on the
consolidated financial statements, and our report on Other Legal and Regulatory
 Requirements is not modified in respect of the above matters with respect to our reliance on
the work done and the reports of the other auditors and the financial statements and other
financial information certified by the Management.

Q.12 Ramesh Co. Ltd., is a holding company with two subsidiaries Mahesh Co. Ltd. and
Suresh Co. Ltd., The Ramesh Co. Ltd., adopts straight line method of depreciation for
its assets whereas Suresh Co. Ltd., follows written down value or diminishing value
method. Though Mahesh Co. Ltd., follows straight line method of depreciation, it does
not give effect to component accounting of depreciation in respect of high value assets,
while consolidating the financials of the Mahesh Co. Ltd., and Suresh Co. Ltd., with
those of Ramesh Co. Ltd., determine the possible issue that you have to ensure for
compliance in the light of above facts. [May 18 (5 Marks)]
Ans.: Consolidated Financial Statements:
 In preparing consolidated financial statements, the financial statements of the parent
and its subsidiaries are combined on a line by line basis by adding together like items
of assets, liabilities, income and expenses.
 Consolidated financial statements are prepared using uniform accounting policies for
like transactions. If a member of the group uses different accounting policies,
appropriate adjustments are made to its financial statements when they are used in
preparing the consolidated financial statements. If it is not practicable to use uniform
accounting policies in preparing the consolidated financial statements, that fact should
be disclosed together with the proportions of the items in the consolidated financial
statements to which the different accounting policies have been applied.
 As per paras 60 and 61 of Ind AS 16, „Property, Plant and Equipment‟, a change in the
method of depreciation shall be accounted for as a change in an accounting estimate as
per Ind AS 8, „Accounting Policies, Changes in Accounting Estimates and Errors‟.
Therefore, the selection of the method of depreciation is an accounting estimate and
not an accounting policy.
 Therefore, there can be different methods of estimating depreciation for property, plant
and equipment, if their expected pattern of consumption is different. The method once
selected in the individual financial statements of the subsidiary should not be changed
while preparing the consolidated financial statements.
 Accordingly, in the given case, the property, plant and equipment of Suresh Co. Ltd.
(subsidiary company) may be depreciated using WDV method and property, plant and
equipment of parent company may be depreciated using SLM, if such method closely
reflects the expected pattern of consumption of future economic benefits embodied in
the respective assets.
 However, under the provisions of Companies Act, 2013 and as per requirement of AS
10, component accounting of depreciation is mandatory. Auditor should insist the
parent company to ask Mahesh Co. Ltd. (subsidiary company) to give effect to
component accounting of depreciation before consolidation of financial statements.
Q.13 MBBA Investments Ltd. is a company having paid up share capital of ` 1 Crore. It has
a subsidiary, Investors Fund Management Ltd., major business of MBBA Investments
Ltd. is to pool money from investors on a collective basis and invest this money in
various funds. This company pooled ` 10 Crores from a number of clients, which
represent the Company‟s shareholders.
While auditing books of account of MBBA Investments Ltd. CA Rachit observed that
whole amount of ` 10 Crores pooled has been invested in shares and debentures of
various companies and profit earned due to appreciation of the prices of these shares
has been distributed to various shareholders of the company.
Now, CA Rachit raised an issue while auditing financial statements of MBBA
Investments Ltd. whether the consolidated financial statements are required as per
Sec. 129(3) of the Companies Act, 2013? Analyse the above issue and give your opinion.
[Dec. 21 (5 Marks), RTP-Nov. 22]
Ans.: Requirement of Consolidated Financial Statements:
 As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries, it shall, in addition to F.S. provided u/s 129(2), prepare a consolidated
financial statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the AGM of the company
along with the laying of its F.S. u/s 129(2).
 As per para 31 of Ind As 110, an investment entity shall not consolidate its
subsidiaries. Instead, an investment entity shall measure an investment in a subsidiary
at fair value through profit or loss in accordance with Ind AS 109 (Financial
Instruments).
 However as per Para 33, parent of an investment entity shall consolidate all entities
that it controls, including those controlled through an investment entity subsidiary,
unless the parent itself is an investment entity.
 An investment entity is an entity that:
1. obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
2. commits to its investor(s) that its business purpose is to invest funds solely for
returns from capital appreciation, investment income, or both; and
3. measures and evaluates the performance of substantially all of its investments on
a fair value basis.
Conclusion: Considering that MBBA Investments Ltd. is an investment entity, it is
exempted from the consolidation provisions by virtue of Para 33 of Ind AS 110.

Q.14 Rathi & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a
listed company, Jain Ltd. Figures of income and net-worth of five out of seven
components of Jain Ltd., which are its unlisted subsidiaries, is tabulated below for the
immediate preceding financial year along with the consolidated amount:
 Particulars Consolidated Components
'A' 'B' 'C' 'D' 'E'
Income 300 35 10 70 65 20
Net Worth 800 40 20 140 180 50

The remaining two components i.e., Component „F‟ & Component „G‟ of Jain Ltd.
Were unaudited. According to Mr. Rathi, the engagement partner, Component „F‟ is
material to the consolidated financial statements whereas Component „G‟ is not
material to consolidated financial statements and this fact has also been discussed In
writing with those charged with governance of Jain Ltd. And it will also form part of
report as a „Key audit matter‟ in accordance with SA 701.
What shall be the audit consideration in relation to reporting in case of unaudited
components of Jain Ltd. By Rathi & Co. and how Rathi & Co. as a principal auditor
shall report in case of Component „F‟ & Component „G‟, respectively?
[MTP March 21, April 22]
Ans.: Audit consideration in relation to reporting in case of unaudited components:
Generally, the financial statements of all components included in CFS should be audited or
subjected to audit procedures in the context of a multi-location group audit. Such audits and
audit procedures can be performed by the auditor reporting on the CFS or by the
components‟ auditor
Where the financial statements of one or more components continue to remain unaudited,
the auditor reporting on the CFS should consider unaudited components in evaluating a
possible modification to his report on the consolidated financial statements. The evaluation
is necessary because the auditor (or other auditors, as the case may be) has not been able to
obtain sufficient appropriate audit evidence in relation to such consolidated
amounts/balances. In such cases, the auditor should evaluate both qualitative and
quantitative factors on the possible effect of such amounts remaining unaudited when
reporting on the CFS using the guidance provided in SA 705.
In the given situation, two out of seven components of Jain Ltd. Have remained unaudited
where Component “F” is material and Component „G‟ is not material to the CFS. Since
Component „F is material, therefore, it may be assumed that reporting of Key Audit Matter
in accordance with SA 701 is being done for Component „F‟ and not for Component „G‟.
Thus, in case of Component „F‟, the Principal Auditor needs to consider its impact on the
auditor‟s opinion on the CFS of the group, in terms of the principles laid down in SA 705.
Whereas in case of Component „G‟, the principal auditor should make appropriate reporting
under the “Other Matters” paragraph, pursuant to SA 706.

Q.15 Elaborate on the situations wherein the requirement related to preparation of

consolidated financial statements may not apply.
Ans.: Situations in which requirement related to preparation of CFS may not apply:
As per 2nd proviso to Rule 6 of Companies (Accounts) Rules, 2014, requirements related to
 preparation of consolidated F.S. shall not apply to a company if it meets the following
conditions:
 It is a wholly-owned or a partially-owned subsidiary of another company & all its
other members, including those not otherwise entitled to vote, having been intimated
in writing & for which the proof of delivery of such intimation is available with the
company, do not object to the company not presenting CFS;
 It is a company whose securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India; and
 Its ultimate or any intermediate holding company files CFS with the Registrar which
are in compliance with the applicable ASs.

Q.16 While doing the audit of Consolidated Financial Statements, which current period
consolidation adjustments are to be taken into account?
Ans.: Current Period Consolidation Adjustment
These are those adjustments which are made in the accounting period for which CFS are
prepared. These adjustments primarily relate to elimination of intra-group transactions and
account balances including:
1. intra-group interest paid and received or management fees, etc.;
2. unrealised intra-group profits on assets acquired/transferred from/to other
subsidiaries;
3. intra-group indebtedness;
4. adjustments relating to harmonising the different accounting policies being followed
by the parent and its components;
5. adjustments to the F.S. (of the parent and the components being consolidated) for
recognized subsequent events or transactions that occur between the balance sheet
date and the date of the auditor‟s report on the consolidated F.S. of the group.
6. adjustments for the effects of significant transactions or other events that occur
between date of components balance sheet and not already recognised in its F.S. and
the date of the auditor‟s report on the group‟s consolidated F.S. when the financial
statements of the component to be used for consolidation are not drawn upto the same
balance sheet date as that of the parent;
7. in case of a foreign component, adjustments to convert a component‟s audited F.S.
prepared under the component‟s local GAAP to the GAAP under which the
consolidated F.S. are prepared.
8. determination of movement in equity attributable to the minorities interest since the
date of acquisition of the subsidiary.
9. adjustments of deferred tax on account of temporary differences arising out of
elimination of profit and losses resulting from intra-group transactions and
undistributed profits of the component in case of consolidated F.S. prepared under
Ind AS.
Q.17 What is meant by “Group financial statements”? Give reference of relevant Auditing
Standard and issues addressed concerning the audit of Group financial statements.
[Nov. 18 (4 Marks)]
Ans.: Meaning of Group Financial Statements:
Financial statements that include the financial information of more than one component. The
term “group financial statements” also refers to combined financial statements aggregating
the financial information prepared by components that have no parent but are under
common control.
Issues addressed concerning the audit of Group Financial Statements as per SA 600
 SA 600, „Using the Work of Another Auditor‟ establishes standards when an auditor
(Principal Auditor PA), reporting on F.S. of an entity, uses work of another auditor
(AO) on financial information of one or more components included in P.S. of the
entity. PA, if he decides to use work of AO in relation to audit of CFS, should comply
with requirements of SA 600.
 In carrying out the audit of the standalone financial statements, the computation of
materiality for the purpose of issuing an opinion on the standalone financial statements
of each component would be done component-wise on a standalone basis. However,
with regard to determination of materiality during the audit of Consolidated Financial
Statements (CPS), the auditor should consider the following:
1. Auditor is required to compute the materiality for the group as a whole. This
materiality should be used to assess the appropriateness of the consolidation
adjustments (i.e. permanent consolidation adjustments and current period
consolidation adjustments) that are made by the management in the preparation of
CFS.
2. The principal auditor can also use the materiality computed on the group level to
determine whether the component‟s financial statements are material to the group
to determine whether they should scope in additional components, and consider
using the work of other auditors as applicable.
 While considering the observations (for instance modification and/or EOM/other
matter in accordance with SA 705/706) of the component auditor in his report on the
standalone financial statements, the parent auditor should comply with the
requirements of SA 600. Therefore, the concept of materiality would be considered
while considering the observations of the component auditor.

Q.18 The adjustments required for preparation of consolidated financial statements are
made in memorandum records kept for the purpose, by the Parent. The auditor should
review the memorandum records to verify the adjustment entries made in the
preparation of consolidated financial statements. Elucidate the other points, apart
from reviewing the memorandum records, the auditor should verify while
consolidation of adjustments for current period. [July 2021 (5 Marks)]
Ans.: Verification of Current Period Consolidation Adjustment:
Adjustments required for preparation of consolidated F.S. are made in memorandum records
kept for the purpose by the parent. Auditor should review these records to verify the
adjustment entries made in the preparation of consolidated F.S. Besides reviewing the
memorandum records, the auditor should verify the following:
 Elimination of intra group transactions and account balances;
 Preparation of consolidated F.S. using uniform accounting policies for like
transactions;
 Adequate disclosures have been made in the consolidated F.S. of application of
different accounting policies if it was impracticable to harmonize them.
 Adjustments made to harmonise the different accounting policies including
adjustments made by management to convert a component‟s F.S. prepared under the
component‟s GAAP to the GAAP under which the consolidated F.S. are prepared;
 Calculation of minorities/non-controlling interest;
 Adjustments relating to deferred tax on account of temporary differences arising out of
elimination of profit and losses resulting from Inter-group transactions;
 Income and expenses of the subsidiary are included in consolidated F.S. from the date
it gains control until the date when the entity ceases to control the subsidiary.

Q.19 Mars Ltd. is a curtain manufacturing company having its corporate office in Punjab.
The company is in the process of expansion and has acquired four companies during
the year. Ratan & Co. is the principal auditor of the company while the audit of all the
companies acquired during the year is being conducted by Jhawar Associates. During
the course of audit, CA Ratan, the engagement partner asked the management of Mars
Ltd., at the corporate office that in order to conduct the audit of the consolidated
financial statements, his audit firm is required to conduct audit of the financial
statements of all the components also (Companies acquired during the year). To this,
the management asked CA Ratan to consider the audit reports of the component
auditor already provided to his audit team and to communicate with the component
auditor for any discussion they wish to have. CA Ratan contended that for the purpose
of audit of consolidated financial statements either his firm is required to conduct an
audit of all the component‟s financial statements or he needs the working papers of the
component auditors. Is the contention of CA Ratan correct?
OR
Rishab & Associates is the principal auditor of KTM Ltd. The company is engaged in
the manufacture of sports items and operates through its 14 branches all over India.
With respect to the audit of branches, the company has appointed seven Chartered
Accountant firms, each firm conducting the audit of two branches. The audit reports
in respect of accounts of branches have already been sent to the principal auditor.
While analysing the work of the branch auditors, CA Rishab, the engagement partner,
 asked the branch auditors to share with him a summary of the audit procedures and
findings in respect of the accounts of the branches examined by them. CA Rishab also
asked one of the branch auditor to share his working paper with respect to the two
branches examined by that branch auditor for his review and return. Is the principal
auditor correct in asking the branch auditors for sharing the summary and the
working papers for his review.

Ans.: Using work of Another Auditor:

 As per SA 600, “Using the work of Another auditor”, principal auditor is entitled to
rely upon the work of component auditor unless there are special circumstances to
make it essential for him to visit the component and/or to examine books of account
and other records of the said component.
 Principal auditor might discuss with the other auditor the audit procedures applied or
review a written summary of the other auditor‟s procedures and findings which may be
in the form of a completed questionnaire or check-list.
 Principal auditor may also wish to visit the other auditor. The NTE of procedures will
depend on the circumstances of the engagement and the principal auditor‟s knowledge
of the professional competence of the other auditor.
 Principal auditor should consider the significant findings of the other auditor.
 Principal auditor may consider it appropriate to discuss with the other auditor and the
management of the component, the audit findings or other matters affecting the
financial information of the components. He may also decide that supplemental tests
of the records or the financial statements of the component are necessary. Such tests
may, depending upon the circumstances, be performed by the principal auditor or the
other auditor.
 Accordingly, CA Ratan, can perform the above mentioned audit procedures. However,
the audit of the component‟s financial statements by the principal auditor is not
required.
Conclusion: Contention of CA Ratan that for the purpose of audit of CFS he is required to
conduct an audit of the components F.S. is not correct.
Access to Working papers:
 SA 230 “Audit Documentation” and SQC 1, provides that, unless otherwise specified
by law or regulation, audit documentation is property of the auditor.
 He may at his discretion, make portions of, or extracts from, audit documentation
available to clients, provided such disclosure does not undermine the validity of the
work performed, or, in the case of assurance engagements, the Independence of the
auditor or of his personnel.
Conclusion: It is the discretion of the component auditor as the working papers with respect
to the components examined by the component auditor are the property of the component
auditor. So, the contention of CA Ratan is not correct.
Q.20 Mahesh Ltd. owns 51% voting power in Taparia Ltd. It however holds and discloses
all the shares as “Stock-intrade” in its accounts. The shares are held exclusively with a
view to their subsequent disposal in the near future. Mahesh Ltd. Represents that
while preparing Consolidated Financial Statements, Taparia Ltd. can be excluded
from the consolidation. As a Statutory Auditor, how would you deal?
OR
Ltd. owns 51% voting power in Appolo Tyres Ltd. It however, holds and Rakesh
discloses all the shares as “Stock-intrade” in its financial statements since the shares
are held exclusively with a view to their subsequent disposal in the near future. Rakesh
Ltd. represents that while preparing Consolidated Financial Statements, Appolo Tyres
Ltd. can be excluded from the consolidation. As the Statutory Auditor of Rakesh Ltd.,
how would you deal when the consolidated financial statements are to be drawn up in
compliance with Ind AS. [May 19 (4 Marks)]
Ans.: Consolidation of Financial Statement:
 As per Ind AS 110, there is no exemption for temporary control, or for operation under
severe long-term funds transfer restrictions and consolidation is mandatory for Ind AS
compliant F.S.
 As per Sec. 129(3) of the Companies Act, 2013 read with Rule 6 of Companies
(Accounts) Rules, 2014, a company having subsidiary which is not required to prepare
CFS under the applicable ASs, it shall be sufficient if the company complies with
provisions on CFS provided in Schedule III.
 In the present case, Mahesh Ltd. intention is to dispose off the shares in the near future
as shares are being held as stock-in-trade and it is quite clear that the control is
temporary.
Conclusion: Mahesh Ltd. is required to prepare CFS in accordance with Ind AS 110 as
exemption for temporary control‟ is not available under Ind AS 110.
As per Para 20 of Ind AS 110, “Consolidation of an investee shall begin from the date the
investor obtains control of the investee and cease when the investor loses control of the
investee”.

Q.21 Write short note on: Permanent Consolidation adjustments.

Ans.: Permanent Consolidation Adjustments:
Permanent consolidation adjustments are those adjustments that are made only on the first
occasion or subsequent occasions in which there is a change in the shareholding of a
particular entity which is consolidated. These adjustments are:
1. Determination of Goodwill or Capital Reserve as per applicable AS.
2. Determination of the amount of equity attributable to minority.
Verification Points
 Auditor should verify that the adjustment of goodwill or capital reserve and minority
 interest have been made appropriately.
 The auditor should pay particular attention to the determination of pre-acquisition
reserves of the components. Date(s) of investment in components assumes importance
in this regard.
 Examine whether the pre-acquisition reserves have been allocated appropriately
between the parent and the minority of the subsidiary.
 Verify the changes that might have taken place in permanent consolidation
adjustments on account of subsequent acquisition of shares in the components,
disposal of the components in the subsequent years.

Q.22 Jemin Ltd. holds the majority ownership of Ramesh Ltd. & Kamlesh Ltd. Surag Ltd.
is an intermediate subsidiary of Jemin Ltd. in Surat. The Jemin Ltd. presents the
consolidated financial statements for audit purposes to NTM & Co. As a statutory
auditor of NTM & Co. obtain a listing of all the components and verify that all the
components included in financial statements unless any component meet criterion for
exclusion. Explain any two reasons which are considered by NTM & Co. for exclusion
of components from the consolidated financial statements and reporting of reasons of
exclusion thereof. [Jan. 21 (5 Marks)]
Ans.: Exclusion of Components from the Consolidated F.S.
 As per Para 11 of AS 21, “Consolidated Financial Statements”, subsidiary should be
excluded from consolidation when:
1. Control is intended to be temporary because the subsidiary is acquired and held
exclusively with a view to its subsequent disposal in the near future; or
2. It operates under severe long-term restrictions which significantly impair its
ability to transfer funds to the parent.
 As per Para 31 of Ind-AS 110, an investment entity shall not consolidate its
subsidiaries. Instead an investment entity shall measure an investment in a subsidiary
at fair value through profit or loss in accordance with Ind AS 109 (Financial
Instruments).
Reporting of reasons of exclusion:
 Where a subsidiary or an associate or a jointly controlled entity is excluded from the
consolidated financial statements, the auditor should examine the reasons for
exclusion.
 In the case of an entity which is excluded from consolidation on the ground of
temporary relationship, the auditor should verify that the intention of the parent, to
dispose the subsidiary. Investment in associate or interest in jointly controlled entity, in
the near future, existed at the time of acquisition of the subsidiary, making investment
in associate or jointly controlled entity.
 The auditor should satisfy himself that the exclusion made by the management falls
within the exceptions covered in Para 11 of AS 21 or Para 31 of Ind-AS 110, as the
 case may be.
 The auditor should also verify that the reasons for exclusion are given in the
consolidated financial statements.

Q.23 Jupiter Ltd. is a company engaged in the manufacture of stainless steel items. The
company operates through 5 business units and has 35 branches across India.
Manglam & Associates are being appointed as the principal auditor of the company.
While accepting the audit assignment as the principal auditor, what will be the points
of consideration for the principal auditor of the company?
Ans.: Acceptance as Principal Auditor:
The principal auditor, Manglam & Associates, should consider whether their own
participation is sufficient to be able to act as the principal auditor. For this purpose, the
auditor would consider:
 the materiality of the portion of the financial information which the principal auditor
audits;
 the principal auditor‟s degree of knowledge regarding the business of the components;
 the risk of material misstatements in the financial information of the components
audited by the other auditor; and
 the performance of additional procedures as set out in this SA regarding the
components audited by other auditor resulting in the principal auditor having
significant participation in such audit.

Q.24 CA Sneha is nearing completion of audit of consolidated financial statements of Asian

Paints Ltd. She requires written representations from the parent‟s management on
matters material to the consolidated financial statements. What specific matters such
written representations can include?
Ans.: Written Representations:
Auditor of the CFS should obtain written representations from parent‟s management on
matters material to the CFS. Examples of such representations include:
 Completeness of components included in the consolidated financial statements;
 Identification of reportable segments for segment reporting;
 Identification of related parties and related party transactions for reporting;
 Appropriateness and completeness of permanent and current period consolidation
adjustments, including the elimination of intra-group transactions.

Q.25 Ankit Ltd. holds the ownership of 10% of voting power and control over the
composition of Board of Directors of Bankit Ltd. While planning the statutory audit of
Ankit Ltd., what factors would be considered by you as the statutory auditors of Ankit
Ltd. For the audit of its consolidated financial statements prepared under Ind AS?
[MTP-April 21]
Ans.: Special considerations in case of entities controlling the composition of Board of
Directors of others:
 In this case, Ankit Ltd. Holds only 10% of the voting power but has control over the
composition of the Board of Directors of Bankit Ltd. In such a case, Ankit Ltd. Shall
be considered as a parent of Bankit Ltd. And. Therefore, it would consolidate Ankit
Ltd. In its consolidated financial statements as a subsidiary.
 The auditor should verify Ankit Ltd. Management‟s assessment of having control in
Bankit Ltd. Despite having only 10% voting power as per the requirements of Ind AS
110. Auditor would need to verify as to how Ankit Ltd. Controls the composition of
the Board of Directors or corresponding governing body of Bankit Ltd.
 There can be various means by which such kind of control can be established. In this
regard, the auditor may verify the minutes of Board meetings, shareholder agreement
entered into by the parent, agreements with Bankit Ltd. to which the parent might have
provided any technology or know how, enforcement of statute, etc.
 Further, the auditor should verify that the adjustments warranted by Ind AS 110 have
been made wherever required and have been properly authorised by the management
of the parent. The preparation of consolidated financial statements gives rise to
permanent consolidation adjustments and current period consolidation adjustments.
The auditor should make plan, among other things, for the understanding of
accounting policies of the Ankit Ltd. and Bankit Ltd. and determining and
programming the nature, timing, and extent of the audit procedures to be performed
etc.
 Further, the duties of an auditor with regard to reporting of transactions with any other
related parties are given in SA 550 on Related Parties. As per SA 550 on, “Related
Parties”, the auditor should review information provided by the management of the
entity identifying the names of all known related parties. A person or other entity that
has control or significant influence, directly or indirectly through one or more
intermediaries, over the reporting entity are considered as Related Party.
 In forming an opinion on the financial statements, the auditor shall evaluate whether
the identified related party relationships and transactions have been appropriately
accounted for closed in accordance with Ind AS 110 and Schedule III and whether the
effects of the related party relationships and transactions prevent the financial
statements from achieving true and fair presentation (for fair presentation frameworks)
or cause the financial statements to be misleading (for compliance frameworks).

Q.26 Moon Ltd. acquired 51% shares of Sun Ltd. during the year ending 31.3.2023. During
the financial year 2023-24, 20% shares of Sun Ltd. were sold by Moon Ltd.
Moon Ltd. While preparing the financial statement for the year ending 31.3.2023 and
31.3.2024 did not consider the financial statements of Sun Ltd. For consolidation. As a
statutory auditor how would you deal with it?
OR
 Pluto Ltd. acquired 51% shares of Saturn Ltd. on 1.4.2022 and sold 25% of these
shares during the financial year 2023-24. Pluto Ltd. did not prepare Consolidated
Financial Statements for the financial year 2023-24 on the plea that the control was
only temporary. Do you agree with the view of Pluto Ltd.? Decide, assuming that Pluto
Ltd. Is required to prepare its financial statements under Ind AS. [Nov. 19 (4 Marks)]
Ans.: Auditor‟s duties in case of exclusion of subsidiaries/associates in consolidation:
 As per Ind AS 110, there is no exemption for „temporary control‟, or “for operation
under severe long-term funds transfer restrictions” and consolidation is mandatory for
Ind AS compliant F.S.
 As per Sec. 129(3) of the Companies Act, 2013 read with Rule 6 of Companies
(Accounts) Rules, 2014, a company having subsidiary which is not required to prepare
Consolidated F.S. under the applicable ASS, it shall be sufficient if the company
complies with provisions on Consolidated F.S. provided in Schedule III of the Act.
 In the given case, Moon Ltd. has acquired 51% shares of Sun Ltd. during the year
ending 31.3.2023 and sold 20% shares during the year 2023-24. Moon Ltd. did not
consolidate the financial statements of Sun Ltd. for the year ending 31.3.2023 and
31.3.2024.
Conclusion: Intention of Moon Ltd. is quite clear that the control in Sun Ltd. is temporary
as the former company disposed off the acquired shares in the next year of its purchase.
Moon Ltd is required to prepare its financial statements in accordance with Ind AS as
exemption for „temporary control‟, or “for operation under severe long-term funds transfer
restrictions” is not available under Ind AS 110.
As per Para 20 of Ind AS 110, “Consolidation of an investee shall begin from the date the
investor obtains control of the investee and cease when the investor loses control of the
investee”.

Q.27 Raja Ltd. holds the ownership of 51% of voting power and control over Kaju Ltd.
Holding company have prepared the consolidated financial statement as required by
Sec. 129 of the Companies Act, 2013. What will be your objective, as an Auditor, in the
audit of such Consolidated Financial Statement? [May 18 (4 Marks)]
Ans.: Objectives of Auditor while auditing the Consolidating Financial Statements:
The auditor of the CFS is responsible for expressing an opinion on whether the CFS are
prepared, in all material respects, in accordance with the FRF under which the parent
prepares the CFS.
Therefore, the auditor‟s objectives in an audit of CFS are:
 to satisfy himself that the consolidated financial statements have been prepared in
accordance with the requirements of applicable financial reporting framework;
 to enable himself to express an opinion on the true and fair view presented by the
consolidated financial statements;
 to enquire into the matters as specified in section 143(1) of the Companies Act, 2013;
 to report on the matters given in the clauses (a) to (1) of section 143(3) of the
Companies 2013; for other matters under section 143(3)(j) read with rule 11 of the
Companies (Audit and Auditors) Rules, 2014; and
 The auditor should also validate the requirement of preparation of CFS for the
company as per applicable FRF.
AUDIT OF NBFC
Q.1 Keshav Finance Ltd. is a Non-Banking Finance Company and was in the business of
accepting public deposits and giving loans. The company was having net owned funds
of ` 1,50,00,000 (one crore fifty lakhs) and was not having registration certificate from
RBI and applied for it on 30th March 2024. The company appointed Mr. Kabra as its
statutory auditors for the year 2023-24. Advise the auditor with reference to auditor
procedures to be taken and reporting requirements on the same in view of CARO,
2020? [MTP-March 19, Oct. 21]
OR
As per CARO, 2020 the auditor is required to report “whether the company is
required to be registered under section 45-IA of the Reserve Bank of India Act, 1934
and if so, whether the registration has been obtained.” Mention the Audit procedures
and reporting for the same. [Jan. 21- Old Syllabus (5 Marks)]

Ans.: Audit Procedure for reporting under CARO, 2021 w.r.t. registration u/s 45-IA of RBI
Act, 1934:
Clause (xvi) of Paragraph 3 of CARO, 2020 requires the company auditor to report:
“Whether the company is required to be registered under Section 45-IA of the RBI Act,
1934 and if so, whether the registration has been obtained”.
Auditor is required to examine whether company is engaged in the business which attract
the requirements of the registration. Registration is required where the financing activity Is a
principal business of the company. RBI restrict companies from carrying on the business of
a non-banking financial institution without obtaining the certificate of registration.
Audit Procedure and Reporting
(i) Examine the transactions of the company with relation to the activities covered under
the RBI Act and directions to determine whether the company is engaged in financial
activity.
(ii) Auditor should examine the financial statements to ascertain whether company‟s
financial assets constitute more than 50% of the total assets and income from
financial assets constitute more than 50% of the gross income.
(iii) Ascertain whether the net owned funds of the company exceed such amount so as to
require the company to get itself registered as NBFC with RBI.
(iv) Ascertain whether the company has obtained the registration as NBFC, if not, the
reasons should be sought from the management and documented.
(v) Auditor‟s Report under CARO, 2020 shall incorporate the following:
 Whether the registration is required under section 45-IA of the RBI Act, 1934.
 If so, whether it has obtained the registration.
 If the registration not obtained, reasons thereof.
In the instant case Keshav Finance Ltd. is a NBFC and was in business of accepting public
 deposits and giving loans since 2015. Company was having net owned funds of
` 1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the prescribed limit for
existing companies i.e. ` 2 Crores and was also not having registration certificate from RBI
(though applied for it on 30th March 2024).
Auditor is required to report on the same as per Clause (xvi) of Paragraph 3 of CARO 2020.

Q.2 Write a short note on the following: Categorisation of NBFCs carrying out specific
activity. [RTP - May 23]
Ans.: Categorisation of NBFCs carrying out specific activity:
As the regulatory structure envisages scale based as well as activity-based regulation, the
following prescriptions shall apply in respect of the NBFCs
 NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer
interface will always remain in the Base Layer of the regulatory structure.
 NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer
(and not in the Base layer), as the case may be. SPD and IDF-NBFC will always
remain in the Middle Layer.
 The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro
Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies
(NBFC-MGC) could lie in any of the layers of the regulatory structure depending on
the parameters of the scale based regulatory framework.
 Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the
case may be. They will not be placed in the Upper Layer till further notice.

Q.3 What are the specific matters to be included in Auditor’s Report in an audit of NBFC
not accepting public deposits.
OR
Dinesh Bank Pvt. Ltd. is a Non-Deposit Taking Non-Systemically Important NBFC
registered with Reserve of India. The Statutory Auditor of the company is required to
give a report to the Board of Directors. What shall be the content of the Auditor’s
Report to the Board.
Ans.: Matters to be included in Auditor’s Report in case of NBFC:
In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the
auditor shall also make a separate report to the Board of Directors of the Company on the
matters as specified in paragraph 3 of the NBFCs Auditor‟s Report (Reserve Bank)
Directions, 2016:
Matters to be reported in case of all NBFC – Para 3
1. Whether the company has obtained a Certificate of Registration (CoR) from the
Bank. (Conducting Non-Banking Financial Activity without a valid CoR is an
offence under the RBI Act, 1934)
2. In case of a company holding CoR issued by the Bank, whether that company is
entitled to continue to hold such CoR in terms of its Principal Business Criteria
(Financial asset/income pattern) as on March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down
in Directions issued by RBI.
Matters to be reported in case of NBFC not accepting public deposits – Para 3
(i) Whether the Board of Directors has passed a resolution for non-acceptance of any
public deposits;
(ii) Whether the company has accepted any public deposits during the relevant
period/year.
(iii) Whether the company has complied with the prudential norms relating to income
recognition, accounting standards, asset classification and provisioning for bad and
doubtful debts as applicable to it;
(iv) In respect of Systemically Important Non-deposit taking NBFCs:
 Whether the capital adequacy ratio as disclosed in the return submitted to the
Bank, has been correctly arrived at and whether such ratio is in compliance
with the minimum CRAR prescribed by the Bank;
 Whether the company has furnished to the Bank the annual statement of
capital funds, risk assets/exposures and risk asset ratio within the stipulated
period.
(v) Whether the NBFC has been correctly classified as NBFC Micro Finance Institutions
(MFI).

Q.4 Bhumik & Associates are going to start the audit of NBFCs. They have not performed
much work for the NBFCS in the past years. You are required to explain the
requirements related to registration and regulation of NBFCs which an auditor needs
to keep in his mind while planning the audit of NBFC which would help this firm.
Ans.: Registration and regulation of NBFC:
 Sec. 45-1A of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
commence or carry on the business of a NBFC without:
 1. obtaining a certificate of registration issued by the RBI.
2. having the net owned fund (NOF) of ` 25 lakh or such other amount, not
exceeding ` 100 crore, as the Bank may, by notification in the Official Gazette,
specify.
NOTE
For all companies currently applying for registration as a NBFC, minimum NOF
requirement is ` 10 Crores (earlier it was ` 2 crores). All existing companies should
meet NOF of ` 10 Crores in a phased manner by 31st March 2027.
 A company incorporated under the Companies Act and desirous of commencing
business of nonbanking financial institution can apply to RBI in prescribed form along
with necessary documents for registration. RBI issues CoR after satisfying itself that
the conditions as enumerated in Section 45-1A of the RBI Act, 1934 are satisfied.
 However, to obviate dual regulation, certain categories of NBFC which are regulated
by other regulators are exempted from requirement of registration with the RBI, for
example: companies registered with SEBI or IRDA.
 The RBI has issued directions to NBFC on acceptance of public deposits, prudential
norms, risk exposure norms & other measures to monitor financial solvency and
reporting by NBFC.
 RBI also issued directions to auditors to report to the RBI, BOD and shareholders, any
noncompliance with the RBI Act and regulations made by the RBI.

Q.5 CA Aashish is conducting the statutory audit of HCL Ltd., a non-banking financial
company. It has branches in various parts of India. The company with a focus on
housing finance, has outstanding nonconvertible debentures worth ` 150 Crores. The
company reportedly missed interest payments of INR ` 15 Crores on its debts because
of inadequate liquidity. As a result, HCL Ltd. faced a series of downgrades by rating
agencies on its debts over the past two months. Rating was cut to D from A4 implying
that the company was in default or expected to be in default soon. What aspects CA
Aashish should look into in relation to the activity of mobilization of public deposits
(particularly in relation to downgrading of credit facilities) by RHL Ltd?
[Nov. 20 (5 Marks), MTP-March 22, April 23]
Ans.: Auditor’s procedure in relation to mobilization of public deposits in case of NBFC:
(i) The ceiling on quantum of public deposits has been linked to its credit rating as given
by an approved credit rating agency. In the event of a upgrading/downgrading of
credit rating, the auditor should bear in mind that the NBFC will have to
increase/reduce its public deposits in accordance with the revised credit rating
assigned to it within a specified time frame and should ensure that the NBFC has
informed about the same to the RBI in writing.
(ii) In the event of downgrading of credit rating below the minimum specified investment
grade, a non-banking financial company, being an investment and credit company or
 a factor, shall regularise the excess deposit as provided hereunder:
 with immediate effect, stop accepting fresh public deposits and renewing
existing deposits;
 all existing deposits shall run off to maturity;
 report the position within 15 working days, to the concerned Regional Office
of the RBI where the NBFC is registered; and
 no matured public deposit shall be renewed without the express and voluntary
consent of the depositor.

Q.6 Arjun Pvt. Ltd. is primarily into the business of selling computer parts. However, the
company is fulfilling the Principal Business Criteria as at the balance sheet date i.e.
Financial Assets are more than 50% of total assets and Financial Income is more than
50% of Gross Income. What shall be the obligation of the Statutory Auditor in such a
scenario?
OR
Murlidhar and Associates, a firm of Chartered Accountants, was appointed as auditor
of an NBFC. The audit work has been completed. The audit team which was involved
in the fieldwork came across various observations during the course of audit of this
NBFC and have also an limited understanding about the exceptions which are
required to be reported in the audit report. They would like to understand in detail
regarding the obligations on the part of an auditor in respect of exceptions in his
report so that they can conclude their work. Please explain.
[MTP-May 20, Nov. 21, Sep. 22]
OR
Rahul and Associates, a firm of chartered accountants, is appointed as auditor of
NBFC. During the audit, audit team comes across various observations/exceptions and
Mr. Jeel, a junior member of audit team, due to his limited understanding about
exceptions which are required to be reported in the audit report, would like to
understand in detail, the obligations on the part of an auditor in respect of exceptions
in the audit report so that he can conclude his work. Discuss. [July 21 (5 Marks)]
Ans.: Obligations of Statutory Auditor of NBFC:
 A company will be treated as NBFC when a company‟s financial assets constitute
more than 50% of the total assets (netted off by intangible assets) and income from
financial assets constitute more than 50% of the gross income. In the given case,
Krishna Pvt. Ltd. Is fulfilling the Principal Business Criteria i.e. Financial Assets are
more than 50% of total assets and Financial Income is more than 50% of Gross
Income.
 In such a scenario, the statutory auditor has an obligation to submit exception report to
the RBI. As per Para 5 of NBFC Auditor‟s Report (Reserve Bank) Directions, 2008
provides that where, in the case of a NBFC, the statement regarding any of the items
 referred to in para 3, is unfavourable or qualified, or in the opinion of the auditor the
company has not complied with:
1. the provisions of Chapter III-B of Reserve Bank of India Act, 1934; or
2. the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
3. NBFC-Non-Systemically Important Non-Deposit taking Company (Reserve
Bank) Directions, 2016 and NBFC-Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016
 it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may
be, in respect of the company to the concerned Regional Office of the Department of
Non-Banking Supervision of the Bank under whose jurisdiction the registered office of
the company is located.
NOTE
Duty of the Auditor to submit exception report shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report
shall not contain any statement with respect to compliance of any of those provisions.

Q.7 Define NBFC. Also give a brief description about types of NBFCs covering any five
NBFCs.
Ans.: Meaning of NBFC:
Sec. 45-1(f) of the RBI (Amendment) Act, 1997 defines a NBFC as:
 a financial institution which is a company;
 a non-banking institution which is a company with principal business of receiving of
deposits or lending in any manner;
 such other non-banking institution or class of such institutions, as the RBI, with the
previous approval of the C.G. may specify by notification in the Official Gazette.
Types of NBFC:
1. Investment and Credit Company (ICC).
2. Infrastructure Finance Company
3. Systemically Important Core Investment Company.
4. Infrastructure debt Fund-NBFC.
5. NBFC-Micro Finance Institution.
6. Non-Banking Financial Company – Factors (NBFC-Factors).
7. Non-Operative Financial Holding Company (NOFHC).

Q.8 Manish Ltd. is a company registered under the Companies Act, 2013. The company is
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authorities.
For the year ended 31st March, 2024 following are some extracts from the financial
 statements:

(1) Paid-up share capital ` 40.53 Cr.

(2) Non-Current Assets – Loans & ` 75.50 Cr.
Advances
(3) Current Assets – Loans & Advances ` 294.33
Cr.
(4) Total assets of the company ` 618.55
Cr.
(5) Intangible assets ` 6.35 Cr.
(6) Profit of the Year ` 8.15 Cr.
(7) Income from interest and dividends ` 62.31 Cr.
(8) Gross Income ` 111.23
Cr.

Directors intend to apply for registration as Non-Banking Financial Company (NBFC)

under Section 45-1A of the Reserve Bank of India (Amendment) Act, 1997. Advise.
[RTP-Nov. 22]
Ans.: Registration of NBFC:
 Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
commence or carry on the business of a NBFC without
1. obtaining a certificate of registration issued by the RBI; and
2. having the net owned fund of ` 25 lakh or such other amount, not exceeding
` 100 crores, as the Bank may, by notification in the Official Gazette, specify.
NOTE
For all companies currently applying for registration as a NBFC, minimum NOF
requirement is ` 10 Crores (earlier it was ` 2 crores). All existing companies should
meet NOF of ` 10 Crores in a phased manner by 31st March 2027.
 The registration is required where the financing activity is a principal business of the
company.
 Financial activity will be considered as principal business if the company‟s financial
assets constitute more than 50% of the total assets (netted off by intangible assets) and
income from financial assets constitute more than 50% of the gross income.
 Financial Assets of Manish Ltd. are:
Non-Current Assets – Loans & Advances ` 75.50 Cr.
Add: Current Assets – Loans & Advances ` 294.33 Cr.
Total Financial Assets ` 369.83 Cr.
 Total Assets (netted off by intangible assets) of Manish Ltd. are:
Total assets of the company ` 618.55 Cr.
Less: Intangible assets ` 6.35 Cr.
 Total Assets (netted off by intangible assets) ` 612.20 Cr.
 In view of above, financial assets of Manish Ltd. constitute more than 50% of the total
assets (netted off by intangible assets).
 Income from financial assets ` 62.31 Cr.
Gross Income ` 111.23 Cr.
Income from financial assets constitute more than 50% of the gross income.
 From the above, it is clear that Manish Ltd.‟s financial assets constitute more than 50
per cent of the total assets (netted off by intangible assets) and income from financial
assets constitutes more than 50 per cent of the gross income.
Conclusion: As the net owned funds of the company exceeds ` 10 Crores and financial
activity is the principal business of the company (based on 50:50 test), company is required
to register as NBFC.

Q.9 “Len and Den Platform” is a P2P online platform owned by Future Technologies Pvt.
Ltd. which is registered with RBI as NBFC. Peer to Peer Platform (P2P) means an
intermediary providing the services of loan facilitation via online medium or otherwise
to the participants. Participants have to enter into an arrangement with NBFC-P2P to
lend on its platform or avail loan facilitation services provided by it. It provides only as
a medium connecting lenders and borrowers. It also carries out the credit assessment
and risk profiling of the participants on the platform. It also provides services relating
to loan documentation and loan recovery. The company falls outside purview of upper
layer. Where does such NBFC fit into in accordance with scale-based regulations?
Suggest few audit procedures for above NBFC-P2P.
Ans.: Classification of NBFC and Audit procedures:
NBFC-P2P falls in base layer in accordance with scale-based regulations of RBI.
Audit procedures:
1. Obtain an understanding of business conducted by NBFC-P2P. Verify verified that
company undertakes only permissible activities like providing online marketplace to
participants for lending and borrowing. It should not be engaged in business of
lending funds on its own.
2. Verify certificate of registration obtained from RBI.
3. Verify adherence to lending and borrowing guidelines prescribed by RBI.
4. Ensure compliance with reporting requirements of RBI.
5. Verify Board approved policy setting out eligibility criteria for participants i.e.
lenders and borrowers.
6. Verify Board approved policy for pricing of services.
7. Verify Board approved policy for grievance redressal and complaints.
8. Verify the appropriateness of arrangements entered into among participants & NBFC-
P2P.
Q.10 Mr. Girish has been appointed as an auditor of PAL Ltd., a NBFC company registered
with RBI. Mr. Girish is concerned about whether the format of financial statements
prepared by PAL Ltd. is as per notification issued by the Ministry of Corporate
Affairs (MCA) dated October 11, 2018. The notification prescribed the format in
Division III under Schedule III of the Companies Act, 2013 applicable to NBFCs
complying with Ind-AS. Mr. G wants to know the differences in the presentation
requirements between Division II and Division III of Schedule III of the Companies
Act, 2013. Help Mr. Girish. [Nov. 19 (5 Marks), MTP-April 21]
OR
Rishab & Co. are the statutory auditors of Legal Finance Ltd, an NBFC engaged in the
business of accepting public deposits and giving loans. Auditors are concerned that the
format of the financial statements should be prepared as per the notification issued by
the Ministry of Corporate Affairs dated 11th Oct, 2018. While auditing there was a
difference of opinion between CA Rohit and CA Bimal regarding the disclosure of
“Other Income” in the financial statements. CA Rohit believes that there is no
difference in the presentation requirements between Division II and Division III of
Schedule III of the Companies Act, 2013. Is the contention of CA R correct?
[May 23 (5 Marks)]
Ans.: Differences between Division II and Division III:
The presentation requirements under Division III for NBFCs are similar to Division II (Non-
NBFC) to a large extent except for the following:
 NBFCs have been allowed to present the items of the balance sheet in order of their
liquidity which is not allowed to companies required to follow Division II.
Additionally, NBFCs are required to classify items of the balance sheet into financial
and non-financial whereas other companies are required to classify the items into
current and non-current.
 An NBFC is required to separately disclose by way of a note any item of „other
income‟ or „other expenditure‟ which exceeds 1% of the total income. Division II, on
the other hand, requires disclosure for any item of income or expenditure which
exceeds 1% of the revenue from operations or ` 10 lakhs, whichever is higher.
 NBFCs are required to separately disclose under „receivables‟, the debts due from any
Limited Liability Partnership (LLP) in which its director is a partner or member.
 NBFCs are also required to disclose items comprising „revenue from operations‟ and
„other comprehensive income‟ on the face of the Statement of profit and loss instead of
showing those only as part of the notes.
 Separate disclosure of trade receivable which have significant increase in credit risk &
credit impaired.
 The conditions or restrictions for distribution attached to statutory reserves have to be
separately disclose in the notes as stipulated by the relevant statute.
Q.11 Shubham and Associates, a firm of Chartered Accountants, are the auditors of NBFC
(Investment and Credit Company). Some of the team members of the audit team who
audited this NBFC have left the firm and the new team members are in discussion with
the previous team members who are still continuing with the firm regarding the
verification procedures to be performed. In this context, please explain what
verification procedures should be performed in relation to audit of NBFC – Investment
and Credit Company (NBFC-ICC). [MTP – Oct. 19, RTP-Nov. 19]
Ans.: Audit of NBFC – Investment and Credit Companies:
(A) Points related in Investments:
 Physical Verification: Auditor should physically verify the securities held by
a NBFC. Where any security is lodged with an institution or a bank, a
certificate from the bank/institution to that effect must be verified.
 Income recognition: Verify that dividend income wherever declared by a
company, has been duly received and accounted for. NBFC Prudential Norms
directions require dividend income on shares of companies and units of mutual
funds to be recognised on cash basis.
 Authorisation: Verify the Board Minutes for purchase and sale of
investments.
 Classification: Ascertain from the Board resolution or obtain a management
certificate to the effect that the investments so acquired are current
investments or Long Term Investments.
 Valuation: Check whether the investments have been valued in accordance
with the NBFC Prudential Norms Directions and adequate provision for fall in
the market value of securities, wherever applicable, have been made there
against, as required by the Directions.
 Compliance of AS 13: An auditor will have to ascertain whether the
requirements of AS 13 “Accounting for Investments” or other accounting
standard, as applicable, (to the extent they are not inconsistent with the
Directions) have been duly complied with by the NBFC.
 External Confirmations: In respect of shares/securities held through a
depository, obtain a confirmation from the depository regarding the
shares/securities held by it on behalf of the NBFC. Obtain a confirmation from
the approved intermediary regarding securities deposited with/borrowed from
it as at the year end.
(B) Point related to Credit:
 Sanctioning: Auditor should examine whether each loan or advance has been
properly sanctioned. He should verify the conditions attached to the sanction
of each loan or advance i.e. limit on borrowings, nature of security, interest,
terms of repayment, etc.
  Security: Auditor should verify the security obtained and the agreements
entered into, if any, with the concerned parties in respect of the advances
given. He must ascertain the nature and value of security and the net worth of
the borrower/guarantor to determine the extent to which an advance could be
considered realisable.
 Loan against own shares: Verify whether the NBFC has not advanced any
loans against the security of its own shares.
 Compliance of prudential norms: Check whether the NBFC has not
lent/invested in excess of the specified limits to any single borrower or group
of borrowers as per NBFC Prudential Norms Directions.
 Appraisal and follow up System: Auditor should verify whether the NBFC
has an adequate system of proper appraisal and follow up of loans and
advances. In addition, he may analyse the trend of its recovery performance to
ascertain that the NBFC does not have an unduly high level of NPAs.
 Classification: Check the classification of loans and advances (including bills
purchased and discounted) made by a NBFC into Standard Assets, Sub-
Standard Assets, Doubtful Assets and Loss Assets and the adequacy of
provision for bad and doubtful debts as required by NBFC Prudential Norms
Directions.

Q.12 Tarun Ltd. is a company registered under the Companies Act, 2013. The company is
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authorities.
For the year ended 31st March, 2024, following are some extracts from the financial
statements:

(1) Paid-up share capital ` 40.53 Cr.

(2) Non-Current Assets – Loans & ` 55.90 Cr.
Advances
(3) Current Assets – Loans & Advances ` 344.47
Cr.
(4) Total assets of the company ` 530 Cr.
(5) Intangible assets ` 3 Cr.
(6) Profit of the Year ` 7.25 Cr.
(7) Income from interest and dividends ` 52 Cr.
(8) Gross Income ` 102.57
Cr.

Directors intend to apply for registration as Non-Banking Financial Company (NBFC)

under Section 45-IA of the RBI (Amendment) Act, 1997. Advise. [Dec. 21 (4 Marks)]
Ans.: Registration of NBFC:
 Sec. 45-1A of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
 commence or carry on the business of a NBFC without
1. obtaining a certificate of registration issued by the RBI; and
2. having the net owned fund of ` 25 lakh or such other amount, not exceeding `
100 crores, as the Bank may, by notification in the Official Gazette, specify.
NOTE
For all companies currently applying for registration as a NBFC, minimum NOF
requirement is ` 10 Crores (earlier it was ` 2 crores). All existing companies should
meet NOF of ` 10 Crores in a phased manner by 31st March 2027.
 The registration Is required where the financing activity is a principal business of the
company.
 Financial activity will be considered as principal business if the company‟s financial
assets constitute more than 50% of the total assets (netted off by intangible assets) and
income from financial assets constitute more than 50% of the gross income.
 In the given case, net owned funds exceed ` 10 Crores and financial activity is the
principal business of the company as the financial assets constitute more than 50% of
the total assets (netted off by intangible assets) and income from financial assets
constitute more than 50% of the gross income.
Conclusion: As the net owned funds of the company exceeds 2 Crores and financial activity
is the principal business of the company (based on 50:50 test), company is required to
register as NBFC.

Q.13 You are auditor of a deposit taking NBFC (NBFC-D). The NBFC is identified by RBI
in its upper layer and its financial statements are required to prepared in accordance
with requirements of Ind AS. The following is extract of statement of profit and loss
for year ending 31st March, 2024 in accordance with Division III of Schedule III of
Companies Act, 2013. Previous year figures are ignored.

Particulars Note No. Figures for year ended 31st

March, 2024 (in ` Crores)
Revenue from Operations
Interest income 15 9500
Dividend income -
Rental Income 150
Fees and commission income 16 100
Net gain on fair value changes 17 150
Net gain on derecognition of financial
instruments under amortised category
(a) Total revenue from operations 9900
(b) Other Income 18 100
(c) Total Income 10000
 On going through details of head “other expenditure” in expenses side of statement of
profit and loss, it is noticed that there is an expenditure relating to manpower
outsourcing cost amounting to ` 99.50 crores included under “other expenditure”.
Does it meet the requirements of Division III of Schedule III of Companies Act, 2013?
Ans.: Compliance of Requirements of Schedule III:
An NBFC is preparing financial statements in accordance with requirements of Division III
of Schedule III of Companies Act, 2013 has to separately disclose by way of note any item
of “other expenditure” exceeding 1% of total income.
In the given case, expenditure of ` 99.50 crore, i.e. it does not exceed 1% of total income.
Conclusion: Requirements of Division III of Schedule III of Companies Act, 2013 has been
complied with.

Q.14 CG & Co. is the statutory auditor of Unicorn NBFC Ltd. While planning the audit
procedures to be done during the audit of entity, there was a difference of opinion
between Mr. Pranav and his partner Mr. Arihant. Mr. Arihant is of the opinion that
evaluation of Internal control system and verification of registration with RBI should
not be the part of audit procedure, as it is the part of internal audits only. Is the
contention of Mr. Arihant correct? Also state what broad areas should mandatorily
become part of the audit procedure of CG & Co. for conducting the audit of Unicorn
NBFC Ltd.? [Dec. 21 (4 Marks), MTP-April 22, Oct. 22]
Ans.: Audit procedure in case of NBFC:
(A) Evaluation of Internal Control System:
 The responsibility of maintaining an adequate accounting system
incorporating various internal controls to the extent appropriate to the size and
nature of its business vests with the management. A sound internal control
system would enable an organisation to plug loopholes in its workings,
particularly in the detection of frauds and would also aid in timely decision.
Making. An auditor should gain an understanding of the accounting system
and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain
whether the internal controls put in place by the NBFC are adequate and are
being effectively followed.
 In particular, an auditor should review the effectiveness of the system of
recovery prevalent at the NBFC. He should ascertain whether the NBFC has
an effective system of periodical review of advances in place which would
facilitate effective monitoring and follow up. The absence of a periodical
review system could result in non-detection of sticky advances at their very
inception which may ultimately result in the NBFC having an alarmingly high
level of NPAs.
(B) Verification of registration with RBI:
  Sec. 45-1A of the RBI Act, 1934, has made it incumbent on the part of all
NBFCs to comply with registration requirements and have minimum net
owned funds (NOF) of ` 2 crore for commencing/carrying on its business.
 An auditor should obtain a copy of the certificate of registration granted by the
RBI or in case the certificate of registration has not been granted, a copy of the
application form filed with the RBI for registration.
 An auditor should, therefore, verify whether the dual conditions relating to
registration with the RBI and maintenance of minimum et owned funds have
been duly complied with by the concerned NBFC.

Q.15 Om Pvt. Ltd. is a company engaged in trading activities, it also has made investments
in shares of other Companies and advanced loans to group companies amounting to
more than 50% of its total assets. However, trading income constitutes majority of its
total income. Whether the Company is an NBFC?
Ans.: Classification of company as NBFC:
 In order to identify a particular company as Non-Banking Financial Company
(NBFC), it will consider both assets and income pattern as evidenced from the last
audited balance sheet of the company to decide its principal business.
 The company will be treated as NBFC when a company‟s financial assets constitute
more than 50% of the total assets (netted off by intangible assets) and income from
financial assets constitute more than 50% of the gross income. A company which
fulfils both these criteria shall qualify as an NBFC and would require to be registered
as NBFC by Reserve Bank of India.
Conclusion: Om Pvt. Ltd. is fulfilling the criteria on the asset side, but however is not
fulfilling the criteria on the income side, the company cannot be classified as a deemed
NBFC.

Q.16 You are the auditor of Ravi Ltd., a NBFC registered with RBI. How would you
proceed to ensure the compliance of “Prudential Norms Directions” by Ravi Ltd.?
[Nov. 18 (4 Marks)]
Ans.: Compliance of Prudential Norms by NBFC
 Prudential Norms: The auditor has to verify the compliance of prudential norms
relating to
1. income recognition;
2. Income from investments;
3. Asset classification;
4. Provision for bad & doubtful debts;
5. Capital adequacy norm;
6. Prohibition of granting loans against its own shares;
7. Prohibition on loans & investments for failure to repay public deposits &
 8. Norms for concentration of credit etc.
 Policy for demand Loans: The auditor shall ensure that Board of the NBPC shall
frame a policy for granting demand/call loans and implement the same.
 Classification of Advances: The auditor should verify the classification of advances
and loans as standard/sub-standard/doubtful/loss and that proper provision has been
made in accordance with 3. The directions.
 Income from NPA: Auditor should ensure that unrealised income from non-
performing assets has not been taken to profit and Loss Account. 4.
 Recovery in NPA Accounts: The auditor should check all NPAs of the previous years
to verify whether during the current year any payments have been received or still they
continue to be NPA during the current year also.

Q.17 Hariram Housing Finance Limited is in the business of housing finance activities
having asset size of ` 800 crores. Its principal business is of providing finances for
housing mainly to individuals. It is not identified by RBI in upper layer. Under scale-
based regulations introduced by RBI, what should be appropriate classification for
such a company?
Is there any specific reporting requirement under CARO, 2020 for statutory auditor of
a company engaged in housing finance activities?
Ans.: Classification of NBFC:
Under scale-based regulations, NBFCs undertaking housing finance activities constitute
“middle layer”. The asset size is not relevant in such a case. All housing finance companies
not identified in upper layer would constitute middle layer due to nature of such activities
undertaken by them.
Reporting Requirements under CARO, 2020:
There is specific reporting requirement under CARO, 2020 under clause 3 (xvi)(b) which
requires auditor to report whether the company has conducted any non-Banking financial or
housing finance activities without a valid Certificate of Registration (CoR) from the RBI as
per the RBI Act, 1934.

Q.18 Write short note on: Classification of Frauds by NBFC. [RTP-May 19, Nov. 20]
Ans.: Classification of Frauds by NBFC:
In order to have uniformity in reporting, frauds have been classified as under based mainly
on the provisions of the Indian Penal Code:
1. Misappropriation and criminal breach of trust.
2. Fraudulent encashment through forged instruments, manipulation of books of account
or through fictitious accounts and conversion of property.
3. Unauthorised credit facilities extended for reward or for illegal gratification.
4. Negligence and cash shortages. Reporting as fraud is required only if the intention to
 cheat/ defraud is suspected/proved. However, if fraudulent intention is not
suspected/proved, at the time of detection, cases of negligence and cash shortage will
be treated as fraud and reported, if:
 Cash shortages are more than ` 10,000 and
 Cash shortages are more than ` 5000 and detected by management/
auditor/inspecting officer and not reported on the occurrence by the persons
handling cash.
5. Cheating and forgery.
6. Irregularities in foreign exchange transactions. Reporting as fraud is required only if
the intention to cheat/defraud is suspected/ proved.
7. Any other type of fraud not coming under the specific heads as above.

Q.19 What is a Core Investment Company (CIC) under the Reserve Bank of India
regulations? What are the specific reporting requirements to be considered by an
auditor in respect of CIC under CARO 2020? [Nov. 22 (5 Marks)]
Ans.: Meaning of Core Investment Company:
A non-banking financial company carrying on the business of acquisition of shares and
securities and which satisfies the following conditions as on the date of the last audited
balance sheet:
 it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
 its investments in the equity shares (including instruments compulsorily convertible
into equity shares within a period not exceeding 10 years from the date of issue) in
group companies and units of Infrastructure Investment Trust only as sponsor
constitute not less than 60% of its net assets as mentioned in clause (i) above;
 it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
 it does not carry on any other financial activity.
Reporting Requirements in respect of CIC under CARO, 2020:
Clause (xvi) of Para 3 of CARO, 2020 requires the auditor to report the following:
 whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the
criteria of a CIC, and in case the company is an exempted or unregistered CIC,
whether it continues to fulfil such criteria;
 whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICS which are part of the Group.
 15. “Audit of Public Sector Undertakings”
PART- I DESCRIPTIVE QUESTIONS
15.1 - Basics of Audit of PSU
Q.1. PGC & Associates are statutory auditors of BNPC Limited, a PSU in power sector. It is
engaged in building large sized thermal power stations to accelerate development of power
sector in the country. One of the financial committees of Parliament has decided to examine
its physical and financial performance. It has also examined audit findings of C&AG in
respect of which action is yet to be taken by the said PSU. The committee also proposes to
include in its report performance of the company in various operational matters.
Which financial committee of Parliament deals with such matters? Outline its main functions.
Ans: Matters to be dealt by Committee on Public Undertakings:
Matters as stated in the question are dealt by Committee on Public Undertakings.
The functions of the Committee are:
(i) to examine the reports and accounts of public undertakings.
(ii) to examine the reports of the C&AG on public undertakings.
(iii) to examine the autonomy and efficiency of public undertakings and to see whether they
are being managed in accordance with sound business principles and prudent commercial
practices.
(iv) to exercise such other functions vested in the PAC and the Estimates Committee as are
not covered above and as may be allotted by the Speaker from time to time.
The examination of public enterprises by the Committee takes the form of comprehensive
appraisal or evaluation of performance of the undertaking. It involves a thorough
examination, including evaluation of the policies, programmes and financial working of the
undertaking.

Q.2. The Comptroller & Auditor General of India plays a key role in the functioning of the
financial committees of Parliament and the State Legislatures. He has come to be
recognised as a „friend, philosopher and guide‟ of the Committees. In view of above, you are
required to list down role of C&AG. [MTP-Oct. 18]
Ans: C&AG Role in functioning of financial committees of Parliament and State Legislature:
C&AG plays a key role in functioning of financial committees of Parliament & State
Legislatures. He has come to be recognised as a „friend, philosopher and guide‟ of the
Committees.
(i) Reports of CAG form the basis of Committees‟ working, i.e., committees examine the
issues raised by C&AG Reports.
(ii) Committees requires assistance of C&AG for scrutinising the notes which Ministries
submit to the Committees insofar as to check the correctness of submissions to the
Committees and facts and figures in their draft reports;
(iii) Reports of Committees are being submitted to the Parliament/State Legislature with their
observations and recommendations. C&AG assists various committees in suggesting
recommendations.
(iv) Audit Reports, which could not be discussed in detail by Committees, written answers
are obtained from Department/Ministry concerned. This ensures that Audit Reports are
not taken lightly by Government, even if the entire report is not deliberated upon by the
Committee.

1
15.2-Audits Conducted by C&AG
Q.3. The reports of the Comptroller and Auditor General of India on the audit of PSUs are
presented to the Parliament and to various state legislatures to facilitate a proper
consideration. Enumerate the contents of Audit Report presented by C & AG.
[May 19; Dec. 21 (5 Marks)]
Ans: Audit Report of CAG:
Reports of the CAG on the PSUs of C.G. are presented to the Parliament in following parts:
(a) Introduction containing a general review of the working results of Government
companies, deemed Government companies and corporations.
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit
Board.
(c) Resume of the company auditor‟s reports submitted by them under the directions issued
by the CAG and that of comments on the accounts of the Government companies.
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit
Board.
For certain specified states, C&AG submits a separate audit report (commercial) to
legislature, while for other States/Union Territories with legislature, there is a commercial
chapter in the main audit report.

15.3-Performance Audit
Q.4. ABG & Co., a Chartered Accountant firm has been appointed by C&AG for
performance audit of a sugar industry. What factors should be considered by ABG &
Co., while planning a performance audit of a sugar industry?
Ans: Factors to be considered while planning performance audit:
1. Significance and the needs of potential users of the audit report.
2. Obtaining an understanding of the program to be audited.
3. Legal and regulatory requirements.
4. Management controls.
5. Identifying the criteria needed to evaluate matters subject to audit.
6. Identify significant findings and recommendations from previous audits that could
affect the current audit objectives.
7. Potential sources of data that could be used as audit evidence and consider the validity
and reliability of these data.
8. Consider whether the work of other auditors and experts may be used to satisfy some of
the auditors‟ objectives.
9. Providing sufficient staff and other resources to do the audit.
10. Preparing a written audit plan.

Q.5. You have been appointed by C & AG for performance audit of a PSU. What are the steps
to be followed by you while planning the performance audit.
Ans: Steps for planning a performance audit:
(1) Understanding the entity /programme: Obtain an understanding of the programme to
be audited to help assess, among other matters, the significance of possible audit
objectives and the feasibility of achieving them.
(2) Defining Audit Objective: The audit objectives should be defined in a concise manner,
as they will impact nature of the audit, govern its conduct and affect audit conclusions.

2
 (3) Scope of Audit: Defining scope focuses the extent, timing and nature of the audit.
(4) Determining the audit Criteria: Criteria are the standards used to determine whether a
program meets or exceeds expectations. In selecting criteria, auditors have a
responsibility to use criteria that are reasonable, attainable, and relevant to the matters
being audited.
(5) Deciding Audit Approach: No uniform audit approach can be prescribed that is
applicable to all types of subjects of performance audits. Selection of approach also
determine methods and means used for conducting the audit.
(6) Developing audit Questions: Audit team should prepare a list of questions to which they
would seek answers. Questions should be framed in comprehensive manner.
(7) Assess audit team skills and requirement of outside expertise: The performance
auditor must possess the range of skills and experience necessary for effective discharge
of audit mandate. The Audit team needs to decide at the planning stage on which aspect
expertise is required.
(8) Audit design Matrix: Audit Design matrix is a structured and highly focused approach
to (8 designing a performance audit study, based around the audit objectives, associated
sub- objectives and lower level detailed questions.
(9) Establish the timetable and resources: Selection of appropriate audit team is the most
important component in planning an audit. Considerations for selection of a particular
team should be recorded in the planning documents along with the proposed timelines for
various activities to be undertaken as part of the audit process.
(10) Intimation of Audit: Audited entities must be informed about the intention of taking up
the planned performance audit with scope and extent of audit well before the
commencement of Audit.

Q.6. In carrying out efficiency audit of a Public Sector Undertaking (PSU), what important
aspects are required to be looked into, to assess the efficiency? [May 18 (4 Marks)]
Ans: Aspects to be looked into to assess the efficiency of a PSU:
Efficiency is the measurement of input-output. It is said to be achieved when the output is
maximised at the minimum of inputs, or input is minimised for any given quantity and quality
of output. Examining efficiency embraces aspects such as whether:
(a) procurement practices followed are sound;
(b) resources are properly protected and maintained;
(c) human, financial and other resources are efficiently used;
(d) optimum amount of resources (staff, equipment and facilities) are used in producing or
delivering the appropriate quantity and quality of goods or services in a timely manner;
(e) efficient operating procedures are used; and
(f) objectives of public sector programmes are met cost-effectively.

Q.7. You have been appointed as auditor of AKY Ltd. After having determined the audit
objectives, now you have been requested to draft audit criteria. What are the sources that you
will use while doing the task? [MTP-Oct. 21]
Ans: Audit criteria are the standards used to determine whether a program meets or exceeds
expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and
effectiveness of programmes and activities can be assessed.

3
 The audit criteria may be sought to be obtained from the following sources:
(i) Procedure manuals of the entity.
(ii) Policies, standards, directives and guidelines.
(iii) Criteria used by the same entity or other entities in similar activities or programmes.
(iv) Independent expert opinion and know how.
(v) New or established scientific knowledge and other reliable information.
(vi) General management and subject matter literature and research papers.

Q.8. C & AG appointed a chartered accountant firm to conduct Performance audit of COP Ltd.,
a PSU of Govt. of India. The firm conducted the audit with a view to check all the expenses
of the unit are in conformity to the public interest and publicly accepted customs. The
audit report submitted by audit firm was rejected by C&AG. Give your opinion on the action
of C & AG. [Dec. 21 (5 Marks); RTP-Nov. 22; MTP-April 23]
Ans: Performance Audit:
 Performance audit is an objective and systematic examination of evidence for the
purpose of providing an independent assessment of the performance of a government
organization, program, activity, or function in order to provide information to improve
public accountability and facilitate decision-making by parties with responsibility to
oversee or initiate corrective action.
 Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions)
through various subordinate offices of Indian Audit and Accounts Department.
In conducting performance audit, the subordinate offices are guided by manual and
auditing standards prescribed by C&AG.
 Therefore, the objectives of performance auditing are evaluation of economy, efficiency,
and effectiveness of policy, programmes, organization and management. • Performance
auditing focuses on areas in which it can add value which have the greatest potential for
development. It provides constructive incentives for the responsible parties to take
appropriate action.
 In the given case, C & AG appointed a chartered accountant firm to conduct Performance
audit of COP Ltd., a PSU of Govt. of India. The firm conducted the audit with a view to
check all the expenses of the unit are in conformity to the public interest and publicly
accepted customs. The audit report submitted by audit firm was rejected by C & AG.
 Audit conducted by the firm is propriety audit, not the performance audit.
Conclusion: Action of C&AG is right as audit conducted by CA firm is propriety audit, not
performance audit.

Q.9. The objectives of audit in connection with a State Electricity Distribution Company were
to ascertain whether the:
1. total cost of providing electricity is being recovered by timely submissions to the State
Electricity Regulatory Commission;
2. tariff orders, sales circulars and sales instructions were issued timely, without any
ambiguity. They were implemented in time;
3. metering, billing and collection was managed efficiently and effectively;
4. monitoring and internal controls were efficient.
What kind of audit is this? Prepare two sample observations which could be part of the
audit report. [RTP-May 22]

4
Ans: Sample observations in case of performance audit:
This is example of Performance Audit. Sample observations are:
(i) Non-replacement of defective/ burnt meters: Large number of meters, much in excess
of the permitted limit of 1% of the total meters were defective and their replacement was
not completed within the stipulated time of 1 month. This resulted in billing on average
basis for a continuous period of several months. This could result in losses as well as
administrative hassles and disputes with consumers.
(ii) Under charging of meter rent: As per Schedule of Charges, the Company is required to
charge meter rent of ` 30 per month for a single phase meter and ` 40 per month for three
phase meter. It was observed that the Company had short charged meter rent of ` 60 lakh
from 3 lakh consumers in 5 lakh bills during the period.

Q.10. Write short note on: Issues addressed in Performance Audit of PSUs. [Nov. 18 (4 Marks)]
Or
“A performance audit is an objective and systematic examination of evidence for the purpose
of providing an independent assessment of the performance of a government organization,
program, activity, or function in order to provide information to improve public
accountability and facilitate decision-making by parties with responsibility to oversee or
initiate corrective action.” Briefly discuss the issues addressed by Performance Audits
conducted in accordance with the guidelines issued by C & AG. [RTP-Nov. 18, May 20]
Ans: Performance Audit:
Meaning: A performance audit is an objective and systematic examination of evidence for
the purpose of providing an independent assessment of the performance of a government
organization, program, activity, or function in order to provide information to improve public
accountability and facilitate decision-making by parties with responsibility to oversee or
initiate corrective action.
Elements of Performance Audit: Performance audits include evaluation of economy,
efficiency and effectiveness.
1. Economy: Economy stands for minimising the cost of resources used for an activity,
having regard to appropriate quantity, quality and at the best price. Evaluating economy
implies forming an opinion whether resources have been used economically and acquired
in due time, in appropriate quantity and quality at the best price.
2. Efficiency Audit: Efficiency is the measurement of input-output. It is said to be achieved
when the output is maximised at the minimum of inputs, or input is minimised for any
given quantity and quality of output. Examining efficiency embraces aspects such as
whether:
(i) procurement practices followed are sound;
(ii) resources are properly protected and maintained:
(iii) human, financial and other resources are efficiently used;
(iv) optimum amount of resources (staff, equipment and facilities) are used in producing
or delivering the appropriate quantity and quality of goods or services in a timely
manner,
(v) efficient operating procedures are used; and
(vi) objectives of public sector programmes are met cost-effectively.
3. Effectiveness: Effectiveness is the measurement of the extent to which objectives
are achieved & the relationship between the intended impact & the actual impact

5
 of an activity. Examining effectiveness will cover the following:
(a) assess whether objectives of & means provided (legal, financial, etc.) for a new or
ongoing public sector programme are proper, consistent, suitable or relevant to the
policy;
(b) determine the extent to which a program achieves a desired level of results;
(c) assess effectiveness of program and/or of individual program components;
(d) determine whether management has considered alternatives for carrying out the
program that might yield desired results more effectively or at a lower cost;
(e) assess adequacy of management control system for measuring, monitoring and
reporting a programme‟s effectiveness;
(f) ensure compliance with laws & regulations applicable to program; &
(g) identify ways of making programmes work more effectively.

15.4 - Comprehensive Audit

Q.11. XYZ & Co., a CA. firm was appointed by C & AG to conduct comprehensive audit of
ABC Public undertaking. C & AG advised to cover areas such as investment decisions,
project formulation, organisational effectiveness, capacity utilisation, management of
equipment, plant and machinery, production performance, use of materials, productivity of
labour, idle capacity, costs and prices, materials management, sales and credit control,
budgetary and internal control systems, etc. Discuss stating the issues examined in
comprehensive audit. [RTP-May 20, MTP-March 22]
Or
Sun Light Limited is a public sector undertaking engaged in production of electricity
from solar power. It had commissioned a new project near Goa with a new technology for a
cost of ` 5,750 crore. The project had seen delay in commencement and cost over-run.
State the matters that a Comprehensive Audit by C & AG may cover in reporting on the
performance & efficiency of this project. [Nov. 18 (4 Marks), MTP-Sep. 22]
Or
The Comptroller and Auditor General of India has appointed a chartered accountant firm to
conduct the comprehensive audit of Metro Company Limited (a listed government company)
which is handling the Metro project of the metropolitan city for the period ending 31.03.2021.
The work to be conducted under Project A handled by the Metro Company Limited was of
laying down railway line of 124 kilometers. [The chartered accountant firm reviewed the
internal audit report and observed the shortcoming reported about the performance of Project
A regarding the understatement of the Current liabilities and Capital work-in-progress by
` 84.68 crore.] Explain some of the matters to be undertaken by the chartered accountant firm
while conducting the comprehensive audit of Metro Company Limited.
[Jan. 21 (5 Marks), MTP-April 22]
Ans: Comprehensive Audit:
Meaning: Comprehensive Audit involves assessing overall efficiency & effectiveness
of Public Enterprises. This is done by reference to certain pre-determined standards,
objectives & criteria.
The starting point of a comprehensive audit is the preparation of an audit programme
based on the study of decisions relating to the setting up of the enterprise, its objectives,
the areas of operation, organisation, financial &operational details, capital & operational
budgets & other relevant available papers.

6
 Areas to be covered in Comprehensive Audit:
The areas covered in comprehensive audit will vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. Some of the broad areas are
listed below:
1. How does overall capital cost of project compare with approved planned costs? Were
there any substantial increases &, if so, whether there is evidence of unnecessary
expenditure?
2. Have planned production or operational outputs been achieved? Has there been
under-utilisation of installed capacity and if so, what has caused it?
3. Has the planned rate of return been achieved?
4. Are the systems of project formulation and execution sound? Are there inadequacies?
5. Are cost control measures adequate and are there inefficiencies, wastages in raw
materials consumption, etc.?
6. Are the purchase policies adequate?
7. Does the enterprise have research and development programmes?
8. If the enterprise has an adequate system of repairs and maintenance?
9. Are procedures effective and economical?
10. Is there any poor or insufficient or inefficient project planning?

15.5 - Propriety Audit

Q.12. What are the principles involved regarding “Propriety audit” in the case of Public Sector
Undertaking?
Ans: General Principles of propriety Aspect:
Propriety Audit stands for verification of transactions on the tests of public interest,
commonly accepted customs and standards of conduct.
Instead of too much dependence on documents, vouchers and evidence, it shifts the emphasis
to the substance of the transactions and looks into the appropriateness thereof on a
consideration of financial prudence, public interest and prevention of wasteful expenditure.
Audit against propriety seeks to ensure that expenditure conforms to these principles which
have been stated as follows:
(i) Expenditure is not prima facie more than the occasion demands and that every official
exercise the same degree of vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money.
(ii) The authority exercises its power of sanctioning expenditure to pass an order which will
not directly or indirectly accrue to its own advantage.
(iii) Funds are not utilised for the benefit of a particular person or group of persons.
(iv) Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly
benefit the management personnel, employees and others.

15.6 - Miscellaneous
Q.13. BT Ltd., a company wholly owned by Central Government was disinvested during the
previous year, resulting in 45% of the shares being held by public. The shares were also listed
on the BSE. Since the shares were listed, all the listing requirements were applicable,
including publication of quarterly results, submission of information to the BSE etc.
Gautam, the Finance Manager of the Company is of the opinion that now the company is
subject to stringent control by BSE and the markets, therefore the auditing requirements of a

7
 limited company in private sector under the Companies Act, 2013 would be applicable
to the company and the C&AG will not have any role to play. Comment.
[MTP - March 21; RTP-May 23]
Ans: Role of C & AG in case of Govt. company:
 Sec. 2(45) of the Companies Act, 2013, defines a “Government Company” as a
company in which not less than 51% of the paid-up share capital is held by the C.G. or
by any State Government or Governments or partly by the Central Government and
partly by one or more State Governments, and includes a company which is a subsidiary
company of such a government company.
 The auditors of these government companies are firms of Chartered Accountants,
appointed by the Comptroller & Auditor General, who gives the auditor directions on the
manner in which the audit should be conducted by them.
 In the given case, 55% shares of the company are still with the C.G. and hence it is
classified as a government company.
Conclusion: Gautam opinion is not correct as VM Ltd. is a government company, listing of
company‟s shares on a stock exchange is irrelevant for this purpose.

Q.14. PS & Associates are statutory auditors of a C.G. owned company for a particular year. The
statutory auditors were required to examine the following areas mandatorily, provide their
specific replies and also their impact on F.S. for that particular year in their audit report.
(1) Whether the company has system in place to process all the accounting transactions
through IT system? If yes, the implications of processing of accounting transactions
outside IT system on the integrity of the accounts along with the financial implications, if
any, may be stated.
(2) Whether there is any restructuring of an existing loan or cases of waiver / write off of
debts / loans / interest etc. made by a lender to the company due to the company‟s
inability to repay the loan? If yes, the financial impact may be stated. Whether such cases
are properly accounted for?
(3) Whether funds (grants/subsidy etc.) received/receivable for specific schemes from C.G.
or its agencies were properly accounted for/utilized as per its term and conditions?
List the cases of deviation. Can you gauge likely nature of such responsibility thrust upon
auditors of above PSU?
Ans: C&AG Directions for Audit:
Areas mentioned in the question for which statutory auditors of PSU were required
to examine, report and indicate impact of these matters in financial statements are likely to
relate to directions issued by C&AG to statutory auditor‟s u/s 143(5) of Companies Act,
2013.
In terms of Sec. 143(5), in case of a government company, the C&AG has the power to direct
the auditor the manners in which accounts of company are required to be audited and auditor
shall submit audit report which among other things, include-
(a) the directions, if any, issued by the C&AG;
(b) the action taken thereon and
(c) its impact on the accounts and financial statements of the company.

8
 PART- II MULTIPLE CHOICE QUESTIONS

1. Setir Ltd. is a company in which 59% of the paid up share capital is held by Punjab
Government. The company is engaged in the business of providing consultancy services in
relation to construction projects.
The Punjab Government is also planning to induct funds in the company in future, if required.
Nocri Ltd is a company controlled by Setir Ltd. The business of Nocri Ltd. is construction
and has an annual turnover of INR 2500 crore approx.
The audit of the financial statements of Nocri Ltd for the financial year ended 31 March 2023
got completed but Nocri Ltd observed that during the course of audit, there was lot of
intervention of Comptroller & Auditor General of India, wherein C&AG was giving
directions to the auditors on the manner in which audit should be conducted in respect of
certain areas.
Further, it also received comments from C&AG on the audit report of the auditors. Nocri Ltd.
is seeking legal opinion to go against C&AG so that they can avoid unnecessary interference
of C&AG and is also looking to have new auditors appointed by Nocri Ltd with whom they
will have an engagement letter with the terms that those auditors don‟t accept any interference
of C&AG which the existing auditors have not been able to avoid.
In this context, please advise which of the following should be correct?
(a) The stand of the existing auditors should have been better i.e. not to accept any
interference of C&AG.
(b) Management could have planned the audit work better by including the same terms in
engagement letter with existing auditors instead of appointing another auditors.
(c) C&AG involvement could have been accepted if this was the audit of Setir Ltd. but not in
case of Nocri Ltd. and hence Nocri Ltd. should also reach out to its parent company to
get this resolved.
(d) Stand of Nocri Ltd. is wrong as the C&AG may get involved in the audit of Nocri Ltd.

2. CGN Ltd. is a large company engaged in the business of oil exploration in India. The Tamil
Nadu Government and the Central Government hold 37% and 20% respectively of the paid-
up share capital of this company.
The C&AG appointed the statutory auditors of this company as per requirements of the
Companies Act, 2013. The company had a concern regarding this appointment because
company wanted to appoint another auditors as per their assessment, however, considering
the legal hassles which would have got involved, the company decided to go ahead with this.
The audit of the financial statement for the year ended 31 March 2023 got completed by the
auditors appointed by the C&AG. Subsequent to this, the C&AG also issued an order to
conduct test audit of the accounts of the company which was objected by the management of
the company.
The management objected saying that the complete set of financial statements have been
audited by auditors appointed by the C&AG and hence this order is not acceptable because
this would lead to duplication of work.
Moreover, the management has also written to the C&AG that for the next financial year, the
existing auditors should either resign so that the management may bring in their own auditors
or the C&AG should have faith in the work of the auditors appointed by them. Please suggest
how to resolve this matter.

9
 (a) The management‟s stand is not correct. The C&AG may order test audit as per the
requirements of the Companies Act, 2013.
(b) The management‟s stand is not correct. The C&AG may order test audit as per the
requirements of the Indian Penal Code.
(c) The management is correct and in this situation they get the right to appoint another
auditor considering the fact that the C&AG has lost faith in the work of auditors
appointed by them.
(d) Such type of matters should be taken to arbitration as per the requirements of the
Arbitration Act.

3. NOP Ltd. is a joint venture of C.G. and a private company & is engaged in the business
of distribution of electricity in Chennai. The Central Government holds 51% shares
of the company.
The company is acknowledged for its consumer-friendly practices. Initially it was
completely owned by the Government & was running into significant losses but after the
joint venture, the aggregate technical & commercial losses of the company showed a record
decline. Operations of the company have improved significantly as claimed by management
of the company.
The C&AG wants to conduct the performance audit of one of the departments of the company
through a subordinate office of Indian Audit and Accounts Department.
For this purpose, the audit programme has also been finalized and the Accountant General has
intimated the company that the audit would start within a day‟s time. The company is
concerned because the programme which has been received from the Accountant General is
quite detailed and would involve significant time. Further the management of the company is
quite surprised as to why this audit should be conducted as this is not a company subject to
such types of audits as per law.
Management of the company would like to have your inputs in respect of this matter.
Please guide.
(a) The notice for such type of audit should give reasonable time to the management to
prepare themselves. Further it should not be a detailed audit requiring significant time of
the company.
(b) The C&AG may conduct such type of audits in respect of NOP Ltd. which would get
covered in this criteria, however, the notice for conducting such type of audit should give
reasonable time to the management to prepare themselves.
(c) In case of a joint venture such type of audit cannot be performed as per the Companies
Act, 2013. The company should write to the Registrar of Companies in respect of this
matter and till that time no audit can be started.
(d) In case of a joint venture such type of audit cannot be performed as per the Companies
Act, 2013. Further wherever this is applicable that is only for a small period of time. The
company should write to the Ministry of Corporate Affairs in respect of this matter.

4. AJ Petroleum & Refining Ltd. is a Maharatna Central Public Sector Undertaking (PSU) in
India having its registered office in Uttaranchal.
It is engaged in the business of oil refining, pipeline transportation & marketing, exploration
& production of crude oil & gas, petrochemicals, gas marketing and other downstream
operations.

10
 The PSU has global aspirations for which its management is working on various plans/
programmes so that the same can be achieved in future. It is also planning to pursue diverse
business interests by setting up of various joint ventures with reputed business partners from
India and abroad to explore global opportunities.
Considering these objectives and other factors, the C&AG directed the performance audit in
respect of its certain activities/functions which has been in progress. Before starting the audit,
the detailed scope and composition of audit team was shared with the management of the
company and tentative timelines were also given with which the management was fine.
However, during the course of the audit the audit team changed its audit programme to
achieve the desired objectives which was approved by the competent authority, however,
the management was not happy with those changes.
The management wants the audit team to conclude the audit with the same scope as this is a
special type of audit wherein such flexibility cannot be accepted as that would defeat the
purpose of the law. However, the audit team has a different view. Please guide.
(a) Changes in audit programme in such type of audits are not acceptable as specified by the
Companies Audit and Auditors Rules, 2014.
(b) Changes in audit programme in such type of audits are not acceptable as specified by the
Companies Audit and Auditors Rules, 2014 and the Ministry of Law.
(c) Changes in audit programme in such type of audits can be accepted provided those are
discussed with the management and approved by the Competent Authority.
(d) The C&AG should get involved in this matter after taking permission from the Central
Government and would require to change the audit team if the scope requires any
changes as the same should have been properly assessed by the audit team before
commencing the audit.

5. A report submitted by you after an audit of a public sector unit is more likely to be finally
reviewed by
(a) Public Accounts Committee (PAC).
(b) Committee on Public Undertakings (COPU).
(c) Estimates Committee.
(d) Public sector Committee.

6. In Case of PSU, Direct Reporting Engagement does not include

(a) Performance audits.
(b) Compliance audits.
(c) Financial audits.
(d) Comprehensive Audit. [MTP-April 21]

7. You have been given an assignment of audit of IT department of a PSU. A checklist was
handed over to you which contained many questions such as,
 Are separate user-names and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
 Are external (offsite) data backups maintained at a place outside the premises?
The type of audit being conducted is likely to be:
(a) Comprehensive audit.
(b) Propriety audit.

11
 (c) Compliance audit.
(d) Financial audit. [MTP-Oct. 22; RTP-May 23]

8. With respect to audit of public sector undertaking, which among the below is related to
propriety audit?
(a) This audit is carried out by assessing whether activities, financial transactions and
information comply in all material aspects, with the regulatory and other authorities
which govern the audited entity.
(b) This auditing focuses on the areas in which it can add value which have the greatest
potential for development. It provides constructive incentives for the responsible parties
to take appropriate action.
(c) It is an audit under which the C&AG does not really cover again the field which has
already been covered. He conducts an appraisal or an efficiency cum performance audit.
(d) It stands for verification of transactions on the tests of public interest, commonly
accepted customs and standards of conduct. This audit is directed towards an
examination of management decisions in sales, purchases, contracts, etc.

Answer Key

1. (d) Stand of Nocri Ltd. is wrong as the C&AG may get involved in the audit of Nocri Ltd.

2. (a) The management‟s stand is not correct. The C&AG may order test audit as per the
requirements of the Companies Act, 2013.

3. (b) The C&AG may conduct such type of audits in respect of NOP Ltd. which would
get covered in this criteria, however, the notice for conducting such type of audit should
give reasonable time to the management to prepare themselves.

4. (c) Changes in audit programme in such type of audits can be accepted provided those are
discussed with the management and approved by the Competent Authority.

5. (b) Committee on Public Undertakings (COPU).

6. (c) Financial audits.

7. (c) Compliance audit.

8. (d) It stands for verification of transactions on the tests of public interest, commonly
accepted customs and standards of conduct. This audit is directed towards an
examination of management decisions in sales, purchases, contracts, etc.

12
 PART- III INTEGRATED CASE SCENARIO

SRM & Associates are refreshening up their knowledge on functions of various Parliamentary
financial committees and on the varied functions and duties of C&AG in relation to audit of
government institutions and government companies. They feel that unless they have understood
scope of duties of C&AG, they would not be in a position to do justice to audits and professional
work in this area.
In the process, they have gone through various materials both offline and online. The summarized
information derived from some of such materials including website of CAG are stated below:
(a) The C&AG report for a particular year contained results of the compliance audit of Department
of Revenue-Direct Taxes of the Union Government dealing with “Assessments relating to
Agricultural Income”. It included certain observations relating to allowing of claim for
exemption of agricultural income without supporting documents, use of this area by non-
agriculturists as a conduit to avoid taxes etc., in scrutiny assessments performed by the
Department.
(b) The C&AG in one of its reports in respect of a state government owned industrial development
corporation pointed out non-adherence of One-time settlement (OTS) guidelines of state
government by the corporation resulting in acceptance of a below par OTS proposal thus
foregoing recovery of loan amounting to € 6.87 crores. The said corporation was providing loans
to industrial units.
(c) Annual report of a listed public sector company which is a “mini -ratna” PSU was also gone
through. The said company is engaged in providing diversified services to Indian Railways.
(d) A state government owned PSU was involved in setting up of a thermal power plant in the state.
The CAG, in its audit report, pointed out delay in completion of work due to failure to decide on
the type of water treatment in the cooling plant on a timely basis. Besides, other reasons leading
to delay like frequent changes in lay-out and re-testing of soil by the company were pointed out.
Answer the following questions based upon above information:
Q.1. Based on description provided at para (a) of case, which Parliamentary financial committee
is likely to examine above report of C&AG and make its recommendations?
(a) Estimates Committee.
(b) Public Accounts Committee.
(c) Committee on Public Undertakings.
(d) Committee on Commerce.

Q.2. Considering the description stated in para (b) of case, the above audit finding is likely to fall
in which areas?
(a) Compliance audit.
(b) Performance audit.
(c) Propriety audit.
(d) Comprehensive audit.

Q.3. As regards listed PSU described in para (c) of case, which of the following statements is most
appropriate?
(a) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by
shareholders in AGM. C&AG cannot give directions to such firm of auditors. However,
its office is empowered to conduct a supplementary audit.

13
 (b) The statutory audit of above PSU is to be conducted by C&AG.
(c) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by
C&AG. Further, C&AG can give directions to the firm of auditors.
(d) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by
shareholders in AGM. However, C&AG can give directions to the firm of auditors.

Q.4. Considering nature of audit finding described at para (d) of case concerning delay
in completion of work of thermal power plant, the said audit finding is likely to fall in
domain of:
(a) Propriety audit.
(b) Performance audit.
(c) Financial audit.
(d) Compliance audit.

Q.5. PSU engagements are generally attestation engagements or direct reporting engagements.
Which of the following statements is correct in this regard?
(a) Performance audits and compliance audits are generally attestation engagements.
(b) Performance audits and compliance audits are generally direct reporting engagements.
(c) Performance audit is a direct reporting engagement whereas compliance audit is an
attestation engagement.
(d) Performance audit is an attestation engagement whereas compliance audit is a direct
reporting engagement.

Answer Key
1. (b) Public Accounts Committee.

2. (a) Compliance audit.

3. (c) The statutory audit of above PSU is to be conducted by a firm of auditors appointed by
C&AG. Further, C&AG can give directions to the firm of auditors.

4. (b) Performance audit.

5. (b) Performance audits and compliance audits are generally direct reporting engagements.

14
DUE DILIGENCE
Q 1. Lalit Ltd. entered into a deal with DRB Ltd. For buying its business of manufacturing
wooden products/ goods. Lalit Ltd. has appointed your firm for conducting due diligence
review and they want to know the cash generating abilities of DRB Ltd. What points will
you check in order to ensure that the manufacturing unit of DRB Ltd. Will be able to
meet the cash requirements internally? (icai study mat)

Ans : Conducting Due diligence to examine cash generating abilities:

In order to ensure that the manufacturing unit of DRB Ltd. will be able to meet the cash
requirements internally, one is required to verify:
▪ Is the company able to honour its commitments to its trade payables, to the banks, to the
government and other stakeholders?
▪ How well is the company able to convert its trade receivables and inventories?
▪ How well the Company deploys its funds?
▪ Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
▪ What is the investment pattern of the company and are they easily realizable?

Q 2. CA Trupti is acting as Credit manager in branch of ICICI Bank Ltd. A company has
approached the branch for a request to sanction credit facilities worth ` 10 crore for
meeting usual business requirements. It is a prospective new client. She checks past
history of the company, back ground of promoters & directors, shareholding pattern and
nature of business. Assessment of financial results of past years & future projections is
also undertaken. She also carries out SWOT analysis.
Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score
and position of name of promoters/directors in RBI defaulter list is also verified.
She also makes discreet inquiries from few clients of the branch engaged in similar line of
activity regarding credit worthiness of company, its promoters and directors. Based on
above:
(i) Identify activity being performed by CA Trupti and discuss its nature.
(ii) Would your answer be different if this activity was to be performed by a person not
qualified as a Chartered Accountant? Can a non-CA perform such activity? State
reason.
(iii) Name any three other areas where identified activity can be undertaken.
[MTP-April 23; RTP-May 23]
Ans : Due diligence:
▪ The activity described in the situation is Due diligence. Due diligence is a measure of
prudence activity, or assiduity, as is properly to be expected from, and ordinarily
exercised by, a reasonable and prudent person under the particular circumstance, not
 measured by any absolute standard but depending upon the relative facts of the case. It
involves a careful study of financial and non-financial possibilities. It implies a general
duty to take care in any transaction.
▪ Due diligence is a process of investigation, performed by investors, into the details of a
potential investment such as an examination of operations and management and the
verification of material facts. It entails conducting inquiries for the purpose of timely,
sufficient and accurate disclosure of all material statements/information or documents,
which may influence the outcome of the transaction. Due diligence involves a careful
study of the financial as well as nonfinancial possibilities for successful implementation
of restructuring plans.
▪ Due diligence involves an analysis carried out before acquiring a controlling interest in a
company to determine that the conditions of the business conform with what has been
presented about the target business. Also, due diligence can apply to recommendation for
an investment or advancing a loan/credit.
▪ There would be no difference in answer if above activity was to be performed by a person
who is not a Chartered Accountant. The activity would remain due diligence. Due
diligence can be performed by any person. It is not necessary that due diligence can only
be carried out by a Chartered Accountant. As due diligence involves exercise of prudence
and general duty to take care in any transaction, it can be undertaken by any person.
▪ The areas where due diligence may be undertaken are: -
(i) Corporate restructuring
(ii) Venture capital financing
(iii) Offerings

Q 3. CA Yash is employed with a leading private sector HDFC Bank posted in Noida branch.
One of the existing borrowers has approached branch with a proposal to sanction fresh
term loan of ` 5 crore with commensurate increase in working capital credit facilities
relating to expansion of its garment manufacturing unit. While performing due diligence,
he notices that company was formed just two years ago and had availed term loan of ` 10
crore and cash credit facilities of ` 5 crore respectively. Its sales have increased from ` 25
crores in first year to ` 45 crores in year just ended. It is generating cash profits and is
timely servicing its debts.
The borrower was earlier catering to domestic market. However, now it is in process of
procuring export orders and working assiduously in this regard. The expansion plans are
in line with development in area of marketing relating to exports.
However, there a large number of units catering to domestic and export market of
garments in Noida, Delhi and surrounding areas. There is also demand slump in biggest
US market.
Besides, the unit is family-based and relies upon marketing skills of its main promoter.
There is lack of well-paid qualified staff with the borrower to deal effectively with its
customers both domestic as well as foreign.
 Lack of well-paid qualified staff to deal effectively with its domestic and foreign customers
is an area of weakness.
He starts jotting down and elaborating above points. Identify what he is trying to do as
part of due diligence.
Ans : SWOT Analysis:
▪ As part of due diligence exercise, he is performing SWOT analysis of borrower. He is
making analysis of strengths, weaknesses, opportunities and threats (SWOT) pertaining to
borrower.
▪ Features such as rise In sales, generation of cash profits and timely service of debts
represent borrower strengths.
▪ Lack of well-paid qualified staff to deal effectively with its domestic and foreign
customers is an area of weakness.
▪ Entering into export market presents opportunity for borrower.
▪ Presence of large number of competitors and demand slump in US market reflect threats.

Q 4. Sri Majan is above 80 years old and wishes to sell his proprietary business of manufacture
of specialty chemicals. Creta Ltd. Wants to buy the business and appoints you to carry out
a due diligence audit to decide whether it would be worthwhile to acquire the business.
What procedures you would adopt before you could render any advice to Creta Ltd.?
(icai study mat- I don’t think aise que exam me aayenge)
Ans : Due Diligence Procedure:
1. Studying the Business History: Accountant should make relevant enquiries about
history of target’s business products, markets, suppliers, expenses, operations.
2. Significant Accounting Policies: Study accounting policies followed and ascertain
whether any accounting policy is inappropriate.
3. Review of F.S.: Examine whether F.S. of target company have been prepared in
accordance with the Statute governing the target entity, Framework for Preparation and
Presentation of the F.S. and the relevant ASs. Review operating results of the target
entity in great detail.
4. Taxation: Check whether business is regular in payment of taxes to Government. Also
look at the tax effects of the merger or acquisition.
5. Cash Flow: Review historical cash flows and their pattern to determine cash generating
abilities. Check whether entity is able to honour its commitments to its trade payables, to
the banks, to government and other stakeholders.
6. Financial Projections: Evaluate projections for the next 5 years with detailed
assumptions and workings and the appropriateness of assumption used in the preparation
and presentation of financial projections. If assumption used by the company appears to
be are unrealistic, consider its impact on the overall valuation of the company.
 7. Management and Employees: Examine status of work force, staff and employees and
their retention. Match the job profile of the administrative and managerial staff with the
requirements of the new incumbents.
8. Statutory Compliance: Make a list of laws that are applicable to the entity as well as to
make a checklist of compliance required under those laws.

Q 5. Write short note on: Example of headings of a Due Diligence Report.

[RTP-Nov. 21]
OR
An American Company engaged in the business of manufacturing and distribution of
industrial gases, is interested in acquiring a listed Indian Company having a market share
of more than 65% of the industrial gas business in India. It requests you to conduct a
"Due Diligence" of this Indian Company and submit your Report. List out the contents of
your Due Diligence Review Report that you will submit to your USA based Client.
OR
Manak Co. is currently a large organisation trading in items of office furniture. The entity
wants to expand and hence are looking at acquisition of Ratan Co. which deals in items of
household furniture. Manak Co. hires a CA to conduct a due diligence to consider
whether there is the potential for additional value to be brought out of the target company
by improving its operational function and also whether there are serious operational risks
about which the potential buyer should be concerned (thereby allowing the buyer to
consider aborting the deal or renegotiating the price). Which of the due diligence review
would be helpful to achieve the above objective? You are also required to briefly discuss
the contents of a due diligence report.
[MTP – April 19]
Ans : Contents of a Due Diligence Report
1. Executive summary.
2. Introduction.
3. Objective of due diligence.
4. Terms of reference and scope of verification.
5. Brief history of the company.
6. Summary on capital structure and group structure of company.
7. Shareholding pattern.
8. Observations on the review.
9. Assessment of Management structure.
10. Assessment of financial liabilities.
11. Assessment of valuation of assets.
12. Assessment of operating results.
13. Assessment of taxation and statutory liabilities.
 14. Assessment of possible liabilities on account of litigation.
15. Assessment of net worth.
16. Any liabilities not provided for in the books.
17. SWOT analysis comments on future projections.
18. Status on charges, liens, mortgages and assets of the company.
19. Ways and means to cover unforeseen contingent liabilities.
20. Aspects to be taken care of before/after merger.
21. Interlocking investments and financial obligations with group/associate companies
amounts receivable subject to litigation.
Q 6. “Due diligence is different from audit” – Explain the difference between due diligence and
audit. (icai study mat)
Ans : Difference between Due Diligence and Audit:
▪ Audit is an independent examination and evaluation of F.S. on an organization with a
view to express an opinion thereon.
▪ Due diligence refers to an examination of a potential investment to confirms all material
facts of prospective business opportunity. It involves review of financial and non-
financial records as deemed relevant and material. It aims to take the care that a
reasonable person should take before entering into an agreement or a transaction with
another party.

Q 7. Kalash Ltd. is intending to acquire Meet Ltd. Your firm of Chartered Accountants is
appointed to conduct due diligence. While reviewing hidden liabilities list out any five
areas which will be specifically examined by you in your due diligence exercise.
[Jan. 21 (5 Marks)]
Ans : Investigation of Hidden Liabilities:
In order to investigate hidden liabilities, following areas need to be examined:
▪ Any show cause notice, which have not matured into demands but may be material and
important.
▪ Contingent liabilities not shown in books.
▪ Company may have sold some subsidiaries/businesses and may have agreed to take over
and indemnify all liabilities and contingent liabilities of the same prior to the date of
transfer.
▪ Product and warranty liabilities, product returns & discounts, liquidated damages, etc.
▪ Tax liability under direct and indirect taxes.
▪ Long pending sales tax assessment.
▪ Cases of custom duty where only provisional assessment has been made and final
assessment is yet to completed.
▪ Agreement to buy back shares at a stated price.
 ▪ Future lease liabilities.
▪ Claims against the company including third party claims.
▪ Unfunded retirement benefit of employees.
▪ Labour claims under negotiations.

Q 8. KDK Bank Ltd., received an application from a pharmaceutical company for takeover of
their outstanding term loans secured on its assets, availed from and outstanding with a
nationalized bank. KDK Bank Ltd., requires you to make a due diligence audit in the
areas of assets of pharmaceutical company especially with reference to valuation aspect of
assets. State what may be your areas of analysis in order to ensure that the assets are not
stated at overvalued amounts.
[May 18 (5 Marks), MTP-Nov. 21, March 22]
OR
A European company engaged in the business of manufacturing and distribution of
industrial gases, is interested in acquiring a listed Indian Company having a market share
of 51% and assets over ` 1,000 Crores. It requests you to conduct “Due Diligence” of
assets of this Indian Company to find out, if any of the assets is overvalued. List down the
areas of due diligence exercise to find out overvalued assets.
[Jan. 21 (5 Marks), MTP-Oct. 22]
Ans : Regularly Overvalued assets: Examine the following areas:
▪ Uncollectable receivables.
▪ Obsolete, slow and non-moving inventories and inventories valued above NRV, if any.
▪ Obsolete and unused plant and machinery and their spares.
▪ Assets value of which have impaired due to sudden fall in market value.
▪ Assets shown in books above market value due to capitalization of expenditure/foreign
exchange fluctuation or capitalisation of revenue expenditure.
▪ Assets under litigation.
▪ Investment shown at cost whose market value is much lower.
▪ Investment carrying very low rate of return.
▪ Infructuous project expenditure.
▪ Intangibles of no value.
 18. “SDG and ESG Assurance”
PART- I DESCRIPTIVE QUESTIONS
18.1 - Global Trends in Sustainable Reporting
Q.1. Mr. X recently joined a listed company after qualifying CA final exams. Although that
company is not amongst top 1000 listed companies in the country, it wants to include
“Sustainability reporting” in accordance with Global Reporting Initiative framework (GRI) in
its annual report on voluntary basis. “Sustainability Reporting” seems to be new buzzword in
corporate circles and Mr. X is assigned responsibility for collating all the information
required for such reporting.
In above context, dwell upon what is your understanding of “Sustainability reporting and list
some of its expected benefits?
Ans: Meaning of Sustainable Reporting:
 Entity‟s practice of reporting publicly on its economic, environmental, and/or social
impacts, and hence its contributions-positive or negative- towards the goal of sustainable
development.
 Sustainability reporting refers to information that an entity provides about their
performance to outside world on a regular basis in a structured way.
 It is the comprehensive mechanism of measuring & disclosing sustainability data with
performance indicators and management disclosures.
Benefits of Sustainable Reporting
 Help stakeholders to understand organizations performance vis a vis sustainability &
impacts. Reporting process emphasizes link between financial & non-financial
performance.
 Help entities to focus on long-term value creation, by addressing ESG issues. Since
investors are recognising that environmental & social issues provide both risks &
opportunities in respect of their Investments and seeking disclosures on environmental &
social performance of businesses, they can use ESG performance of companies to make
investment decisions.
 Investing in social and environmental issues will not only improve own business
continuity of companies but also put them in a better position with their B2B (Business
to Business) customers as well as enable them to acquire new ones.

Q.2. What are the global trends in sustainable reporting?

Ans: Global trends in sustainable reporting:
(A) Global Reporting Initiative (GRI)
 Helps organizations to report on economic, environmental & social impacts.
 General disclosures which are required to be reported under this standard are
Economic, Environment and Social.
 Report is addressed to all the stakeholders of the entity.
(B) Carbon Disclosure Project (CDP)
 Captures environmental performance data which is related to GHG emissions,
water, forests, and supply chain.
 Major details required to be reported are climate change, Forest & Water security.
 This report is addressed to all the investors, buyers, and other stakeholders of the
entity.

1
 (C) International Integrated Reporting Framework
 IIRC has established guiding principles and content elements in order to allow the
companies to produce integrated reports.
 Report consists of Organisational overview, Governance structure, Business model,
risks & opportunities, strategy, performance, outlook etc.
18.2 - Integrated Reporting
Q.3. What are the 6 C‟s of Integrated reporting?
Ans: 6 C’s of Integrated reporting:
(i) Financial Capital: Funds available to the organization for use in production of goods or
provision of services. Raised through financing such as debt, equity or grants; or
generated through operations or investments.
(ii) Manufactured Capital: Seen as human-created, production-oriented equipment & tools.
Available for use in production of goods or provision of services. Includes buildings,
equipment, infrastructure (such as roads, ports, bridges and waste treatment plants).
(iii) Natural Capital: Includes water, land, minerals & forests, biodiversity, & eco
system health.
(iv) Human Capital: People‟s skills, experience, capacity and motivations to innovate,
including their alignment with and support of organization‟s governance framework &
ethical values such as its recognition of human rights; Ability to understand and
implement an organization‟s strategy; and Loyalties and motivations for improving
processes, goods & services including their ability to lead and to collaborate.
(v) Social Capital: Institutions and relationships established within and between each
community, group of stakeholders and other networks to enhance individual and
collective well-being.
(vi) Intellectual Capital: This accounts for the intangibles associated with brand &
reputation, in addition to patents, copyrights, organizational systems & related
procedures.

18.3 - Legal Framework of ESG in India

Q.4. What type of companies are required to mandatorily furnish the Business Responsibility
and Sustainability Report (BRSR) as per the SEBI circular with effect from FY 2022-23?
Ans: Companies required to mandatorily furnish BRSR:
 As per Reg. 34(2) of SEBI (LODR) Regulations, 2015 (as amended), annual report of
top 1,000 listed entities based on market capitalization shall contain a business
responsibility report.
 SEBI introduced new reporting requirements on ESG parameters called the Business
Responsibility and Sustainability Report (BRSR).
 BRSR seeks disclosures from listed entities on their performance against 9 principles of
the „National Guidelines on Responsible Business Conduct (NGBRC)‟ & reporting under
each principle is divided into essential & leadership indicators.
18.4 - Business Responsibility & Sustainability Report (BRSK)

Q.5. What are the nine principles of BRSR? How are the nine principles of BRSR linked with
the 17 UN Sustainable Development Goals?

2
Ans: Nine Principles of BRSR:
(1) Principle 1-Ethics, Transparency and Accountability
(2) Principle 2-Safe and Sustainable Goals and Service
(3) Principle 3-Promote well-being of all employees including those in the value chain
(4) Principle 4-Respect for stakeholders‟ interests and responsiveness
(5) Principle 5-Respect and promote human rights
(6) Principle 6-Protection and restoration of Environment
(7) Principle 7-Influence on Public and Regulatory Policy
(8) Principle 8-Promote Inclusive Growth and equitable development
(9) Principle 9-Provide value to the consumers in a responsible manner
Alignment of BRSR Principles with SDGs:
P1 P2 P3 P4 P5 P6 P7 P8 P9
SDG 1 Y Y Y
SDG 2 Y Y Y Y Y
SDG 3 Y Y
SDG 4 Y Y Y
SDG 5 Y Y Y Y
SDG 6 Y Y Y
SDG 7 Y Y Y
SDG 8 Y Y Y
SDG 9 Y Y
SDG 10 Y Y
SDG 11 Y Y Y Y
SDG 12 Y Y Y
SDG 13 Y Y Y Y
SDG 14 Y Y Y Y Y
SDG 15 Y Y Y Y Y
SDG 16 Y Y Y Y Y
SDG 17 Y Y Y

Q.6. What is the methodology of providing assurance in BRSR?

Ans: Methodology to provide assurance on BRSR:
(1) Step 1: Preliminary Review of ESG report, parameters
(2) Step 2: On-site Assessment/Verification of ESG Report
(3) Step 3: Issuance of Assessment Report and Assessment Statement
(4) Step 4: Review of the responses and clarifications on the findings
(5) Step 5: Submission of findings of the onsite assessment and document review
(6) Step 6: Preparation of Assessment/Verification report including final results of
Assessment.
18.5-Role of Auditor - Consideration of Climate Related Risks in an Audit of F.S.
Q.7. What is the auditor‟s role on ESG aspects in an audit of financial statements of the Company?
Ans: Auditor’s role on ESG aspects in an audit of financial statements of the Company:
(A) Consideration of Climate Related Risks in Understanding the Entity
 In developing understanding of an entity, auditor should include consideration of
climate related risks and how these risks may be relevant to the audits.

3
  Climate-related risks could be more relevant in certain sectors or industries, eg,
banks & insurance, energy, transportation, materials and buildings, agriculture &
food products.
 Stakeholders are seeking information from auditor‟s reports about how climate-
related risks were addressed in the audit. Hence, auditor need to be aware of and may
face, increasing pressure for transparency about climate matters in auditor‟s reports.
(B) Auditor’s Report:
 Auditor‟s report is a key mechanism of communication to users about the audit that
was performed.
 In addition to audit opinion, it provides information about auditor‟s responsibilities
and when required, an understanding of the matters of most significance in the audit
and how they were addressed.
 In some circumstances, it may warrant inclusion of an EOM paragraph to draw
attention to disclosures that are of fundamental importance to users‟ understanding
of F.S.
 Auditor should determine whether entity has appropriately disclosed relevant
climate-related Information in F.S. In accordance with the applicable FRF e.g. Ind-
AS or ASs, when relevant before considering climate-related matters in the auditor‟s
report.
(C) Reading the Other Information
 To comply with the requirements of SA 710, auditor should read other information
for consistency with information disclosed in F.S. & information that is publicly
communicated to stakeholders outside the F.S., such as management report
narratives in the annual report.

18.6 - Comprehensive Case Study

Q.8. The agrochemical sector is about a $35 billion Industry in India. The Indian agrochemicals
market is segmented by product type (fertilizers, pesticides, adjuvants, and plant growth
regulators) and application (crop-based and non-crop-based). India is one of the most
prominent exporters of agrochemicals in the world and is being keenly looked at as an ideal
hub for export-oriented production of agrochemicals. There has been a recent surge in the
production of agrochemicals to overcome problems such as lack of right nutritious elements
required for proper growth of crops, etc. While there is low awareness about the use and
impact of agrochemicals, there is also a push from the industries to use more agrochemicals,
linking it to better yield. The continuous and increased use of agrochemicals seems to have an
adverse effect on humans, animals, and nature in whole.
The toxicity levels of the agrochemicals are harmful, not only to the workers in the
manufacturing process but also to farmers, the soil, and the end consumers. The Central
Insecticide Board (CIB) of India has categorized agrochemical toxicity levels based on a
labeling system-using red, yellow, blue, and green labels-where red is the most toxic and
green is the least. Most of the red-labeled products are banned abroad but are being sold in
India due to the lack of a strong regulatory environment.
In India, it is estimated that almost 25% of the total amount of agrochemicals sold are
counterfeit products. The quality and the efficacy of these counterfeit products differ from the
original products, which can lead to reputational damages for the companies. Agrochemical
companies need to add barcodes or other identifying technologies to their product packaging,

4
 to allow end use consumers to check for authenticity. Also, since India is a multilingual
country, the companies will have to publish the usage instructions in multiple languages.
Company A and B are both listed companies and part of top 1000 listed companies. They are
engaged in the production of agrochemicals. Company A has been looking for opportunities
to comply with the recently launched and evolving guidelines for ESG in India while
Company B on the other hand is just focused to increase revenue and profits. In December
2022, Company A made a decision to eliminate red-labeled products from its portfolio and to
increase its research and development (R&D) spending to safeguard itself from the market
shift due to the new regulatory norms; in 2022, it also discontinued yellow-labeled products.
Company A is also planning to incur a small expenditure to improve their backend systems
and provide for all its products a unique labeling system that is user friendly and interactive.
At the other end of the spectrum, 14% of Company B‟s top-selling products are derived from
red-and yellow labeled products.
Initially, Company A‟s phasing out of its toxic products negatively affected its revenues by
8%. But as the country‟s regulatory landscape evolves toward more stringent norms,
Company A will be cushioned for regulatory changes and thus, would not face potential
future downsides. Company B has recently witnessed a 9% year on year growth in revenue
from the last financial year and is planning to increase the production of its bestselling
product, an insecticide DDT, categorized as red labelled by the Central Insecticide Board.
Company B has recently been approached by the regulatory authority for an investigation for
its products which include performing additional tests and studies to testify that its products
have no adverse effects.
Ans: (1) Reporting Requirements:
 As per Reg. 34(2) of SEBI (LODR) Regulations, 2015 (as amended), annual report
of top 1000 listed entities based on market capitalization shall contain a business
responsibility report.
 SEBI introduced new reporting requirements on ESG parameters called the Business
Responsibility and Sustainability Report (BRSR).
 Reporting questionnaire of BRSR is divided into three sections:
(i) Section A-General Disclosures:
It contains details of the listed companies, its products, services, operations,
employee related details, its holding, subsidiary, associate companies etc.
(ii) Section B-Management and Process disclosures:
It contains questions related to policy and management processes, governance,
leadership and oversight.
(iii) Section C-Principle-wise performance disclosures:
In contains reporting over Key Performance Indicators (KPIs) in alignment with
the nine principles of the NGRBC.
The section classifies KPIs into two categories:
(a) Essential indicators (Mandatory disclosures): This would include data on
training programs conducted, environmental data on energy, emissions,
water, waste management etc.
(b) Leadership indicators (Optional disclosures): It would include life cycle
assessments, details of conflict management policy, additional data on
biodiversity, energy consumptions, supply chain managements etc.

5
 (2) Company absorbing impact of possible future regulatory changes:
Company A has absorbed the impacts of possible future regulatory changes. Steps taken
by Company A for complying with Regulatory Standards are:
 Elimination of red-labeled products from portfolio and increase of research and
development (R&D) spending to safeguard from the market shift due to the new
regulatory norms
 Discontinuation of yellow-labeled products in 2022.
 Plan to incur expenditure to improve backend systems and provide for all products a
unique labeling system that is user friendly and interactive.
(3) Auditor’s Considerations: Refer answer of Q. No. 7

PART- II MULTIPLE CHOICE QUESTIONS

1. The norms of Extended Producer Responsibility (EPR) are applicable to a listed company
required to do mandatory BRSR reporting, EPR norms require processing of plastic
packaging waste through recycling, re-use or end of life disposal. The listed company has to
register on portal of Central Pollution Control Board in this regard. Which principles requires
such information?
(a) Principle 1
(b) Principle 2
(c) Principle 3
(d) Principle 4

2. BRSR reporting is founded upon 9 principles. Which of following is most appropriate

description of Principle 2?
(a) It states that businesses should respect the interests of and be responsive to all its
stakeholders.
(b) It states that businesses should respect and make efforts to protect and restore the
environment.
(c) It states that businesses should provide goods and services in a manner that is sustainable
and safe.
(d) It states that businesses should promote inclusive growth and equitable development.

3. One of 9 principles of BRSR reporting requires companies to provide details of social impact
assessments (SlAs) of the projects undertaken by the company based upon applicable laws.
Which principle is most likely to include such indicators?
(a) Principle 8
(b) Principle 1
(c) Principle 9
(d) Principle 3
4. A listed company is including sustainability reporting as part of its annual report in
accordance with Global reporting initiative framework (GRI) on a voluntary basis. Such
reporting talks about 6 capitals of integrated reporting. The company has launched a
programme under the name of “Saksham” to standardise quality of its branch accountants
spread across various towns of India including turnaround time (TAT) and operational
efficiency. Under which capital above description needs reporting?

6
 (a) Intellectual capital
(b) Social and relationship capital
(c) Natural capital
(d) Human capital

5. Business responsibility and sustainability reporting (BRSR) has become mandatory for
certain listed companies from financial year 2022-23 in accordance with SEBI circular. The
mandatory reporting is applicable to:
(a) Top 1000 listed companies by revenue.
(b) Top 1000 listed companies by profits before taxes.
(c) Top 1000 listed companies by market capitalization.
(d) Top 1000 listed companies as decided by SEBI in accordance with certain criteria in
different sectors.

6. In Case of PSU, Direct Reporting Engagement does not include

(a) Performance audits.
(b) Compliance audits.
(c) Financial audits.
(d) Comprehensive Audit. [MTP-April 21]

Answer Key
1. (b) Principle 2

2. (c) It states that businesses should provide goods and services in a manner that is sustainable
and safe.

3. (a) Principle 8

4. (d) Human capital

5. (c) Top 1000 listed companies by market capitalization

PART- III INTEGRATED CASE SCENARIO

“Quick Push Finance Limited” is one of the top listed 1000 companies by market capitalization. As
per a SEBI circular, Business Responsibility and Sustainability Report (BRSR) based on ESG
parameters mandatory from financial year 2022-23 for top listed 1000 companies. The company is an
NBFC and is engaged mainly in providing finance for commercial vehicles.
The report is to be prepared in three sections- Section A, B and C. Whereas Section A and B relate to
general disclosures and management & process disclosures respectively, Section C of the report
relates to principle wise performance disclosures. Under this section C, information is sought on each
of the 9 principles of “National Guidelines on Responsible Business Conduct” (NGBRCs). This
information is categorized on two indicators i.e., “Essential indicators” and “Leadership indicators”.
The said company has an anti-corruption/anti-bribery policy which is available on its website.
Besides, the company has regularly conducted awareness programmes for its dealers highlighting
relevant governance practices of the company.
The company is sensitive to environmental concerns. It has established mechanisms to recycle

7
hazardous e-waste in accordance with applicable laws. Further, disposal of paper waste is also made
responsibly. It is also a member of 5 prominent industry chambers/trade associations including
FICCI, CII and ASSOCHAM. Besides, regular inputs to government are provided by the company
through various forums for improvement in administrative processes relating to automobile and
financial sectors.
One of the NGBRC principles states that businesses should promote inclusive growth and equitable
development. The scope of this principle is wide and quite encompassing. Many activities of
company could fall under promotion of inclusive growth and equitable development.
The CFO of company is clueless as to preparation of BRSR. Help him out by answering the
following questions.
Based upon above, answer the following questions:
Q.1. As regards anti-corruption/anti-bribery policy and organization of awareness programmes for
dealers conducted during the year, which of the following is most likely to be true?
(a) Having an anti-corruption/anti-bribery policy and organization of awareness programmes
for dealers are in nature of essential indicators.
(b) Having an anti-corruption/anti-bribery policy and organization of awareness programmes
for dealers are in nature of leadership indicators
(c) Having an anti-corruption/anti-bribery policy is in nature of essential indicators.
Organization of awareness programmes for dealers is in nature of leadership indicators.
(d) Having an anti-corruption/anti-bribery policy is in nature of leadership indicators.
Organization of awareness programmes for dealers is in nature of essential indicators.

Q.2. As regards established mechanisms for recycle of hazardous e-waste and disposal of paper
waste by company, which of the NGBRC principle(s) are involved?
(a) Principle 5 only
(b) Principle 9 only
(c) Principles 6 and 9
(d) Principles 2 and 6

Q.3. Considering description of membership of various industry chambers/ trade associations and
providing of inputs to government for improvement in administrative processes, which of the
NGBRC principle is referred to?
(a) Principle 8
(b) Principle 4
(c) Principle 3
(d) Principle 7

Q.4. Which of the following activities relates to the principle that businesses should promote
inclusive growth and equitable development?
(a) CSR projects undertaken by the company in designated aspirational districts of country
(b) Carrying out real time digital Net Promoter Score (NPS) with all public customers to
gauge customer reactions and satisfaction
(c) Getting conducted “energy audits” in the company
(d) Conducting programmes to assist employees in finding employment after retirement

Q.5. Which of the following statements is true in respect of essential indicators and leadership
indicators as far as their reporting In BRSR is concerned?

8
 (a) Both types of indicators are mandatorily required to be disclosed.
(b) Essential indicators require mandatory disclosure whereas leadership indicators require
voluntary disclosure.
(c) Essential indicators require voluntary disclosure whereas leadership indicators require
mandatory disclosure.
(d) All indicators based information whether relating to essential indicators or leadership
indicators is voluntary.

Answer Key
1. (c) Having an anti-corruption/anti-bribery policy is in nature of essential indicators.
Organization of awareness programmes for dealers is in nature of leadership indicators.

2. (d) Principles 2 and 6

3. (d) Principle 7

4. (a) CSR projects undertaken by the company in designated aspirational districts of country.

5. (b) Essential indicators require mandatory disclosure whereas leadership indicators require
voluntary disclosure.

9
 PROFESSIONAL ETHICS AND AUDITOR'S LIABILITIES
DESCRIPTIVE QUESTIONS

Q 1. The audit team is preparing to conduct audit for Preksha Company Ltd. for the period
ending 31.3.2024. However, the audit team has not received its audit fees from Preksha
Company Ltd. for its audit concluded for ended 31.3.2023. The audit team might be
tempted to issue a favourable report so that Preksha Company Ltd. is able to secure a
loan to settle the fees outstanding for their 31.3.2023 audit. The audit team is not
complying the fundamental principles of auditing hence hindering the Auditor‟s
Independence. Explain the types of threats that may hinder Auditor‟s Independence
while issuing Audit Report.
[Jan. 21 (5 Marks)]
Ans: Threats that may hinder Auditor‟s Independence:
1. Self-interest threats: The threat that a financial or other interest will inappropriately
influence a professional accountant‟s judgment or behaviour.
2. Self-review threats: The threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made; or an activity performed by the
accountant, or by another individual within the accountant‟s firm or employing
organization, on which the accountant will rely when forming a judgment as part of
performing a current activity.
3. Advocacy threats: The threat that a professional accountant will promote a client‟s or
employing organization‟s position to the point that the accountant‟s objectivity is
compromised.
4. Familiarity threats: The threat that due to a long or close relationship with a client, or
employing organization, a professional accountant will be too sympathetic to their
interests or too accepting of their work.
5. Intimidation threats: The threat that a professional accountant will be deterred from
acting objectively because of actual or perceived pressures, including attempts to exercise
undue influence over the accountant.

Q 2. Mr. Hitesh, a newly qualified chartered accountant started his practice in February 2023
by setting up an office in the hill station Kodaikanal. Initially, since he was getting very
less assignments, he decided to set up a temporary office in the nearby city Madurai,
situated at about 100 kms from the main office. As planned, he took an office space on
rent for the months of Dec. Jan. and Feb. During these months, his regular office was not
closed and Mr. Ajay was in-charge for both the offices. Mrs. Ishika, another newly
qualified chartered accountant who is also in practice in Madurai came to know about
the new office of Mr. Ajay. Thinking that he could be a potential competitor, she
informed the institute stating that Mr. Ajay had violated the provisions of the Chartered
Accountant Act. As a member of the Board of Discipline of ICAI, you are requested to
analyse this complaint.
[MTP-March 21]

1
Ans: Maintenance of Branch office:
 In terms of Sec. 27 of CA Act, 1949, if a CA in practice has more than one office in India,
each one of such offices should be in the separate charge of a member of the Institute. This
condition applies to any additional office situated at a place beyond 50 kms from the
municipal limits in which any office is situated.
 However, exemption has been given to members in practicing in hill areas subject to certain
conditions such as:
1. Such member be allowed to open temporary offices in a city in the plains for a limited
period not exceeding 3 months in a year.
2. The regular office need not be closed during this period and all correspondence can
continue to be made at the regular office.
3. The name board of the firm in temporary office should not be displayed at times other
than the period such office is permitted to function.
4. The temporary office should not be mentioned in letter head, visiting card, any other
documents as a place of business of the member/ firm.
5. Before commencement of every winter, it shall be obligatory on the member/firm to
inform the Institute that he/it is opening the temporary office from a particular date
and after the office is closed at the expiry of the period of permission, an intimation to
that effect should also be sent to the office of the Institute by registered post.
 In the given case, Mr. Ajay has set up his regular office in the hill area of Kodaikanal, he
decided to set up a temporary office in the nearby city Madurai, situated at about 100 kms
from the main office. As planned, he took an office space on rent for the months of Dec.
Jan. and Feb. During these months, his regular office was not closed. Further he was in-
charge for both the offices.
 In view of above mentioned criteria‟s, he is eligible to avail the benefits of the above
exemptions. Also, it is given that the temporary office was open in Madurai for only 3
months and not beyond that. The fact that Mr. Ajay is in-charge for both the offices, the
temporary office being set-up in the plains which is 100 kms away and the regular office
kept open during the 3 months does not constitute any violation of the provisions of the
Chartered Accountant Act. Assuming Mr. Ajay has informed the Institute regarding such
temporary office in the prescribed manner.
Conclusion: No penal action needs to be taken on the basis of complaint registered by Mrs.
Ishika, as Mr. Ajay is not guilty of professional misconduct.

Q 3. Give your comments with reference to the Chartered Accountants Act, 1949 and
Schedules thereto: Manish, a practicing Chartered Accountant gave 50% of the audit
fees received by him to Devang, who was not a Chartered Accountant, under the
nomenclature of office allowance and such an arrangement continued for a number of
years. [MTP-Oct. 19]

2
Ans: Sharing Fees with Employees:
As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a CA in
practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to pay or
allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his
professional business, to any person other than :
 a member of the Institute or
 a partner or
 a retired partner or
 the legal representative of a deceased partner,
 or a member of any other professional body or
 with such other persons having such qualification as may be prescribed,
for the purpose of rendering such professional services from time to time in or outside India.
In the given case Manish, a practicing CA has shared his profit and therefore, is guilty of
professional misconduct under the clause. It is not the nomenclature to a transaction that is
material but it is the substance of the transaction, which has to be looked into.
Conclusion: Mr. Manish be will be deemed to be guilty of professional misconduct under Clause
2 of Part I of First Schedule.

Q 4. CA. S and CA. M are two partners of the CA firm „SM & Co. Being very pious, CA. S
organised a religious ceremony at his home for which he instructed his printing agent to
add his designation Chartered Accountant” with his name in the invitation cards. Later
on, the invitations were distributed to all the relatives, close friends and clients of both the
partners.
Ans: Using designation “Chartered Accountant” on invitation cards:
 As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in
practice shall be deemed to be guilty of professional misconduct if he solicits clients or
professional work either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means.
 Guidelines issued by the Council of ICAI under Clause 6 allowed a member to use
designation “Chartered Accountant” as well as name of firm in greeting cards, invitations
for marriages and religious ceremonies and any invitation for opening or inauguration of
office, or letters regarding change in office premises or telephone numbers provided these
are sent only to clients, relatives and close friends of concerned member.
 In the present case, CA. S is adding the designation Chartered Accountant with his name on
invitation cards and these cards were distributed to his and his partner‟s relatives, close
friends and clients.
Conclusion: CA. S shall be deemed to be guilty of professional misconduct for sending the
invitation cards using designation chartered accountant to partner‟s relatives, close friends and
clients.

3
Q 5. Give your comments with reference to the Chartered Accountants Act, and schedules
thereto: Mr. Binod, a Chartered Accountant and the proprietor of Binod & Co., wrote
several letters to the Assistant Registrar of Co-operative Societies stating that though his
firm was on the panel of auditors, no audit work was allotted to the firm and further
requested him to look into the matter.

Ans: Soliciting Professional Work:

 As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement,
personal communication or interview or by any other means.
 In the given case, Mr. Binod, a Chartered Accountant and proprietor of M/s X and Co,
wrote several letters to the Assistant Registrar of Cooperative Societies, requesting for
allotment of audit work.
 The writing of continuous letter to ascertain the reasons for not getting the work is quite
alright but request for allowing the work does not appear to be correct.
Conclusion: Mr. Binod would be held guilty under clause 6 of Part 1 of First Schedule of the CA
Act, 1949.

Q 6. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: Lalit, a Chartered Accountant in practice, empanelled as IP (Insolvency
Professional) has mentioned the same on his visiting cards, letterheads and other
communications also. Mr. Lalit, who is residing in his neighbourhood has filed a complaint
for professional misconduct against the said member for such mention of insolvency
professional on circulations.
[May 19 (4 Marks), MTP-March 22]
Ans: Using designation other than Chartered Accountant:
 As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of
professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letterheads or sign boards unless it be a degree
of a university established by law in India or recognized by the Central Government
or a title indicating membership of the ICAI or of any other institution that has been
recognized by the Central Government or may be recognized by the council.
 In present case, a Chartered Accountant in practice, empanelled as IP (Insolvency
Professional) has mentioned the same on his visiting cards, letterheads and other
communications also. Mr. A, who is residing In his neighbourhood has filed a complaint for
professional misconduct against the said member for such mention of insolvency
professional on circulations.

4
 Conclusion: Lalit, a Chartered Accountant empanelled as IP (Insolvency Professional) can
mention „Insolvency Professional‟ on his visiting cards, Letterheads and other communication, as
this is a title recognised by the Central Government in terms of Clause 7 of Part I of First
Schedule to the Chartered Accountants Act, 1949. Thus, complaint of neighbour is not
enforceable/valid.

Q 7. Distinguish: Self-interest threat from self-review threat in an assurance engagement.

[May 18 (4 Marks)]
Ans: Self Interest Threat:
The threat that a financial or other interest will inappropriately influence a professional
accountant‟s judgment or behaviour is known as Self Interest threat. As per Code of Ethics,
examples of facts and circumstances that might create self-interest threats for a professional
accountant when undertaking a professional service includes the following:
1. A professional accountant having a direct financial interest in a client
2. A professional accountant quoting a low fee to obtain a new engagement and the fee is so
low that it might be difficult to perform the professional service in accordance with
applicable technical and professional standards for that price.
3. A professional accountant having a close business relationship with a client.
4. A professional accountant having access to confidential information that might be used for
personal gain.
5. A professional accountant discovering a significant error when evaluating the results of a
previous professional service performed by a member of the accountant‟s firm.
Self-review Threat:
The threat that a professional accountant will not appropriately evaluate the results of a previous
judgment made; or an activity performed by the accountant, or by another individual within the
accountant‟s firm or employing organization, on which the accountant will rely when forming a
judgment as part of performing a current activity is known as Self review Threat.
As per Code of Ethics, examples of facts and circumstances that might create self-interest threats
for a professional accountant when undertaking a professional service includes the following:
1. A professional accountant issuing an assurance report on the effectiveness of the operation
of financial systems after implementing the systems.
2. A professional accountant having prepared the original data used to generate records that
are the subject matter of the assurance engagement.

Q 8. Mr. Sheetal is a practicing chartered accountant. Due to natural calamities and

misfortune during the year 2021, he lost almost all of his wealth and became undischarged
insolvent. After a few court hearings, finally, in the year 2023, he was declared discharged
insolvent and obtained a certificate from the court stating that his insolvency was caused
by misfortune without any misconduct on his part. You are required to comment on the
above situation with reference to the Chartered Accountants Act, 1949 and Schedules

5
 thereto, (especially from the point of section 8: Entry of name in Register of Members).
[MTP-April 23]
Ans: Disabilities for the Purpose of Membership:
 As per Sec. 8 of Chartered Accountants Act, a person is debarred from having his name
entered in or borne on the Register of Members, if he, being a discharged insolvent, has not
obtained from the court a certificate stating that his insolvency was caused by misfortune
without any misconduct on his part. Here it may be noted that a person who has been
removed from membership for a specified period shall not be entitled to have his name
entered in the Register until the expiry of such period.
 In addition, failure on part of a person to disclose fact that he suffers from any one of the
disabilities would constitute professional misconduct. The name of the person, who is found
to have been subject at any time to any of the disabilities discussed in Sec. 8, can be
removed from the Register of Members by the Council.
 In the given case, it is clearly stated that Mr. Sheetal was discharged insolvent, and he has
also obtained from the court a certificate stating that his insolvency was caused by
misfortune without any misconduct on his part.
Conclusion: Mr. Sheetal has not violated the provisions of Section 8, and he is not debarred from
having his name entered in the Register of Members.

Q 9. Mr. Abdul, a practicing Chartered Accountant was ordered to surrender his certificate of
practice and he was suspended for one year on certain professional misconduct against
him. During the period of suspension, Mr. Abdul, designating himself as GST consultant,
did the work of filing GST returns and made appearance as a consultant before various
related authorities. He contended that there is nothing wrong in it as he, like any other
GST consultant, could take such work and his engagement as such in no way violate the
order of suspension inflicted on him. Is he right in his contention? [May 18 (4 Marks)]
Ans: Undertaking Tax Representation Work:
 A CA not holding CoP cannot take up any other work in the capacity of CA in practice
because it would amount to violation of provisions of the CA Act, 1949.
 In case a member is suspended and is not holding CoP, he cannot in any other capacity take
up any practice separable from his capacity to practices as a member of the Institute. This is
because once a member becomes a member of the Institute, he is bound by the provisions
of the CA Act, 1949 and its Regulations.
 In case he files GST returns and appears as a consultant before various related authorities in
his capacity as a CA and a member of the Institute, having bound himself by the said Act
and its Regulations made thereunder, he cannot then set the Regulations at naught by
contending that even though he continues to be a member and has been punished by
suspension, he would be entitled to practice in some other capacity. But if he is doing so in
any other capacity such as GST Consultant wherein his capacity is not CA in practice, he
will not be held guilty for misconduct.

6
  In the instant case, Mr. Abdul was a Practicing CA and he was ordered to surrender his
certificate of practice and was suspended for one year. Mr. Abdul is doing the work of
filing GST returns and has appeared as a consultant before various related authorities as
GST Consultant which is not in capacity of a Practicing CA rather in capacity of authorized
representative. Any person who has been authorized to act as a GST Practitioner on behalf
of the concerned registered person can become authorized representative.
Conclusion: Filing GST return and appearing as GST Consultant by Mr. Abdul is not
professional misconduct. Therefore, Mr. Abdul will not be held guilty for misconduct.

Q 10. A Chartered Accountant in practice has been suspended from practice for a period of 6
months and he had surrendered his Certificate of Practice for the said period. During said
period of suspension, though the member did not undertake any audit assignments, he
undertook representation assignments for income tax whereby he would appear before the
tax authorities in his capacity as a Chartered Accountant
Ans: Undertaking Tax Representation Work:
 A CA not holding CoP cannot take up any other work because it would be violation of
provisions of the CA Act, 1949.
 In case a member is suspended and is not holding CoP, he cannot in any other capacity take
up any practice separable from his capacity to practice as a member of the Institute. This is
because once a person becomes a member of the Institute; he is bound by the provisions of
the CA Act, 1949 and its Regulations.
 If he appears before the income tax authorities, he is only doing so in his capacity as a
chartered accountant and a member of the Institute. Having bound himself by the said Act
and its Regulations made there under, he cannot then set the Regulations at naught by
contending that even though he continues to be a member and has been punished by
suspension, he would be entitled to practice in some other capacity.
Conclusion: CA would not be allowed to represent before the income tax authorities for the
period he remains suspended. Accordingly, in the present case he is guilty of professional
misconduct.

Q 11. Comment with respect to Chartered Accountants Act, 1949: Mr. Tanish, a Chartered
Accountant obtains registration as category IV merchant banker under the SEBI‟s Rules
and Regulations and act as Advisor to a capital issue of MB Co. Ltd. He designated
himself under the caption “Merchant banker” in client offer documents and „Advisor to
issue‟ in his own letterheads, visiting cards and professional documents.
Ans: Using designation other than Chartered Accountant:
 As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of
professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letterheads or sign boards unless it be a degree

7
 of a university established by law in India or recognized by the Central Government
or a title indicating membership of the ICAI or of any other institution that has been
recognized by the Central Government or may be recognized by the council.
 A Chartered Accountant is allowed to act as advisor to a capital issue and offer document of
client company may specify the name of address of chartered accountant under the caption
“Advisor to issue”. However, it is specifically prohibited that member concerned should not
use the designation either “Merchant Banker” or “Advisor to issue” in their own
letterheads, visiting cards and professional documents.
 In the present case, Mr. Tanish designated himself under the caption “Merchant banker” in
client offer documents and „Advisor to issue‟ in his own letterheads, visiting cards and
professional documents.
Conclusion: Mr. Tanish is guilty of Professional Misconduct under Clause 7 of Part I of First
Schedule due to use of designation other than Chartered Accountant.

Q 12. Comment with the reference to the Chartered Accountants Act, 1949 and schedules
thereto: Rakshass, a practicing Chartered Accountant, is a Director in Sky Ltd; a Public
Company. The prospectus of Sky Ltd. Mentions the name of Mr. Rakshass as a director
along with his various professional attainments, his areas of specialization and expertise in
the fields of international taxation. [Nov. 18 (4 Marks)]
Ans: Advertisements of professional attainments:
 As per clause 7 of Part I of First Schedule, a CA in practice is deemed to be guilty of
professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letterheads or sign boards unless it be a degree
of a university established by law in India or recognized by the Central Government
or a title indicating membership of the ICAI or of any other institution that has been
recognized by the Central Government or may be recognized by the council.
 As per guidelines issued under Clause 7, name of CA acting as director in the company is
permissible to appear in the prospectus of the company, however descriptions regarding his
expertise, specialisation and knowledge in any particular field is not permitted.
 In the present case, Rakshass, a practicing Chartered Accountant, is a Director in Sky Ltd.
A Public Company. The prospectus of Sky Ltd. Mentions the name of Mr. Rakshass as a
director along with his various professional attainments, his areas of specialization and
expertise in the fields of international taxation.
Conclusion: Mr. Rakshass will be deemed to be guilty of professional misconduct under Clause
7, Part I of First Schedule.

Q 13. A professional accountant in public practice is always subject to various threats in

compliance with fundamental principles of his profession and you, as a professional

8
 accountant, is worried about engagement specific threat in your audit assignment of M/s
Soft Ltd. And want to implement some measures to eliminate and reduce the same.
Enumerate some safeguards which you may introduce to ward off such threats.
[May 19 (5 Marks)]
Ans: Safeguards to be introduced to ward off threats in compliance with fundamental principles:
Safeguards are actions, individually or in combination, that the professional accountant takes that
effectively reduce threats to compliance with the fundamental principles to an acceptable level.
Safeguards vary depending on the facts and circumstances. Examples of actions that in certain
circumstances might be safeguards to address threats include:
1. Assigning additional time and qualified personnel to required tasks when an engagement
has been accepted might address a self-interest threat.
2. Having an appropriate reviewer who was not a member of the team review the work
performed or advise as necessary might address a self-review threat.
3. Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client might address self-review,
advocacy or familiarity threats.
4. Involving another firm to perform or reperform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
5. Separating teams when dealing with matters of a confidential nature might address a self-
interest threat.

Q 14. Mr. Piyush, a Chartered Accountant did not maintain books of account for his professional
work on the ground that his income is assessed u/s 44ADA of the Income-tax Act, 1961.
Comment with reference to the Chartered Accountants Act, 1949 and Schedules thereto.
[Nov. 22 (4 Marks)]
OR
Kantilal, a chartered accountant did not maintain books of account for his professional
earnings on the ground that his income is less than the limits prescribed u/s 44AA of the
Income Tax Act, 1961.
Ans: Maintenance of Books of Account:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made there under or any guidelines issued by the council.
 Chapter V of the Council General Guidelines, 2008 specifies that a member of the Institute
in practice or the firm of Chartered Accountants of which he is a partner shall maintain and
keep in respect of his/its professional practice, proper books of account including the
following:
(i) a Cash Book
(ii) a Ledger

9
  In the instant case, Mr. Piyush did not maintain books of account for his professional work
on the ground that his income is assessed u/s 44ADA of the Income-tax Act, 1961.
Conclusion: Mr. Piyush will be held guilty for professional misconduct for violation of Council
General Guidelines, 2008.

Q 15. Manav, who conducts the tax audit u/s 44AB of the Income-tax Act, 1961 of M/s Green, a
partnership firm, has received the audit fees of ` 2,50,000 on progressive basis in respect of
the tax audit for the year ended on 31.3.2023. The audit report was, however, signed on
25.5.2023. Comment.
Ans: Appointment of an auditor when he is indebted to the concern:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 Council General Guidelines, 2008 specifies that a member of the Institute in practice or a
partner of a firm in practice or a firm shall not accept appointment as auditor of a concern
while indebted to the concern given any guarantee or provided any security in connection
with the indebtedness of any third person to the concern, for limits fixed in the statute and
in other cases for amount exceeding ` 1,00,000.
 As per Explanation to Sec. 288 to Income-tax Act, 1961, an individual who, or his relative
or partner is indebted to the assessee cannot conduct tax audit, provided that the relative
may be indebted to the assessee for an amount not exceeding ` 1,00,000.
 In the instant Case, Manav is appointed to conduct a tax audit u/s 44AB of the Income-tax
Act, 1961 and received the audit fees of ` 2,50,000 on progressive basis.
Conclusion: As the fees were recovered on progressive basis, amount received will not be
considered as indebtedness. Hence, no professional misconduct arises on part of Mr. Manav.

Q 16. A member of the institute shall not accept in a year more than the specified number of tax
audits under section 44AB of the Income-tax Act. Mr. Gaurav is a partner in M/s Sky &
Co., a firm of Chartered Accountants with 6 partners. During the assessment year 2022-23,
Mr. Gaurav alone had signed 290 tax audit reports consisting of both corporate and non-
corporate assessees. [Nov. 16 (4 Marks)]
Ans: Signing of Tax Audit Report:
 As per Chapter VI of Council General Guidelines 2008, a member of the Institute in
practice shall not accept, in a financial year, more than the “specified number of tax audit
assignments” u/s 44AB of the Income-tax Act, 1961.
 In the case of a firm of CAs in practice, the “specified number of tax audit assignments”
shall be construed as the specified number of tax audit assignments for every partner of the
firm.
 The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax
audit assignments per partner in the firm, in a financial year, whether in respect of corporate
or non-corporate assessees.

10
  It is further clarified by the Council of ICAI that tax audit report accepted by the firm of
Chartered Accountants can be signed by any partner on the behalf of the firm.
 In the present case, there are six partners in the firm and hence the firm can accept 360 tax
audit assignment and any partner can sign the tax audit report on the behalf of the firm.
Conclusion: Mr. Gaurav can sign the 290 tax audit reports on behalf of the firm.

Q 17. Give your comments with reference to Chartered Accountants Act, 1949 and Schedules
thereto: Mr. „Chirag‟, a Chartered Accountant holds a certificate of practice while in
employment also, recommends a particular lawyer to his employer in respect of a case. The
lawyer, out of the professional fee received from employer paid a particular sum as referral
fee to Mr. „Chirag‟.
OR
Mr. „C‟, a Chartered Accountant employed as Senior executive in charge of Tax in a
company, and not holding certificate of practice recommends a particular lawyer to his
employer in respect of a case. The lawyer, out of the professional fee received from the
employer of Mr. „C‟ paid a particular sum as referral fee to Mr. „C‟. Comment with
reference to the CA Act, 1949 and schedules thereto.
[Nov. 19 (5 Marks)]
OR
C, a member of the Institute of Chartered Accountants of India, not holding certificate of
practice, is employed with a firm of Chartered Accountants. He recommends a particular
lawyer to his firm for some client related litigation being handled by the firm. The lawyer,
out of the professional fee received by him from the said client, paid a certain sum as
referral fee to C. Is A guilty of misconduct under the Chartered Accountants‟ Act, 1949?
[Nov. 19 (4 Marks)]
Ans: Referral Fee from Lawyer:
 As per Clause 2 of Part II of First Schedule of the CA Act, 1949, a member of the Institute
(other than a member in practice) shall be guilty of professional misconduct, if he being an
employee of any company, firm or person accepts or agrees to accept any part of fee, profits
or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or
person or agent or customer of such company, firm or person by way of commission or
gratification.
 In the present case, Mr. Chirag who besides holding a certificate of practice, is also an
employee and by referring a lawyer to the company in respect of a case, he receives a
particular sum as referral fee from the lawyer out of his professional fee.
Conclusion: Mr. Chirag is guilty of professional misconduct by virtue of clause 2 of Part II of
First schedule for accepting referral fees from the lawyer of his employer.

Q 18. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:

11
 A special notice has been issued for a resolution at 3rd AGM of LED Ltd., providing
expressly that CA Rajesh shall not be reappointed as an auditor of the company.
Consequently, CA Rajesh submitted a representation in writing to the company with a
request to circulate to the members. In the detailed representation, CA. Rajesh included
the contributions made by him in strengthening the control procedures of the company
during his association with the company and also indicated his willingness to continue as an
auditor if reappointed by the shareholders of the company.
[Nov. 19 (4 Marks)]
Ans: Right of representation:
 As per Clause 6 of Part I of First Schedule to the Chartered Accountants Act, 1949, a
member shall be held guilty if a Chartered Accountant in practice solicits clients or
professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
 Section 140(4) of the Companies Act, 2013 permits an auditor to make a representation in
writing (not exceeding a reasonable length) to the company. The proposition of the auditor
to highlight contributions made by the firm in strengthening the control procedures in the
representation is not acceptable because the representation letter should not be prepared in a
manner so as to seek publicity.
 The Code of Ethics issued by the Institute makes it amply clear that the right to make
representation does not mean that an auditor has any prescriptive right or a lien on an audit.
 The wording of his representation should be such that, apart from the opportunity not being
abused to secure needless publicity, it does not tantamount directly or indirectly to
canvassing or soliciting for his continuance as an auditor. The letter should merely set out
in a dignified manner how he has been acting independently and conscientiously through
the term of office and may in addition, indicate if he so chooses his willingness to continue
as auditor if reappointed by the shareholders.
Conclusion: Mr. Rajesh will be guilty of professional misconduct under Clause (6) of Part I of
the First Schedule to the Chartered Accountants Act, 1949, as including contributions made by
him in strengthening the control procedures of the company, amounts to solicitation of work
which is not permitted.

Q 19. M/s Kunal & Co., a firm of Chartered Accountants responded to a tender from a State
Government for appointment of GST Auditor wherein no minimum fee was prescribed.
For this purpose, the Firm also paid `50,000 as earnest deposit as part of the terms of the
tender. Comment on the above with reference to the Chartered Accountants Act, 1949,
Code of Ethics and Schedules to the Act.
[Nov. 20 (5 Marks)]
Ans: Responding to tenders:
 Clause (6) of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 lays down
Guidelines for responding to tenders, etc. As per the Guideline issued by the Council of the
ICAI, a member in practice shall not respond to any tender issued by an organization or

12
 user of professional services in areas of services which are exclusively reserved for
chartered accountants, such as audit and attestation services.
 However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants. Further, in respect of a non-exclusive area, members
are permitted to pay reasonable amount towards earnest money/security deposits.
 In the given case, M/s Kunal & Co., a firm of Chartered Accountants responded to a tender
from a State Government for appoint of GST Auditor and for this purpose, the firm also
paid ` 50,000 as earnest deposit as part of the terms of the tender.
Conclusion: Since GST Audit does not fall within exclusive areas for chartered accountants, M/s
Kunal & Co. can respond to tender as well as deposit `50,000 as earnest deposit and shall not
have committed any professional misconduct.

Q 20. The professional accountants need to observe certain fundamental principles, which are
covered in the Code of Ethics of the ICAI. Briefly explain each of the five principles which
needs to be complied by the Chartered Accountants?
[Nov. 22 (5 Marks)]
Ans: Fundamental Principles as per Code of Ethics:
1. Integrity: A professional accountant should be straightforward and honest in all
professional and relationship.
2. Objectivity: A professional accountant should not compromise professional or business
judgments because of bias, conflict of interest or undue influence of others.
3. Professional Competence and Due Care: A professional accountant has a continuing
duty to attain and maintain professional knowledge and skill at the level required to ensure
that a client or employing organization receives competent professional service, based on
current technical and professional standards and relevant legislation. A professional
accountant should act diligently and in accordance with applicable technical and
professional standards.
4. Confidentiality: A professional accountant should respect the confidentiality of
information acquired as a result of professional and business relationships.
5. Professional Behaviour: A professional accountant should comply with relevant laws and
regulations and avoid any conduct that the professional accountant knows or should know
might discredit the profession.

Q 21. CA Vasu started his practice from August 15, 2023. On 16th August 2023, one female
candidate approached him for articleship. In addition to monthly stipend, CA Vasu also
offered her 2% profits of his CA firm. She agreed to take both 2% profits of the CA firm
and stipend as per the rate prescribed by the ICAI. The Institute of Chartered Accountants
of India sent a letter to CA Vasu objecting the payment of 2% profits. CA. Vasu replies to
the ICAI stating that he is paying 2% profits of his firm over and above the stipend to help
the articled clerk as the financial position of the articled clerk is very weak.

13
 Is CA Vasu liable to professional misconduct? Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto.
[MTP-Oct. 22]

Ans: Sharing Fees with an Articled Clerk:

As per Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949, a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if he pays or
allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the
fees or profits of his professional business, to any person other than
 a member of the Institute or
 a partner or
 a retired partner or
 the legal representative of a deceased partner, or
 a member of any other professional body or
 with such other persons having such qualification as may be prescribed,
for the purpose of rendering such professional services from time to time in or outside India.
Based on the above stated provisions, the objections of the Institute are correct and reply of CA
Vasu, stating that he is paying 2% profits of his firm over and above the stipend to help the
articled clerk as the position of the articled clerk is weak, is not tenable.
Conclusion: CA Vasu is guilty of professional misconduct in terms of Clause (2) of Part I of
First Schedule to the Chartered Accountants Act 1949.

Q 22. CA Sandeep, the auditor of Sharma Pvt. Ltd. Has delegated following works to his articles
and staff:
 Raising of bills and issuing acknowledgements for money receipts.
 Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
 Issuing acknowledgements for records produced.
 Signing financial statements of the company.
 Is this correct as per the Professional Ethics and ICAI‟s guidelines and pronouncements?
[RTP-May 21]
Ans: Delegation of Certification work:
 As per Clause 12 of Part 1 of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
allows a person not being a member of the institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.
 The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause:

14
 (i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of
audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording
the results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of
Income Tax Act.
(x) Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
 In the instant case, CA Sandeep, the auditor of Sharma Pvt. Ltd. Has delegated certain task
to his articles and staff such as raising of bills and issuing acknowledgements for money
receipts, initiating and stamping of vouchers and of schedules prepared for the purpose of
audit and issuing acknowledgements for records produced and signing financial statements
of the company.
 Therefore, CA Sandeep is correct in allowing first three tasks i.e., raising of bills and
issuing acknowledgements for money receipts, initiating and stamping of vouchers and of
schedules prepared for the purpose of audit.
 However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or a member not being his partner to sign on his behalf or on behalf of
his firm, CA Sandeep is not right in delegating signing of financial statements to his staff.
Conclusion: In view of this, CA Sandeep would be guilty of professional misconduct for
allowing the person signing the financial statements on his behalf to his articles and staff under
Clause 12 of Part 1 of First Schedule of the Chartered Accountants Act, 1949.

Q 23. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: The manager of Tata (P) Ltd. Approached CA Ravi in the need of a
certificate in respect of a consumption statement of raw material. Without having
Certificate of Practice (COP), CA Ravi issued the certificate to the manager of the
company, acting as a CA in Practice and applied for the Cop to the Institute on very next
day to avoid any dispute.
[RTP-May 18]
Ans: Contravening Provisions of the Act:
 As per Clause (1) of Part II of Second Schedule to the CA Act, 1949, a member of the
Institute, whether in practice or not, shall be deemed to be guilty of professional

15
 misconduct, if he contravenes any of the provisions of this Act or the regulations made
thereunder or any guidelines issued by the Council.
 Section 6 of Chartered Accountants Act, 1949 provides that no member of the Institute
shall be entitled to practice (whether in India or elsewhere) unless he has obtained from the
Council a certificate of practice.
 In the given case, CA. Ravi has issued a certificate in respect of a consumption statement of
raw material to the manager of Tata (P) Ltd., as a Chartered Accountant in practice when he
had not even applied for the CoP to the Institute, thereby contravening the provisions of
section 6 of the Chartered Accountants Act, 1949.
Conclusion: Mr. Ravi has violated the provisions of Sec. 6 of CA Act, 1949 and hence would be
guilty of professional misconduct under Clause 1, Part II of Second Schedule.

Q 24. Mr. Girish, a Chartered Accountant in practice, delivered a speech in the national
conference organized by the Ministry of Information Technology. While delivering the
speech, he told to the audience that he is a Cybersecurity Expert and his firm provides
services of cloud accounting, IT governance, risk compliance, and information security at
reasonable rates. He also requested the audience to approach his firm of chartered
accountants for these services and at the request of the audience he also distributed his
business cards and telephone number of his firm to those in the audience. Comment in the
light of professional Code of Ethics.
[May 22 (4 Marks)]
Ans: Solicitation of Professional Work and Advertisement:
 Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement,
personal communication or interview or by any other means.
 Section 7 of the Chartered Accountants Act, 1949 read with Clause 7 of Part I of the First
Schedule to the said Act prohibits advertising of professional attainments or services of a
member. It also restrains a member from using any designation or expression other than
that of a Chartered Accountant in documents through which the professional attainments of
the member would come to the notice of the public.
 Guidelines issued under clauses 6 & 7 permits a practicing member to give lectures at
forums and may give their names and describe themselves as Chartered Accountants, but no
reference should be made, to the name and address or services of his firm.
 In the present case, Mr. Girish uses the designation of “Cybersecurity Expert‟ and also
made reference to the services provided by his firm of Chartered Accountants at reasonable
rates and distribute business cards to audience.
Conclusion: Mr. Girish will be held guilty of professional misconduct under clauses 6 & 7 of
Part 1 of First Schedule to the CA Act, 1949 due to solicitation of professional work and
advertisement of services rendered by his firm.

16
Q 25. Mr. Suraj a chartered Accountant accepted his appointment as tax auditor of a firm u/s
44AB of Income tax Act and commenced the tax audit within 2 days of his appointment
since the client was in a hurry to file return of income before the due date. After
commencing the audit, Mr. Suraj realised his mistake of accepting this tax audit without
sending any communication to the previous tax auditor. In order to rectify his mistake,
before signing the tax audit report, he sent a registered post to the previous auditor and
obtained the postal acknowledgement. Will Mr. Suraj be held guilty under the CA Act?
Ans: Prior Communication with the previous auditor:
 As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in
practice is deemed to be guilty of professional misconduct if he accepts a position as
auditor previously held by another chartered accountant without first communicating with
him in writing.
 Object of incoming auditor communicating in writing with retiring auditor is to ascertain
whether there are any circumstances which warrant him not to accept appointment, for
example, whether previous auditor has been changed on account of having qualified the
report or he had expressed a wish not to continue on account of something inherently wrong
with administration of business.
 The retiring auditor may even give out information regarding the condition of the accounts
of the client or the reason that impelled him to qualify his report. Under all circumstances, it
would be essential for the incoming auditor to carefully consider the facts before deciding
whether or not he should accept the audit. As a matter of professional courtesy and
professional obligation it is necessary for the new auditor appointed to communicate with
such earlier auditor.
Conclusion: Mr. Suraj is guilty of professional misconduct by virtue of clause 8 of Part I of First
Schedule.

Q 26. Jaynil, a practicing Chartered Accountant has not maintained the records of audit
assignments of the companies on the ground that he is conducting lesser number of audits
prescribed under Section 141(3)(g) of the Companies Act, 2013.
[Nov. 18 (4 Marks)]
Ans: Record of Audit Assignments:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 Chapter VIII of Council General Guidelines, 2008 requires a Chartered Accountant in
practice as well as firm of Chartered Accountants in practice to maintain a record of the
audit assignments accepted by him or by the firm of Chartered Accountants, or by any of
the partners of the firm in his individual name or as a partner of any other firm, as far as
possible, in the following format:

17
 S. No. Name of Registration Date of Date of Date on
the No. Appointment Acceptance which Form
Company ADT-1 Filed
with ROC
1 2 3 4 5 6
 In the present case, Jaynil, a practicing Chartered Accountant has not maintained the
records of audit assignments of the companies on the ground that he is conducting lesser
number of audits prescribed under Section 141(3)(g) of the Companies Act, 2013.
Conclusion: Ground of Mr. Jaynil is not admissible and he will be held guilty of professional
misconduct by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter
VIII of Council General Guidelines, 2008 for not maintaining of record of audit assignments.

Q 27. Mr. Rachit, a CA in practice and statutory auditor of True Ltd., advised the Managing
Director of the company to include in sales, “Orders under negotiation” to reflect a better
financial position for obtaining bank loan. Mr. Rachit, thereafter, gave clean reports on the
balance sheet prepared accordingly without examining the accounts. Comment with
reference to Chartered Accountants Act, 1949 and Schedules thereto.
[MTP-March 23]
Ans: Auditor‟s negligence in performance of duties:
 As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
“does not exercise due diligence or is grossly negligent in the conduct of his professional
duties”.
 Furthermore, Clause (2) of Part IV of the First Schedule to the said Act states that a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he, in the opinion of the Council, brings disrepute to the profession or the
Institute as a result of his action whether or not related to his professional work.
 In the present case, Mr. Rachit, a partner of Blue & Co., advised the M.D. of True Ltd. To
include in sales, orders under negotiations to reflect a better financial position for obtaining
bank loan.
Conclusion: Mr. Rachit is guilty of professional misconduct under Clause 7 of Part I, Second
Schedule to the CA Act, 1949, as he has acted in a negligent manner.
He will also be deemed guilty of other misconduct under Clause (2) of part IV of First Schedule
for advising unethical practice to the client.

Q 28. Comment on the following with reference to the CA Act, 1949 and schedules thereto: M/s
XYZ a firm of Chartered Accountants received ` 2 lakhs in January, 2022 on behalf of one
of their clients, who has gone abroad and deposited the amount in their Bank account, so
that they can return the money to the client in July, 2022, when he is due to return to India.
[RTP-Nov. 19]
Ans: Deposit of Client‟s Money in Separate Bank account:

18
  As per Clause 10 of Part I of Second Schedule to the CA Act, 1949, a CA in practice will
be deemed to be guilty of professional misconduct if he fails to keep moneys of his client
other than the fees or remuneration or money meant to be expended in a separate banking
account or to use such moneys for purposes for which they are intended within a reasonable
time.
 The term reasonable time would depend upon the circumstances of the case. Moneys which
are intended to be spent within a reasonably short time need not be put in a separate bank
account.
 In the instant case, M/s XYZ should have kept the amount in a separate bank account.
Conclusion: M/s XYZ will be deemed to be guilty of professional misconduct by virtue of clause
10 of Part I of Second Schedule as the money is required to be kept in a separate bank account.

Q 29. In the course of his assignment in M/s Bailey Ltd., CA Imran came to know that the
company, due to financial crunch and unable to meet employees salary, has taken a loan of
` 50 lakhs from Employees Gratuity Fund. The said loan was not reflected in the books of
account of the company and the auditor ignored this transaction in his report.
Comment with reference to the Chartered Accountants Act, 1949 and Regulations there to.
[May 18 (4 Marks)]
Ans: Failure to Disclose Material Facts:
 As per Clause (5) of Part I of Second Schedule to the CA Act, 1949, a CA in practice will
be held liable for misconduct if he fails to disclose a material fact known to him, which is
not disclosed in the financial statements but disclosure of which is necessary to make the
financial statements not misleading.
 In this case, CA Imran has come across an information that a loan has been taken by the
company from Employees PF and the said loan has not been reflected in the books of
account and hence not disclosed in the financial statements.
Conclusion: If CA Imran fails to disclose the fact stated above in his report, he will be attracted
by the provisions of professional misconduct under Clause (5) of Part I of Second Schedule to the
Chartered Accountants Act, 1949.
However, if he discloses the fact in his report, there will not be any misconduct.

Q 30. CA Naresh was appointed as an auditor of JAL Ltd. The company has branches all over
the state of Haryana. CA Naresh, in consultation with management, decided to visit 6 out of
10 branches. Management decided to pay him advance of ` 2 Lakhs on visits to be
conducted as a part of services rendered. As agreed, ` 2 Lakhs was transferred in his bank
account from which he met all the expenses. Comment with reference to CA Act, 1949
whether the action of CA Naresh of receiving the advance money in his saving accounts and
not keeping it in separate bank account is valid.
[Jan. 21 (4 Marks)]

Ans: Deposit of Client‟s Money in separate Bank account:

19
  Clause 10 of Part I of Second Schedule to the CA Act, 1949 states that a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if “he fails
to keep money of his clients other than fees or remuneration or money meant to be
expended in separate banking account or to use such money for the purpose for which they
are intended”.
 In connection with compliance of Clause 10, Council has considered some practical
difficulties of the members and suggest that an advance received by a Chartered Accountant
against services to be rendered does not fall under Clause (10) of Part I of the Second
Schedule.
 In the given case, CA Naresh was appointed as an auditor of JAL Ltd. The company has
branches all over the state of Haryana. CA Naresh, in consultation with management,
decided to visit 6 out of 10 branches. Management decided to pay him advance of ` 2
Lakhs on visits to be conducted as a part of services rendered. As agreed, ` 2 Lakhs was
transferred in his bank account from which he met all the expenses.
Conclusion: An advance received by a CA against services to be rendered does not fall under
Clause (10) of Part I of the Second Schedule, hence no misconduct arises on part of CA. Naresh.

Q 31. Mr. Chiranjive accepted the statutory audit of M/s PSU Ltd., whose net worth is negative
for the year 202122. The audit was to be conducted for the year 2022-23. The audited
accounts for the year 2022-23 showed liability for payment of tax audit fees of ` 15,000 in
favour of Mr. Vikas, the previous auditor.
Ans: Accepting Appointment as an Auditor:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 As per Chapter VII of Council General Guidelines, 2008, a member in practice shall not
accept the appointment as auditor of an entity in case the undisputed audit fee of another
CA for carrying out the statutory audit under the Companies Act, 2013 or various other
statutes has not been paid. As per the proviso, such prohibition shall not apply in case of a
sick unit.
 “Sick unit” shall mean a unit registered for not less than 5 years, which has at the end of
any financial year accumulated losses equal to or exceeding its entire net worth.
 In the present case, Mr. Chiranjive accepted the audit of M/s PSU Ltd., though the
undisputed fees of previous auditor remain unpaid.
Conclusion: Assuming that M/s PSU Ltd. Falls under the criteria of Sick Unit, Mr. Chiranjive
would not be guilty of professional misconduct.
Q 32. Mr. Chand, the auditor of ABC Pvt. Ltd. Has delegated following works to his articles and
staff:
 Issue of audit queries during the course of audit.
 Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.

20
  Issue of memorandum of cash verification and other physical verification.
 Letter forwarding draft observations/financial statements.
 Issuing acknowledgements for records produced.
 Raising of bills and issuing acknowledgements for money receipts.
 Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI‟s guidelines and pronouncements?
[MTP-Nov. 21]
Ans: Delegation of Certification work:
 As per Clause (12) of Part I of the First Schedule of the CA Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the institute in practice or a member not being his partner to
sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report
or financial statements.
 The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of
audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording
the results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of
Income-tax Act.
(x) Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
 In the instant case, Mr. Chand, auditor of ABC Pvt. Ltd. Has delegated certain task to his
articles and staff such as issue of audit queries during the course of audit, issue of
memorandum of cash verification and other physical verification, letter forwarding draft
observations/financial statements, issuing acknowledgements for records produced and
signing financial statements of the company.
 Mr. Chand is correct in allowing first four tasks i.e. issue of audit queries during the course
of audit, issue of memorandum of cash verification and other physical verification, letter
forwarding draft observations/F.S., issuing acknowledgements for records produced to his
staff and articles.

21
  However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or member not being his partner to sign on his behalf or on behalf of his
firm, Mr. Chand is wrong in delegating signing of financial statements to his staff.
Conclusion: In view of this, Chand would be guilty of professional misconduct for allowing the
person signing the F.S. on his behalf to his articles and staff under Clause 12 of Part 1 of First
Schedule of the CA Act, 1949.

Q 33. Mr. Piyush, a Chartered Accountant was invited by the Chamber of Commerce to present a
paper in a symposium on the issues facing Indian Leather Industry. During the course of
his presentation, he shared some of the vital information of his client‟s business under the
impression that it will help the Nation to compete with other countries at international
level.
OR
Mr. Bimal, a chartered accountant in practice was invited to deliver a seminar on GST
which was attended by professionals as well as by representatives of various industry to
which it pertains. Mr. Bimal enthusiastically explained the issue and elaborated how he
actually solved this for his client facing the same issue with worked out examples from the
computer storage device using the actual data of one of his clients with full identification of
client details being displayed to the group for the sake giving clarity on a topic in a real life
situation. Comment his acts in the light of code of conduct.
[May 18 (4 Marks), MTP-April 22]
Ans: Disclosure of Client‟s Information:
 Clause (1) of Part I of the Second Schedule to CA Act, 1949 deals with professional
misconduct relating to the disclosure of information by a CA in practice relating to the
business of his clients to any person other than his client without the consent of his client or
otherwise than as required by any law for the time being in force would amount to breach
of conduct. .
 The Code of Ethics further clarifies that such a duty continues even after completion of the
assignment. The Chartered Accountant may however, disclose the information in case it is
required as a part of performance of his professional duties.
 In the given case, Mr. Piyush has disclosed vital information of his client‟s business
without the consent of the client under the impression that it will help the nation to compete
with other countries at International level.
Conclusion: It is a professional misconduct covered by Clause (1) of Part I of Second Schedule
to the CA Act, 1949.

Q 34. Can a practicing Chartered Accountant be held guilty of professional misconduct under the
following circumstance: Mayank, a chartered Accountant has sent letters under certificate
of posting to the previous auditor informing him his appointment as an auditor before the
commencement of audit by him.
Ans: Prior Communication with the previous auditor:

22
  Clause (8) of Part I of the First Schedule to the CA Act, 1949 requires communication by
the incoming auditor with the previous auditor before accepting a position by him.
 Council of the Institute has taken the view that a mere posting of a letter “under certificate
of posting” is not sufficient to establish communication with the retiring auditor unless
there is some evidence to show that the letter has in fact reached the person communicated
with.
 A Chartered Accountant who relies solely upon a letter posted “under certificate of posting”
therefore does so at his own risk.
 Since the letters were sent by “Mayank” to the previous auditor informing him of his
appointment as an auditor before the commencement of audit by him under Certificate of
Posting is not sufficient to prove communication with the retiring auditor. In the opinion of
the Council, communication by a letter sent “Registered Acknowledgement Due” or by
hand against a written acknowledgement would in the normal course provide positive
evidence.
Conclusion: “Mayank” was guilty of professional misconduct under Clause (8) of Part I of First
Schedule to the CA Act, 1949.

Q 35. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: Amar, a Practicing CA gives power of attorney to an employee chartered
accountant to sign reports and financial statements, on his behalf.
Ans: Delegation of Certification work:
 As per clause 12 of Part 1 of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he
allows a person not being a member of the Institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements”.
 This clause should be read in conjunction with Sec. 26 of CA Act, 1949 which stipulates
that no person other than a member of the Institute shall sign any document on behalf of a
chartered accountant in practice or a firm of such chartered accountants in his or its
professional capacity.
 The term „Financial Statement‟ for this purpose would cover an examination of the
accounts or financial statements given under a statutory enactment or otherwise.
 Further, Clause (1) of Part II of the Second Schedule to the CA Act, 1949 states that a
member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he contravenes any of the provisions of this Act or the
regulations made there under or any guidelines issued by the Council.
 In this case CA „Amar‟ gives power of attorney to an employee to sign reports and financial
statements on his behalf, which is not permitted as such.
Conclusion: Amar is guilty of professional misconduct under Clause (12) of Part I of First
Schedule and also under Clause (1) of Part II of Second Schedule for contravening Sec. 26.

23
Q 36. Mr. Shantilal, a Chartered Accountant, employed as a paid Assistant with a Chartered
Accountant firm, leaves the services of the firm on 31st December, 2023. Despite many
reminders from ICAI he fails to reply regarding the date of leaving the services of the firm.
Comment with reference to the Chartered Accountants Act, 1949, and Schedules thereto.
[MTP-March 22]
Ans: Failed to supply information called for:
 Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a
member, whether in practice or not, will be deemed to be guilty of professional misconduct
if he does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate authority.
 In the given case, Mr. Shantilal has failed to reply to the letters of the Institute asking him
to confirm the date of leaving the service as a paid assistant.
Conclusion: Mr. Shantilal is held guilty of professional misconduct as per Clause 2 of Part III of
the First Schedule to the Chartered Accountants Act, 1949.

Q 37. CA Rachit is a chartered accountant in practice. He has an articled trainee Ravi. Rachit has
informed Ravi that since his practice and receipt of fees is seasonal, the stipend would not
be paid in the months of April to December, but would be paid from January to March and
the shortfall for the earlier 9 months will be made good in these 3 months along with
interest 5% pa. Comment with reference to the Chartered Accountants Act, 1949.
[Nov. 17 (4 Marks)]
Ans: Contravening Provisions of the Act/Regulations:
 As per Clause (1) of Part II of the Second Schedule to the CA Act, 1949, a member of the
Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct
under, if he contravenes any of the provisions of this Act or the regulations made there
under or any guidelines issued by the Council.
 Regulation 48 of Chartered Accountants Regulations, 1988 requires that payment to articled
clerks to be made on monthly basis.
 In the present case, Chartered Accountant has failed to make the payments of stipend to
articled assistant every month in accordance with Regulation 48. The fact that the articled
assistant will be compensated with extra sum in the form of interest on late payment and the
plea that his receipts are seasonal is of no relevance and hence not acceptable.
Conclusion: Regulation 48 of CA Regulations, 1988 has been violated, hence chartered
accountant would be guilty of professional misconduct under Clause 1, Part II of Second
Schedule.
Q 38. M/S PQR & Co. is a partnership firm of 3 partners P, Q and R. All partners are exclusively
associated with the firm in practice and are not doing practice in individual capacity. For
the year ended 31st March, 2023, the partners have undertaken audits and signed audit
reports under section 44AB/44AD of the Income-tax Act, 1961 as under:

24
 Under Section 44AB Under Section 44AD
P 10 15
Q 60 5
R 100 5

Discuss whether there is any professional misconduct by the firm in regard to the aforesaid audits.
[Nov. 19 (4 Marks)]
Ans: Signing of Tax Audit Report:
 As per Chapter VI of Council General Guidelines, 2008, a member of the Institute in
practice shall not accept, in a financial year, more than the “specified number of tax audit
assignments” u/s 44AB of the Income-tax Act, 1961.
 In the case of a firm of CAs in practice, the “specified number of tax audit assignments”
shall be construed as the specified number of tax audit assignments for every partner of the
firm.
 The specified number of tax audit assignments in the case of firm of CAs in practice, 60 tax
audit assignments per partner in the firm, in a financial year, whether in respect of corporate
or non-corporate assessees.
 The audits conducted under Sections 44AD, 44AE, 44AF of the Income-tax Act, 1961 shall
not be taken into account for the purpose of reckoning the “specified number of tax audit
assignments”.
 It is further clarified by the Council of ICAI that tax audit report accepted by the firm of
Chartered Accountants can be signed by any partner on the behalf of the firm.
 In the present case, there are three partners in the firm and hence the firm can accept 180
tax audit assignment and any partner can sign the tax audit report on the behalf of the firm.
Firm has accepted 170 tax audit assignments other than the audit under section 44AD.
Conclusion: No Misconduct arises on part of Firm or partners.

Q 39. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules there to: Mr. Bhawani a practicing CA expressed his opinion on the financial
statements of M/s Supreme Ltd. For the year ended on 31st March, 2022. It was later found
that the closing stock was valued arbitrarily by Management which was accepted by him
without verification and large amount of revenue expenditure was capitalized.
Ans: Auditor‟s negligence in performance of duties:
 As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
“does not exercise due diligence or is grossly negligent in the conduct of his professional
duties”.
 In the present case, Mr. Bhawani a practicing CA expressed his opinion on the financial
statements of M/s Supreme Ltd. And it was found later that the closing stock was valued

25
 arbitrarily by Management which was accepted by him without verification and large
amount of revenue expenditure was capitalized.
 Thus, having regard to this, it is reasonable to think that prima facie there is a case against
the auditor for gross negligence.
Conclusion: Mr. Bhawani is guilty of gross negligence by virtue Clause 7 of Part 1 of second
schedule.

Q 40. Mr. Nishant, a practicing Chartered Accountant did not reply within a reasonable time and
without any cause to the letter received from the local Police Station, a public authority,
soliciting his suggestions as regards some non-professional work. Comment with reference
to CA Act, 1949.
[Jan. 21 (4 Marks)]
Ans: Other Misconduct:
 As per Part IV of First Schedule to Chartered Accountants Act, 1949, a member of the
Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(i) is held guilty of any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months.
(ii) In the opinion of the Council brings disrepute to the profession or the Institute as a
result of his action whether or not related to his professional work.
 One of the situations, where a member may be found guilty of “Other Misconduct”, under
the aforesaid provisions rendering, himself unfit to be member is non-replying within a
reasonable time and without a good cause to the letter of the public authorities.
 In the present case, Mr. Nishant, a practicing Chartered Accountant did not reply within a
reasonable time and without any cause to the letter received from the local Police Station, a
public authority, soliciting his suggestions as regards some non-professional work.
Conclusion: Mr. Nishant will be deemed to be guilty of other misconduct.

Q 41. The professional accountants need to observe certain fundamental principles, which are
covered in the Code of Ethics of the ICAI. Briefly explain each of the five principles which
needs to be complied by the Chartered Accountants?
[Nov. 22 (5 Marks)]
Ans: Fundamental Principles as per Code of Ethics:
1. Integrity: A professional accountant should be straightforward and honest in all
professional and relationship
2. Objectivity: A professional accountant should not compromise professional or business
judgments because of bias, conflict of interest or undue influence of others.
3. Professional Competence and Due Care: A professional accountant has a continuing
duty to attain and maintain professional knowledge and skill at the level required to ensure
that a client or employing organization receives competent professional service, based on
current technical and professional standards and relevant legislation. A professional

26
 accountant should act diligently and in accordance with applicable technical and
professional standards.
4. Confidentiality: A professional accountant should respect the confidentiality of
information acquired as a result of professional and business relationships.
5. Professional Behaviour: A professional accountant should comply with relevant laws and
regulations and avoid any conduct that the professional accountant knows or should know
might discredit the profession.

Q 42. CA Sandeep Sharma is a newly qualified Chartered Accountant in practice and in order to
increase his professional practice and client base, entered into an agreement with Mr.
Hitesh Pawar, a qualified and experienced registered valuer to share 20% professional fees
for all cases of valuation referred to him by CA Sandeep Sharma. Based on this, CA
Sandeep received ` 1,20,000 during the year 2023-24 from Mr. Hitesh. Is CA Sandeep guilty
of misconduct under the Chartered Accountants‟ Act, 1949?
[Nov. 19 (4 Marks)]

Ans: Sharing Fees of professional work of others:

 As per Clause 3 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
CA in Practice is deemed to be guilty of professional Misconduct if he accepts or agrees to
accept any part of the profits of the professional work of a person who is not a member of
the Institute. However, such a restriction does not apply in respect of member of any other
professional bodies or with such other persons having prescribed qualifications.
 Regulation 53A of CA Regulations 1988 prescribes the qualifications of persons with
whom profits can be shared.
 In this case, CA Sandeep a practicing Chartered Accountant entered into an agreement with
Mr. A, a qualified and experienced registered valuer to share 20% professional fees for all
cases of valuation referred to him by CA Sandeep. Based on this, CA Sandeep received `
1,20,000 during the year 2023-24 from Mr. Hitesh.
Conclusion: Mr. Sandeep will be deemed to be guilty of professional misconduct by virtue of
Clause 3, Part I of First Schedule as he accepts professional fees from a person who is not a
member of ICAI. Further, registered valuers are not recognised for profit sharing purpose under
Regulations 53A and 53B.

Q 43. Comment on the following with reference to the CA Act, 1949, and Schedules thereto: A
special notice has been issued for a resolution at 6th AGM of F Ltd. providing expressly that
CA. S shall not be reappointed as an auditor of the company. Consequently, CA. S
submitted a representation in writing to the company as provided under section 140(4)(iii)
of the Companies Act, 2013. In the representation, CA. S incorporated his independent
working as a professional throughout the term of office and also indicated his willingness to
continue as an auditor if reappointed by the shareholders of the Company.

Ans: Sending representation to solicit the professional work:

27
  As per Clause 6, Part I of First Schedule of Chartered Accountants Act, 1949, a CA in
practice shall be deemed to be guilty of professional misconduct if he solicits clients or
professional work either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means.
 Guidelines issued by the Council of ICAI under Clause 6 allowed a member to send
representation to the company provided right of Representation should not be used to
secure needless publicity. It needs to be set out in a dignified manner how he has been
acting independently through his term of office and his willingness to continue as an auditor
if reappointed by shareholders.
 In the present case, CA. S has submitted the representation u/s 140(4)(iii) of Companies
Act, 2013 in the proper manner.
Conclusion: No misconduct arises on Part of CA. S as guidelines issued under Clause 6 of Part I
of First Schedule allows a CA in practice to make the representation u/s 140(4) of Companies
Act, 2013 which is not used by the auditor to secure needless publicity.

Q 44. CA Vijay, is appointed to carry out internal audit of Stock brokers, AKE Steel Ltd., listed
with NSE. CA Vijay started his work and submitted his first monthly report. CA Manish, a
partner of ASL & Co., statutory auditors of AKE Steel Ltd., during his first visit got to see
the internal audit report of CA Vijay. CA Manish feels that since CA Vijay did not inform
about his appointment as an internal auditor to ASL & Co., this is violation of professional
ethics. Comment with reference to the Chartered Accountants Act, 1949 and Schedules
thereto.
[July 21 (4 Marks)]
Ans: Prior Communication with the previous auditor:
 As per Clause 8 of Part I of First Schedule to the CA Act, 1949, a chartered accountant in
practice is deemed to be guilty of professional misconduct if he accepts a position as
auditor previously held by another chartered accountant without first communicating with
him in writing.
 This requirement would apply to all types of audit i.e. statutory audit, tax audit, internal
audit, concurrent audit, etc.
 Further the requirement of Clause 8 is applicable in situation of replacing of one auditor by
another auditor and not in case of parallel positions.
 In the present case, CA Vijay was appointed as Internal Auditor, he owes no duty towards
statutory auditor for prior communication.
Conclusion: There is no violation of professional ethics as Clause 8 of Part I of First schedule
applies in case of replacement positions and not in case of parallel positions.

Q 45. M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming financial
year, M/s DD & Co., Chartered Accountants, were appointed as the statutory auditors of
SS limited. The CEO of the holding company was impressed with the knowledge and
experience of Mr. D, one of the partners of the firm and hence, he offered Mr. D to take up

28
 the position of Director (not MD/ wholetime director) of HH limited. At the same time, Mr.
D‟s friend approaches him with an assignment to act as a Recovery Consultant for a bank.
Mr. D is now confused whether to accept or reject the offers. He approaches you and seeks
your advice on the same. Advise what Mr. D about what he can do with the offers with
reference to the CA Act, 1949 and Schedules thereto.
[MTP-March 21]
Ans: Engagements in Other Occupations:
 As per Clause (11) of Part I of First Schedule of CA Act, 1949, a member in practice is
deemed to be guilty of professional misconduct if he engages in any business or occupation
other than the profession of Chartered Accountant unless permitted by the Council so to
engage.
Provided nothing contained herein shall disentitle a chartered accountant from being a
director of a company (not being MD or whole-time director) unless he or his partners Is
interested in such company as auditor.
 The Ethical Standards Board (ESB) noted that public conscience is expected to be ahead of
law. Members, therefore, are expected to interpret the requirement as regards independence
much more strictly than what the law requires and should not place themselves in positions
which would either compromise or jeopardise their independence. In the view of the above,
the Board, via a clarification, decided that the auditor of a Subsidiary company cannot be a
Director of its Holding company, as it will affect the independence of the auditor.
 However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary. „acting as Recovery Consultant in the banking sector‟ is covered under general
permission.
 In the given situation, M/s SS limited is a partly owned subsidiary of M/s HH limited. For
the upcoming financial year, M/s DD & Co., Chartered Accountants, were appointed as the
statutory auditors of SS limited. The CEO of the holding company was impressed with the
knowledge and experience of Mr. D, one of the partners of the firm and hence, he offered
Mr. D to take up the position of Director (not MD/whole-time director) of HH limited.
Further, Mr. D‟s friend approached him for an assignment for acting as a Recovery
Consultant for a bank.
Conclusion: Based on the provisions as stated above, Mr. D should not accept the offer to be
appointed as director of HH Limited. However, he can accept the assignment offered by his
friend and can act as a recovery consultant for a bank.

Q 46. Give your comments with reference to Chartered Accountants Act, 1949 and Schedules
there to: Mr. „Giriraj‟, while applying for a certificate of practice, did not fill in the
columns which solicit information about his engagement in other occupation or business,
while he was indeed engaged in a business.
Ans: Disclosure of Information:

29
  As per Clause 2 of Part III of First Schedule to the Chartered Accountants Act, 1949 a
member shall be held guilty if a Chartered Accountant, in practice or not, does not supply
the information called for, or does not comply with the requirements asked for, by the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee. Quality Review Board or the Appellate Authority;
 In the given case, Mr. “Giriraj”, a Chartered Accountant while applying for a certificate of
practice, did not fill in the columns which solicit information about his engagement in other
occupation or business, while he was indeed engaged in a business.
 Details of engagement in business need to be disclosed while applying for the certificate of
practice as it was the information called for in the application, by the Institute.
Conclusion: Mr. Giriraj will be held guilty for professional misconduct under the Clause 2 of
Part III of First Schedule for not providing the information to the Institute.

Q 47. Give your comments with reference to Chartered Accountants Act, 1949 and schedules
thereto: Mr. Mahesh, a practicing Chartered Accountant, in the course of the audit of a
listed company discovered serious violations of the provisions of the Companies Act, 2013,
informed the registrar of companies out of public interest.
Ans: Disclosure of Confidential Information:
 As per Clause 1 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 a
member in practice will be guilty of professional misconduct if he discloses information
acquired in the course of his professional engagement to any person other than his client so
engaging him without the consent of his client or otherwise than as required by any law for
the time being in force.
 Further, Sec. 143(12) of Companies Act, 2013 requires that if an auditor of a company, in
the course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or
employees of the company, he shall immediately report the matter to the Central
Government within 60 days of his knowledge and after following the prescribed procedure.
 In the given case, Mr. Mahesh has disclosed serious violations of the provisions of the
Companies Act, 2013 to Registrar of Companies without the consent of the client under the
impression that it would be in public interest. It is not clear from the questions whether the
violations of provisions involve fraud being committed by officers or employees of the
company.
 Hence, in the present case, instead of disclosing the violations to the RoC directly, auditor
should mention the violations in his report in due compliance of SA 250 “Consideration of
Laws and regulations in an audit of financial statements”.
Conclusion: Mr. Mahesh will be guilty of professional misconduct covered by clause 1 of Part I
of Second Schedule to the Chartered Accountants Act, 1949.

Q 48. Comment with the reference to the Chartered Accountants Act, 1949 and schedules
thereto: David, a practicing Chartered Accountant examined and reported on the

30
 prospective financial statements for one of his clients to obtain a cash credit facility of ` 75
lakhs from a Private Bank. The bank has sanctioned the cash credit facility for 60 lakhs to
his client. Consequent to the sanction of loan by Bank, he charged a fees of ` 60,000 based
on 1% of the credit facility sanctioned.
[Nov. 18 (4 Marks)]

Ans: Certification of Financial Forecast and charging fees on a % age basis:

 As per Clause 3 of Part I of Second Schedule to the CA Act, 1949, a CA in practice is
deemed to be guilty of professional misconduct if he permits his name or the name of his
firm to be used in connection with an estimate of earnings contingent upon future
transactions in a manner which may lead to the belief that he vouches for the accuracy of
the forecast.
 Further SAE 3400 “The Examination of Prospective Financial Information”, provides that
the management is responsible for the preparation and presentation of the prospective
financial information, including the identification and disclosure of the sources of
information, the basis of forecasts and the underlying assumptions.
 The auditor may be asked to examine and report on the prospective financial information to
enhance its credibility, whether it is intended for use by third parties or for internal
purposes. Thus, while making report on projection, the auditor needs to mention that his
responsibility is to examine the evidence supporting the assumptions and other information
in the prospective financial information, his responsibility does not include verification of
the accuracy of the projections, therefore, he does not vouch for the accuracy of the same.
 Clause 10 of Part I to First Schedule to the CA Act, 1949 prohibits a CA in practice to
charge, or offers to charge, accept or offers to accept in respect of any professional
employment, fees which are based on a percentage of profits or which are contingent upon
the findings or results of such employment.
 However, this restriction is not applicable where such payment is permitted by the
regulations made in this behalf. The Council of the Institute has framed regulation 192
which exempts certain professional services from the operation of clause 10. Charging fees
on % age of credit facility is not covered under Regulation 192.
Conclusion: Mr. David will be deemed to be guilty of professional misconduct by virtue of
clause 10 of part I of First schedule as he charges fees on % age of credit facility sanctioned.

Q 49. Give your comments with reference to Chartered Accountants Act, 1949 and schedules
thereto: Mr. Vinod, a practicing Chartered Accountant, did not complete his work relating
to the audit of the accounts of a company and had not submitted his audit report in due
time to enable the company to comply with the statutory requirements.
[RTP-Nov. 18, Nov. 19. MTP-Oct. 20]
Ans: Failure to exercise due diligence:
 As per clause 7 of Part 1 of Second Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he

31
 “does not exercise due diligence or is grossly negligent in the conduct of his professional
duties”.
 Where a CA had not completed his work relating to the audit of the accounts a company
and had not submitted his audit report in due time to enable the company to comply with
the statutory requirement in this regard, it can be said that the work is carried out with gross
negligence.
Conclusion: Mr. Vinod is guilty of professional misconduct by virtue of clause 7 of Part I of
Second Schedule to the CA Act, 1949.

Q 50. Mr. Jay and Mr. Viru are running a firm of Chartered Accountants in the name of M/s
Sholay & Co. On 23.5.2023, they included the name of Mr. Bhasant, a practicing Chartered
Accountant, without his knowledge, as a partner while submitting an application for
empanelment as auditor for Public Sector Bank branches to the Institute. However, they
added Mr. Bhasant as a partner to their firm offering a share of 25% of the profits, on
25.5.2023.
[MTP-April 18, RTP-May 20]
Ans: Providing False information to ICAI:
 As per clause 3 of Part II of second schedule, a Chartered Accountant whether in practice or
not is guilty of professional misconduct if he includes in any information, statement, return
or form to be submitted to the Institute, Council or any of its committees, Directors
(Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the
Appellate Authority any particulars knowing them to be false.
 In the instant case Sholay & Co. included another CA name as partner in his firm, in his
application for empanelment as Auditor of branches of Public Sector Banks submitted to
the Institute. In fact, such a member was not a partner of the said firm on the date of
application.
Conclusion: CA Jay & CA Viru will be held guilty of professional misconduct as per Clause 3,
Part II of Second Schedule for submitting false information with the Institute.

Q 51. AJ & Associates and PK & Co., chartered accountant firms have joined the Network firm
A to Z & Affiliates registered with Institute. AJ & Associates was statutory auditor of B
Ltd. For last 10 years. Due to rotation of auditor as per section 139(2) of Companies Act,
2013, B Ltd, retires AJ & Associates and appoints PK & Co., as auditor for the year 2023-
24. Comment as per Chartered Accountants Act, 1949 – Guidelines for Networking.
[Dec. 21 (4 Marks)]
Ans: Ethical Compliance in case of Network Firms:
 In accordance with Guidelines for networking, once the relationship of network arises, it
will be necessary for such a network to comply with all applicable ethical requirements
prescribed by the Institute from time to time in general and in particular in cases, where
rotation of firms is prescribed by any regulatory authority, no member firm of the network

32
 can accept appointment as an auditor in place of any member firm of the network which is
retiring.
 In the given case, AJ & Associates and PK & Co., chartered accountant firms have joined
the Network firm A to Z & Affiliates registered with Institute. AJ & Associates was
statutory auditor of B Ltd. For last 10 years. Due to rotation of auditor as per Sec. 139(2) of
Companies Act, 2013, B Ltd., retires AJ & Associates and appoints PK & Co., as auditor
for the year 2023-24.
Conclusion: PK & Co. cannot accept appointment as an auditor in place of any member firm of
the network which is retiring.

Q 52. SAM Yarns Limited a listed Company, having its registered office at Meerut is engaged in
manufacturing of various types of yarns to be supplied to the textile mills. The Company
has installed pollution control equipment for processing the pollutants so that before
discharge of effluents outside factory, the level of pollution is kept at a level below the
prescribed standard. The Company managed to get pollution clearance certificate by unfair
means, while still there continues to be breach of pollution control laws in matters of
discharge of polluting effluents. Amount of ` 10.25 Lakhs had been incurred for arranging
clearance certificate and the amount incurred unlawfully had been booked as pollution
recycling expenditure. The matter had not reached to those in governance, and the
Director-Finance who is a Chartered Accountant came to know of these matters on review
of major expenditure incurred during the period. Comment the action/responses expected
of Director Finance (CA Rahul) referring to any applicable requirements of Responses for
NOCLAR under code of ethics.
[May 23 (5 Marks)]
Ans: Responsibility of the senior professional accountants in service relating to NOCLAR:
1. Obtaining an Understanding of the Matter: If, during the course of carrying out
professional activities, a senior professional accountant becomes aware of any information
relating to NOCLAR or suspected NOCLAR, he/she should obtain an understanding of the
relevant matter
2. Addressing the Matter: If the senior Chartered Accountant identifies or suspects that
noncompliance has occurred or might occur, he shall, discuss the matter with the
immediate superior, if any.
3. Determining whether further action is needed: Senior Chartered Accountant shall
assess appropriateness of the response of the accountant‟s superiors, if any, and TCWG.
Further action that the senior professional accountant might take includes:
 Informing the management of the parent entity of the matter, if the employing
organisation is a member of a group,
 Disclosing matter to an appropriate authority as specified under respective law, or
 Resigning from the employing organisation.
4. Seeking Advice: Senior Chartered Accountant might consider consulting internally:
Obtaining legal advice to understand the accountant‟s options and the professional or legal

33
 implications of taking any particular course of action; or consulting on a confidential basis
with the Institute.
5. Determining Whether to Disclose the Matter to an Appropriate Authority: Disclosure
of the matter to an appropriate authority would be precluded if doing so would be contrary
to law or regulation.

Q 53. Amitabh, a Chartered Accountant in practice provides management consultancy and other
services to his clients. During 2023, looking to the growing needs of his clients to invest in
the stock markets, he also advised them on Portfolio Management Services whereby he
managed portfolios of some of his clients. Is Amitabh guilty of professional misconduct?

OR
CA Natraj, in practice, accepted an assignment as advisor and consultant to the public
issue of shares by his client M/s Super Ltd. Besides helping the company as an advisor, he
also underwrote the public issue of the company to the extent of 25% at a commission of
1%. Remaining shares were underwritten by banks and other financial institutions at the
same rate of commission. He contends that above assignments are part of management
consultancy work permitted by the council of the Institute. Do you agree with the view of
CA Natraj? Decide in the light of applicable code of conduct.
[May 19 (4 Marks)]
Ans: Advising on Portfolio Management Services:
 The Council of the ICAI pursuant to Section 2(2)(iv) of the CA Act, 1949 has passed a
resolution permitting “Management Consultancy and other Services” by a CA in practice.
 A clause of the aforesaid resolution allows CAs in practice to act as advisor or consultant to
an issue of securities including such matters as drafting of prospectus, filing of documents
with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc.
 It is, however, specifically stated that CAs in practice are not permitted to undertake the
activities of broking, underwriting and portfolio management Services. Thus, a CA in
practice is not permitted to manage portfolios of his clients.
Conclusion: Mr. Amitabh would be guilty of misconduct under CA Act, 1949 as a practicing CA
is not permitted to render portfolio management services.

Q 54. Mr. Aashish, a practicing Chartered Accountant agreed to select and recruit personnel,
conduct training programmes for and on behalf of a client where he is not providing any
assurance service. Is this a professional misconduct?
Ans: Providing Management Consultancy and Other Services:
 As per Sec. 2(2)(iv) of the CA Act, 1949, a member of the Institute shall be deemed “to be
in practice” when individually or in partnership with CA in practice, he, in consideration of
remuneration received or to be received renders such other services as, in the opinion of the
Council, are or may be rendered by a CA in practice. Pursuant to Sec. 2(2)(iv) above, the

34
 Council has passed a resolution permitting a CA in practice to render entire range of
“Management Consultancy and other Services”.
 The definition of the expression “Management Consultancy and other Services” includes
Personnel recruitment and selection. Personnel Recruitment and selection includes,
development of human resources including designing and conduct of training programmes,
work study, job description, job evaluation and evaluations of workloads.
Conclusion: Mr. Aashish is not guilty of professional misconduct.

Q 55. Comment on the following with reference to the CA Act, 1949 and schedules thereto: A
Chartered Accountant in practice certified in requisite Form that an articled assistant was
undergoing training with him, whereas, he was also employed in a company between 10
a.m. and 6 p.m. on a monthly salary of ` 17,000 and attended the office of the Chartered
Accountant thereafter until 7 p.m. CA pleaded that the articled assistant was on audit of
the company.
[MTP-Oct.18, Oct. 19]
Ans: Failure to Observe Regulations:
 As per Clause 1 of Part II of Second Schedule to the Chartered Accountants Act, 1949, a
member shall be held guilty of professional misconduct if he contravenes any of the
provisions of the Act or the regulations made thereunder or any guidelines issued by the
Council. The chartered accountant, as per Regulations also, is expected to impart proper
practical training.
 As per Clause 3 of Part II of Second Schedule to the CA Act, 1949, a member is deemed to
be guilty of professional misconduct if he includes in any information, statement, return or
form to be submitted to the Institute, Council or any of its Committees, Director
(Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the
Appellate Authority any particulars knowing them to be false.
 In the instant case, the articled assistant is not attending office on timely basis and the
explanation of the Chartered Accountant that the articled assistant was on audit of the
company cannot be accepted particularly in view of the fact that articled assistant is getting
monthly salary from that company.
Conclusion: Chartered Accountant will be deemed to be guilty of professional misconduct under
Clause 1 of Part II of Second Schedule for contravention of regulations of the Institute and under
Clause 3 of Part II of Second Schedule for submission of false information to the ICAI.

Q 56. Mr. S is a practising chartered accountant based out of Chennai. During the weekends, he
involved himself in equity research and used to advise his friends, relatives and other
known people who are not his clients. Apart from this, he was also involved as a paper-
setter for Accountancy subject in the school in which he studied. He also owned agricultural
land and was doing agriculture during his free time. During the year 20X1, heavy losses
were incurred in agricultural activity due to natural calamities and misfortune, and he lost
almost all of his wealth and became undischarged insolvent. After a few court hearings,
finally, in the year 20X3, he was declared discharged insolvent and obtained a certificate

35
 from the court stating that his insolvency was caused by misfortune without any
misconduct on his part. You are required to comment on the above situation with reference
to the Chartered Accountants Act, 1949 and Schedules thereto, (especially from the point of
section 8: Entry of name in Register of Members).
[RTP-May 23]
Ans: Miscellaneous Provisions over Code of Ethics:
Given situation can be visualised in following parts:
(A) Mr. S used to involve himself in equity research and used to advise his friends,
relatives and other known people:
As per the recent decisions taken by the Ethical Standards Board of ICAI, a Chartered
Accountant in practice may be an equity research adviser, but he cannot publish a retail
report, as it would amount to other business or occupation.
In the given case, though Mr. S is involved in doing equity research and in advising
people, it is clear that he does not publish any retail report of his research. Hence, this act
of Mr. S shall not make him guilty of professional misconduct.
(B) Mr. S is involved in paper-setting for the Accountancy subject in the school where he
studied. He also owns agricultural land and does agriculture activities:
As per Clause 11 of Part I of First Schedule of Chartered Accountants Act and regulation
190A of Chartered Accountants Regulations, a Chartered Accountant in practice is
deemed to be guilty of professional misconduct if he engages in any business or
occupation other than the profession of chartered accountant unless permitted by the
Council so to engage. Further, Regulation 190A mentions the „Permissions granted
Generally‟ to engage in a certain category of occupations, for which no specific
permission of Council is required. Those cases include:
 Valuation of papers, acting as paper-setter, head examiner or a moderator, for any
examination.
 Owning agricultural land and carrying out agricultural activities.
Therefore, in the given case, the activities of Mr. S as a paper-setter and involvement in
agricultural activities do not make him guilty of professional misconduct.
(C) Mr. S was discharged insolvent: Disabilities for the Purpose of Membership:
Section 8 of the Chartered Accountants Act, 1949 enumerates the circumstances under
which a person is debarred from having his name entered in or borne on the Register of
Members, If he, being a discharged insolvent, has not obtained from the court a certificate
stating that his insolvency was caused by misfortune without any misconduct on his part.
Here it may be noted that a person who has been removed from membership for a
specified period shall not be entitled to have his name entered in the Register until the
expiry of such period.
In addition, failure on the part of a person to disclose the fact that he suffers from any one
of the aforementioned disabilities would constitute professional misconduct. The name of

36
 the person, who is found to have been subject at any time to any of the disabilities
discussed in section 8, can be removed from the Register of Members by the Council.
In the given case, it is clearly stated that Mr. S was discharged insolvent, and he has also
obtained from the court a certificate stating that his insolvency was caused by misfortune
without any misconduct on his part. Hence, Mr. S has not violated the provisions of
Section 8, and he is not debarred from having his name entered in the Register of
Members.

Q 57. Mr. Naman, a Chartered Accountant in practice as a sole proprietor has an office in
Mumbai near Church Gate. Due to increase in professional work, he opens another office in
a suburb of Mumbai which is approximately 80 kilometers away from the municipal limits
of the city. For running the new office, he employs three retired Income-tax Officers. Is Mr.
Naman guilty of professional misconduct?

Ans: Maintenance of Branch office:

 In terms of Sec. 27 of the CA Act, 1949 if a CA in practice has more than one office in
India, each one of these offices should be in the separate charge of a member of the
Institute.
 There is however an exemption from the above if the second office is located in the same
premises, in which the first office is located; or the second office is located in the same city,
in which the first office is located; or the second office is located within a distance of 50
kms from the municipal limits of a city, in which the first office is located.
Conclusion: Since the second office is situated beyond 50 kms of municipal limits of Mumbai
city, he would be liable for committing a professional misconduct.

Q 58. Mr. Tarun, Chartered Accountant, in practice allowed his brother-in-law Mr. Tarun who is
not a Chartered Accountant, to practice in the name of CA Tarun. He also allowed Mr.
Mayank who is employee in his firm to practice in the name. Whether Mr. Tarun is correct
in allowing his brother-in-law Mr. Tarun and Mr. Mayank employee of his firm to practice
in his name.
Ans: Allowing to Practice in a Chartered Accountant‟s name:
 As per Clause (1) of Part I to the First Schedule to CA Act, 1949, a CA in practice is
deemed to be guilty of professional misconduct if he allows any person to practice in his
name as a CA unless such person is also a CA in practice and is in partnership with or
employed by him.
 In given situation Mr. Tarun, CA who is in practice allowed a non-Chartered Accountant
his brother-inlaw Mr. Mayank to practice in the name of CA Tarun is not correct in view of
Clause 1 of Part I to the First Schedule. However, he can allow Mr. Mayank who is
employee in his firm to practice in his name.
Conclusion: CA Tarun will be held guilty of professional misconduct for allowing Mr. Mayank
who is not a CA to practice in his name as a chartered accountant as per Clause (1) of Part I to the
First Schedule.

37
Q 59. A partner of a firm of chartered accountants during a T.V. interview handed over a bio-
data of his firm to the chairperson. Such bio-data detailed the standing of the international
firm with which the firm was associated. It also detailed the achievements of the concerned
partner and his recognition as an expert in the field of taxation in the country. The
chairperson read out the said bio-data during the interview. Discuss whether this action by
the Chartered Accountant would amount to misconduct or not.
Ans: Prohibition on solicitation of work
 Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949 prohibits
solicitation of work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means, would constitute professional
misconduct.
 In the present case, bio-data was handed over to the chairperson during the T.V. interview
by the Chartered Accountant which included details about the firm and the achievements of
the partner as an expert in the field of taxation. The chairperson simply read out the same in
detail about association with the international firm as also the achievements of the partner
and his recognition as an expert in the field of taxation. Such an act would lead to the
promotion of his name and publicity thereof to the firm.
Conclusion: Partner is guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the CA Act, 1949.

Q 60. A company has appointed a practicing Chartered Accountant as an independent director

on its board. The said company publishes description about the Chartered Accountant‟s
expertise, specialization and knowledge in any particular field or add appellations or
adjectives to his name in the prospectus or public announcements issued by this company.
Whether the said publication will be covered under Code of Ethics? What should be the
role of the Chartered Accountant in this regard?
[July 21 (4 Marks)]
Ans: Publishing details of practicing CA in a Prospectus:
 The Council of the ICAI has in a communication to members stated that if the prospectus or
public announcements issued by these Companies often publish descriptions about the
Chartered Accountant‟s expertise, specialisation and knowledge in any particular field or
add appellations or adjectives to their names. It shall constitute a misconduct under Clauses
(6) and (7) of Part I of the First Schedule to the Chartered Accountants Act.
 The Council has further stated that in such cases the member concerned has to take
necessary steps to ensure that such prospectus or public announcements or public
communications do not advertise his professional attainments and also that such prospectus
or public announcements or public communications do not directly or indirectly amount to
solicitation of clients for professional work by the members.
 It is advisable for a member that as soon as he is appointed as a director on the Board of a
Company, he should specifically invite the attention of the management of the Company to
the aforesaid provisions and should request that before any such prospectus or public

38
 announcements or public communication mentioning the name of the member concerned, is
issued, the material pertaining to the member concerned should, as far as practicable be got
approved by him.
 In the given situation, a company has appointed a practicing chartered accountant as
independent director on its board. The said company published description about the
Chartered Accountant‟s expertise, specialisation and knowledge in any particular field or
add appellations or adjectives to his names in the prospectus or public announcements
issued by this Company.
 Thus, in the instant case, Chartered Accountant would be held to be guilty of professional
misconduct under Clauses (6) and (7) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 and liable for disciplinary action.

Q 61. Vineet & Associates have been offered Statutory Audit of TLP Ltd. As part of ethical
requirements of the Institute of Chartered Accountants, CA. V, partner of the firm,
communicated with the previous auditor enquiring as to whether any professional reason
exists for which he should not accept the audit assignment. Previous auditor informed that
he issued a qualified report, so management is changing the auditor. Comment with
reference to the provisions of the Chartered Accountants Act, 1949 and schedules thereto as
to whether Vineet & Associates can accept the audit.
[July 21 (4 Marks)]
Ans: Acceptance of Audit in case of qualified report by predecessor auditor:
 As per Clause 8, Part I of First Schedule to the CA Act, 1949, a member in practice shall be
deemed to be guilty of professional misconduct if he accept a position as Auditor
previously held by another chartered accountant or certified auditor without first
communicating with him in writing.
 This clause enables a member to know the reasons for the change, in order to safeguard his
own interest, public interest and to ensure independence. Professional reasons for not
accepting Audit:
(i) Non-compliance of provisions of Secs. 139 and 140 of Companies Act, 2013.
(ii) Non-payment of undisputed audit fee (except sick unit). Provision for Audit fees in
accounts signed by auditor and the client shall be considered as undisputed.
(iii) Issuance of a qualified Report.
 In first two cases, acceptance of audit amounts to professional misconduct. In (iii) case,
member may accept audit if he thinks that attitude of retiring auditor wasn‟t proper and
justified. But if the report was qualified for good and valid reasons, non-acceptance of audit
would be a healthy practice.
Conclusion: Based on the above discussions, Vineet & Associates can accept the audit if attitude
of retiring auditor wasn‟t proper and justified. But if the report was qualified for good and valid
reasons, non-acceptance of audit would be a healthy practice.

39
Q 62. Comment with respect to CA Act, 1949: Mr. Nozar a practicing chartered accountant
acting as liquidator of Niraj & Co. charged his professional fees on percentage of the
realization of assets.
OR
Comment on the following with reference to the Chartered Accountants Act, 1949 and
Schedules thereto: Praveen Pvt Ltd. approached CA Naveen, a Chartered Accountant in
Practice, for debt recovery services. CA Naveen accepted the work and insisted for fees to
be based on 2% of the debt recovered.
OR
Prabhat Ltd. is running into losses and in order to optimize resource utilization and cost
reduction, approaches you to carry out the assignment and offers a fee of 5% of benefits
derived from the suggestions made by you. Comment with respect to CA Act, 1949 and
Regulations there to.
[May 18 (4 Marks)]
OR
Mr. Josh, a Practicing CA, has accepted an appointment as auditor of cooperative society
and agreed charge fees @ 7% of the profits of the society during the financial year 2023-
24. Comment on action of Mr. Josh with reference to the CA Act, 1949 and Schedules
thereto.
[Dec. 21 (4 Marks)]
Ans: Charging Fees on Percentage Basis:
 Clause 10 of Part I of First Schedule to CA Act, 1949, prohibits a CA in practice to charge
or offer to charge, accept or offer to accept in respect of any professional work, fees which
are based on a percentage of profits or which are contingent upon the findings or result of
work.
 However, this restriction is not applicable where such payment is permitted by the
regulations made in this behalf. The Council of the Institute has framed regulation 192
which exempts certain professional services from the operation of clause 10.
 As per Regulation 192, in case of a receiver or a liquidator, the fees may be charged on a
percentage of the realisation or disbursement of the assets.
Conclusion: No Misconduct arises on part of Mr. Nozar as charging fees as a percentage of
realisation of assets while acting as a liquidator is permitted by Regulation 192.

Q 63. Give your comments with reference to CA Act and schedules thereto: Mr. Keshav, a
practicing CA, took over as the executive Chairman of a software company on 01.04.2023.
On 10.04.2023 he applied to the council for permission.
Ans: Engagements in other occupations:
 As per Clause 11 of Part I of First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if

40
 he engages in any business or occupation other than the profession of Chartered Accountant
unless permitted by the Council so to engage.
 In the instant case, Mr. Keshav took over as the executive chairman on 01.04.2023 and
applied for permission on 10.04.2023.
 On the basis of these facts, he was engaged in other occupation between the period
01.04.2023 and 10.04.2023, without the permission of the Council.
Conclusion: Mr. Keshav is guilty of professional misconduct in terms of Clause 11 of Part I of
First Schedule of the CA Act, 1949 as he accepted the employment without obtaining permission
from Council.

Q 64. CA Ajitnath is Special Executive Magistrate. He also took over as the Executive Chairman
of Software Company on 1.4.2023. He is also a leading income tax practitioner and
consultant for derivative products. He resides in Chennai near to the ION commodity stock
exchange and does trading in commodity derivatives. Every day, he invests nearly 40% of
his time to settle the commodity transactions. He has not taken any permission for
becoming Special Executive Magistrate. However, he has got special permission of Council
of ICAI for becoming Executive Chairman. Is CA Ajitnath liable for professional
misconduct?
[RTP-May 21, MTP-Nov. 21]
Ans: Engagements in Other Occupations:
 As per Clause (11) of Part I of First Schedule of CA Act, 1949, a member in practice is
deemed to be guilty of professional misconduct if he engages in any business or occupation
other than the profession of Chartered Accountant unless permitted by the Council so to
engage.
 However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.
 In this case, C.A. Ajitnath is Special Executive Magistrate, engaged in the occupation of
trading in commodity derivatives and also took over as the Executive Chairman on
01.04.2022
 In this context, it may be noted that the Special Executive Magistrate which is generally
permitted for Members of the Institute in practice, further specific permission is required
for holding the position of Executive Chairman and getting engaged in the occupation of
trading in commodity derivatives.
 In the given situation, CA Ajitnath is acting as Special Executive Magistrate which is
generally permitted for Members of the Institute in practice. Further, he is engaged in the
occupation of trading in commodity derivatives which is not covered under the general
permission. He also took over as the Executive Chairman for which specific permission is
required. CA Ajitnath got the permission for the same from the Council of ICAI.

41
 Conclusion: CA Ajitnath is not guilty for acting as Special Executive Magistrate as it is covered
under the general permission. He is also not guilty for holding the position of Executive
Chairman after getting specific permission of the Institute.
However, he is guilty of professional misconduct under Clause (11) of Part I of First Schedule of
Chartered Accountants Act, 1949 for getting engaged in the occupation of trading in commodity
derivatives which is not covered under the general permission.

Q 65. Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: CA Arjit, a practicing Chartered Accountant was on Europe tour between 15-9-23
and 25-9-23. On 18-9-23 a message was received from one of his clients requesting for a
stock certificate to be produced to the bank on or before 20-9-23. Due to urgency, CA Arjit
directed his assistant, who is also a Chartered Accountant to sign and issue the stock
certificate after due verification, on his behalf.
Ans: Signing of Stock Certificate:
 As per clause 12 of Part I of the First Schedule of the CA Act, 1949, a CA in practice is
deemed to be guilty of professional misconduct “if he allows a person not being a member
of the Institute in practice or a member not being his partner to sign on his behalf or on
behalf of his firm, any balance sheet, profit and loss account, report or financial
statements”.
 In this case CA Arjit allowed his assistant who is not a partner but a member of the ICAI to
sign stock certificate on his behalf and thereby commits misconduct.
Conclusion: CA Arjit is guilty of professional misconduct under clause 12 of Part I of First
Schedule of the CA Act, 1949.

Q 66. Parth Associates, a Chartered Accountants Firm is having a relationship with a multi-
national accounting firm in India. The ICAI required that all firms having networking
relationship with any other entity need to furnish information online within the stipulated
time. Parth Associated failed to respond. Comment on this with reference to professional
misconduct, if any.
[Nov. 18 (4 Marks)]
Ans: Failed to supply information called for:
 Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949, a
member, whether in practice or not, will be deemed to be guilty of professional misconduct
if he does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate authority.
 In the given case, Parth Associates, a Chartered Accountants Firm is having a relationship
with a multi-national accounting firm in India. The ICAI required that all firms having
networking relationship with any other entity need to furnish information online within the
stipulated time. Parth Associated failed to respond.

42
 Conclusion: Parth Associates will be deemed to be guilty of professional misconduct as per
Clause 2 of Part III of the First Schedule to the Chartered Accountants Act, 1949.

Q 67. Discuss the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto Mr. Rohit, a Chartered Accountant in practice has been elected as the treasurer of
a Regional Council of the Institute. The Regional Council had organized an international
tour through a tour operator during the year for its members. During the audit of the
Regional Council, it was found that Mr. Rohit had received a personal benefit of ` 50,000
from the tour operator.
[MTP-Oct. 20, March 23]
Ans: Bringing disrepute to profession:
 Section 21 of the Chartered Accountants Act, 1949 provides that a member is liable for
disciplinary action if he is guilty of any professional or “Other Misconduct.” Other
misconduct has been defined in Part IV of the First Schedule and Part III of the Second
Schedule.
 These provisions empower the Council to inquire into any misconduct of a member even it
does not arise out of his professional work. This is considered necessary because a
chartered accountant is expected to maintain the highest standards of integrity even in his
personal affairs and any deviation from these standards, even in his non-professional work,
would expose him to disciplinary action.
 The Council has also laid down that among other things “misappropriation by an office-
bearer of a Regional Council of the Institute of a large amount and utilization thereof for his
personal use” would amount to “other misconduct”.
 In the instant case, receipt of personal benefit of ` 50,000 from the tour operator by
Mr. Rohit for organising an international tour as treasurer of a Regional Council of the
Institute would amount to other misconduct as per section 21.
Conclusion: Mr. Rohit would be held guilty for other misconduct.

Q 68. Lion Ltd. Has applied to a bank for loan facilities. The bank on studying the financial
statements of the company notices some discrepancies in the books of the company. Upon
discussion with the auditor of the company, the bank manager requested for detailed
information regarding a few items in the financial statements. The information is available
in the working paper file of the auditor. What should be the response of the auditor in this
regard?
[Nov. 20 (5 Marks)]
Ans: Divulging information obtained in the course of audit:
 As per Clause (1) of Part I of the Second Schedule to the CA Act, 1949, a chartered
accountant in practice shall be deemed to be guilty of professional misconduct if he
discloses information acquired in the course of his professional engagement to any person
other than his client, without the consent of the client or otherwise than as required by law
for the time being in force.

43
  SA 200 on “Overall Objectives of Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing” requires that the auditor should respect
confidentiality of information acquired in the course of his work and should not disclose
any such information to a third party without specific authority or unless there is a legal or
professional duty to disclose
 In the instant case, Lion Ltd. Has applied to a bank for loan facilities and the bank has
asked the auditor for detailed information regarding few items in the financial statements
available in his working papers. Having regard to the position stated earlier, the auditor
cannot disclose the information in his possession without specific permission of the client.
 As far as working papers are concerned, working papers are the property of the auditor
Auditor may at his discretion, make portions of or extracts from his working papers
available to his client.
Conclusion: There is no requirement compelling the auditor to divulge information obtained in
the course of audit and included in the working papers to any outside agency except as and when
required by any law or permitted by the client.

Q 69. AP & Co., a firm of Chartered Accountants, was appointed by D Ltd., to evaluate the cost
of a new product manufactured by it for their information system and fixation of fair
market price. Partner „P‟ of the CA firm is a non-executive director of the Company.
Comment with reference to Chartered Accountants Act, 1949 and Regulations there to.
[May 18 (4 Marks)]
OR
Comment on the followings: A firm of CAs were appointed by a company to evaluate the
costs of the various products manufactured by it for their operation system. One of the
partners of the firm of chartered accountants was a non-executive director of the company.
[Nov. 20 (5 Marks)]
Ans: Evaluation of Cost structure:
 Clause 4 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 desists a
chartered accountant in practice to express opinion on financial statements of an enterprise
in which he, his firm or a partner in his firm has a substantial interest.
 In the present case, the firm has been appointed to evaluate the costs of the various products
manufactured by it for their operation system, not for expressing opinion on F.S., so it
cannot be construed to be misconduct, as it is a verification of facts and no opinion is
expressed.
Conclusion: There is no professional misconduct in evaluating the costs of a company in which
one of the partners of firm is a non-executive director.
However, the firm while accepting the position as auditor in future would have to consider
whether it would be possible to act in an independent manner and express opinion on financial
statements.

44
Q 70. Comment with the reference to the Chartered Accountants Act, 1949 and schedules
thereto: MASS Ltd; a company registered under the Companies Act, 2013 has created a
separate Trust “MASS Employees Gratuity Fund Trust”. Both the Company and Trust are
under the same management. Mr. Raj is the auditor of both the entities. Mr. Raj has
observed that some part of the expenditure was not applied towards the objects of the
Trust. He informed the matter to the Board of Trustees through a separate report but did
not qualify the Audit Report of the Trust.
[Nov. 18 (4 Marks)]
Ans: Non-disclosure of irregularities
 A chartered Accountant in practice is deemed to be guilty of professional misconduct under
clause 5 of Part 1 of the Second Schedule if he “fails to disclose a material fact known to
him which is not disclosed in a financial statement but disclosure of which is necessary to
make the financial statement not misleading”.
 In this case, the Chartered Accountant was aware of the contraventions and irregularities
committed by the trust as these were referred to in the confidential report given by the
Chartered Accountant to the trustees of the company. However, he had issued the annual
accounts without any qualification.
Conclusion: Mr. Raj is guilty of professional misconduct if amount of irregularities is proved
material.

Q 71. CA Z who conducted statutory audit of a Haryana daily „New Era‟ certified the circulation
figures based on Management Information System Report (M.I.S Report) without
examining the books of Account.

OR
Give your comments with reference to the CA Act, 1949 and schedules thereto: Mr. Z is a
Practicing CA. He issued a certificate of consumption which did not reflect the correct
factual position of the consumption of raw material by the concerned entity. It is found
that the certificate is given on the basis of data appearing in the minutes of meeting of
Board of Directors.
[MTP-Oct. 18]
OR
CA. Z, a practicing Chartered Accountant issued a certificate of circulation of a periodical
without going into the most elementary details of how the circulation of a periodical was
being maintained i.e., by not looking into the financial records, bank statements or bank
pass books, by not examining evidence of actual payment of printer‟s bills and by not
caring to ascertain how many copies were sold and paid for. Is CA. Z liable to professional
misconduct? Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto.

[MTP-Oct. 22, April 231]

45
Ans: Failure to exercise due diligence and to obtain necessary information:
 Clause 2 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be
guilty of professional misconduct if he Certifies or submits in his name or in the name of
his firm a report of an examination of financial statements unless the examination of such
statements and the related records has been made by him or by a partner or an employee in
his firm or by another CA in practice.
 Clause 7 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be
deemed to be guilty of professional misconduct if he “does not exercise due diligence or is
grossly negligent in the conduct of his professional duties”.
 Clause 8 of Part I of Second Schedule to CA Act, 1949 states that if a CA in practice fails
to obtain sufficient information to warrant the expression of an opinion or its exceptions are
sufficient material to negate the expression of an opinion, the CA shall be deemed to be
guilty of a professional misconduct.
 In the present case, Mr. Z, did not exercise due diligence and is grossly negligent in the
conduct of his professional duties since he certified the circulation figures without the
examination of records and other required documents. He should not express his opinion
before obtaining the required data and information.
 As an auditor, Mr. Z ought to have verified the basic records such as print order, printer‟s
bill. Number of copies sold and paid for, number of copies returned unsold to ensure the
correctness of circulation figures.
Conclusion: Mr. Z will be held guilty of professional misconduct as per clauses 2, 7 and 8 of
Part 1 of Second Schedule of Chartered Accountants Act, 1949.

Q 72. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: Abhisshek is the auditor of Zyon Ltd., which has a turnover of ` 200
crores. The audit fee for the year is fixed at ` 50 lakhs. During the year, the company offers
Mr. Abhiskek, assignment of management consultancy within the meaning of Section
2(2)(iv) of the CA Act, 1949 for a remuneration of ` 1 Crore. A seeks your advice on
accepting the assignment.
Ans: Appointment as a statutory auditor of a PSUs‟/Govt company/listed company and other
public company:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 Council General Guidelines, 2008, specifies that a member of the Institute in practice shall
be deemed to be guilty of professional misconduct if he accepts the appointment as a
statutory auditor of a PSUs‟/Govt companies/listed companies and other public company
having a turnover of ` 50 crores or more in a year and accepts any other work(s) or
assignment(s) or service(s) in regard to same undertaking(s) on a remuneration which in
total exceeds the fee payable for carrying out the statutory audit of the same undertaking.

46
  For this purpose, the other work/services include Management Consultancy and all other
professional services permitted by Council excluding audit under any other statute,
Certification work required to be done by the statutory auditor and any representation
before an authority.
Conclusion: In view of the above position, it would be a misconduct on Abhishek‟s part if he
accepts the management consultancy assignment.
NOTE
Applicability of Chapter IX of Council General Guidelines, 2008 seems to be redundant in case
of companies, because as per Sec. 144 of the Companies Act, 2013, auditor of a company cannot
render management services to the company, its holding company or subsidiary company,
directly or indirectly.

Q 73. Comment on the following with reference to the Chartered Accountants Act, 1949, and
Schedules thereto: M (P) Ltd. Appointed CA. P for some professional assignments like
company‟s ROC work, preparation of minutes, statutory register etc. For this, CA. P
charged his fees depending on the complexity and the time spent by him on each
assignment.
Later on, M (P) Ltd. Filed a complaint against CA. P to the ICAI that he has charged
excessive fees for the assignments comparative to the scale of fees recommended by the
Committee as well as duly considered by the Council of ICAI.
[MTP-April 18]
Ans: Charging Excess Fees:
 Prescribed scale of fees for the professional assignments done by the chartered accountants
is recommendatory in nature. Fees in any professional assignment depend upon the mutual
agreement and understanding between the member and the client.
 Charging fee more than the fees recommended for a professional assignment does not
constitute any misconduct in the context of the provisions of the Chartered Accountants
Act. 1949 and regulation made thereunder.
 In the given case, CA. P has charged excess fees comparative to the scale of fees
recommended by the Committee as well as duly considered by the Council of ICAI.
Conclusion: Scale of fees recommended by the Committee as well as duly considered by the
Council of ICAI is only recommendatory and not mandatory, hence no misconduct arise on part
of Mr. P.

Q 74. Mr. Kushal, a practicing Chartered Accountant has signed the GST Audit Reports, Tax
Audit Reports u/s 44AB of the Income-tax Act, 1961 for the financial year 2022-23 that are
filed online using Digital Signature and without generating UDIN on the ground that there
is no field for mentioning UDIN on digitally signed online reports. Is the contention of Mr.
Kushal valid? Give your comments with reference to the Chartered Accountants Act, 1949
and schedules thereto.
[Nov. 20 (4 Marks)]

47
Ans: Non-Generation of UDIN:
 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 Chapter XIV of Council General Guidelines, 2008, specifies that a member of the Institute
in practice shall generate Unique Document Identification Number (UDIN) for all kinds of
the certification, GST and Tax Audit Reports and other Audit, Assurance and Attestation
functions undertaken/signed by him which made mandatory from the following dates
through announcements published on the website of the ICAI www.icai.org at the relevant
time:
(i) For all Certificates w.e.f. 1st February, 2019.
(ii) For all GST and Tax Audit Reports w.e.f. 1st April, 2019.
(iii) For all other Audit, Assurance and Attestation functions w.e.f. 1st July, 2019.
Conclusion: Contention of Mr. Kushal is not valid as non-generating of UDIN amounts to
professional misconduct under Clause 1, Part II of Second Schedule due to non-compliance of
Council General Guidelines, 2008.

Q 75. CA Dhawan, a chartered accountant In practice availed of a loan against his personal
investments from a bank. He issued 2 cheques towards repayment of the said loan as per
the instalments due. However, the cheques were returned back by the bank with the
remarks “Insufficient funds”. Comment reference to the Chartered Accountants Act, 1949.
[Nov. 17 (4 Marks)]
Ans: Bringing disrepute to the profession:
 As per Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if in the opinion of the council, that member brings disrepute to the profession
or the Institute, as a result of his action, whether or not related to his professional work.
 Accordingly, a CA is also expected to maintain the highest standards and integrity even in
his personal affairs and any deviation from these standards calls for disciplinary action.
 In the present case, two cheques were dishonoured and returned back with the remarks
“Insufficient Funds”. Issuing cheques without having sufficient balance in the account is
punishable offence under the Negotiable Instruments Act, 1881.
Conclusion: As the cheques were dishonoured due to insufficiency of funds, the drawer will be
held guilty of offence under Negotiable Instruments Act, 1881 and consequently he would be
held guilty of “Other Misconduct”.

Q 76. Masters & Co., a sole proprietary Chartered Accountant firm in practice with an office in a
busy belt of a city, had great difficulty in regularly attending to the consultancy needs of his
client who are mostly located in an industrial cluster in a nearby outskirt which is situated
at a distance of 26 kms from the office of the firm. To mitigate the difficulty and to have
ease of business, a facilitation center was opened in the industrial cluster. The proprietor

48
 managed both the office and the facilitation center, by himself. No intimation was made to
the institute of chartered accountants of India. Examine whether there is any professional
misconduct in this respect.
[May 18 (5 Marks)]
Ans: Maintenance of Separate office:
 In terms of Sec. 27 of CA Act, 1949 if a chartered accountant in practice has more than one
office in India, each one of these offices should be in the separate charge of a member of
the Institute.
 There is however an exemption from the above if the second office is located in the same
premises, in which the first office is located; or the second office is located in the same city,
in which the first office is located; or the second office is located within a distance of 50
kms from the municipal limits of a city, in which the first office is located.
 Regulation 189 of CA Regulations, 1988 requires that a CA in practice or a firm of such
CAs shall inform the Council within one month of the opening or closing of a branch
office.
 In the present case, proprietor of Masters & Co. has opened a new office at a distance of 26
Kms from the existing office and managing both offices by himself. However, no
intimation was made to the ICAL.
Conclusion: Though there is no problem in managing both the offices, but misconduct arises due
to non-intimation to Council of ICAI.

Q 77. CA Santosh, a newly qualified professional with certificate of practice, approached CA

Pant, the auditor of his father‟s company M/s Max Ltd., to allow him to have some
practical and professional knowledge and experience in his firm before he can set up his
own professional practice. CA Pant allowed him to sit in his office for 6 months and allotted
a small chamber with other office infrastructure facility. In the course of his association
with CA Pant‟s office, he used to provide tax consultancy independently to the client of the
firm and also filed few IT and GST return and represented himself before various tax
authorities on behalf of the firm although no documents were signed by him. During his
association in CA Pant‟s office he did not get any salary or share of profit or commission
but only reimbursement of usual expenses like conveyance, telephone etc. was made to him.
After the end of the agreed period, he was given a lump sum amount of ` 3,00,000 by CA
Pant for his association out of gratitude.
Examine the case in the light of code of professional misconduct.
[May 19 (5 Marks), MTP-March 22, April 23]
Ans: Allowing Others to use firm's name
 As per Clause (1) of Part 1 of First Schedule to the Chartered Accountants Act, 1949, a CA
in Practice is deemed to be guilty of professional Misconduct if he allows any person to
practice in his name as a chartered Accountant, unless such person is also a Chartered
Accountant in practice, and is in partnership with, or employed by himself.

49
  The above clause is intended to safeguard the public against unqualified accountant
practicing under the cover of qualified accountants. It clause ensures that the work of the
accountant will be carried out by a Chartered Accountant who may be his partner, or his
employee and would work under his control and supervision.
 In the present case, CA Pant allowed Mr. Santosh, another Chartered Accountant, holding
Certificate of Practice to practice in his firm for a period of 6 months, whereas Mr. Santosh
is not a partner or employee. Further after expiry of six months, Mr. Pant also gives Mr.
Santosh a lump sum amount of `3,00,000 for his association out of gratitude.
Conclusion: Mr. Pant will be guilty of professional misconduct by virtue of Clause 1 of Part I of
First Schedule as he allows another person to practice in his firm name, whereas other person (Mr.
Santosh) is neither a partner nor an employee.

Q 78. Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His widow
proposes to sell the practice of her husband to Mr. Pardeshi, Chartered Accountant, for t 5
lakhs. The price also includes right to use the firm name – Qureshi and Associates. Can
widow of Qureshi sell the practice and can Mr. Pardeshi continue to practice in that name
as a proprietor?
Ans: Sale of Goodwill:
 With reference to Clause (2) of Part I to the First Schedule to CA Act, 1949, the Council of
the Institute considered whether the goodwill of a proprietary concern of chartered
accountant can be sold to another member who is otherwise eligible, after the death of the
proprietor.
 It lays down that the sale is permitted subject to certain conditions discussed in the above
flowchart. It further resolved that the legal heir of the deceased member has to obtain the
permission of the Council within a year of the death of the proprietor concerned.
 In given case, the widow of Mr. Qureshi, who has proposed to sell the practice for `5 lakhs
is in effect proposing the sale of goodwill.
Conclusion: Act of Mrs. Qureshi is permissible and Mr. Pardeshi can continue to practice in that
name as a proprietor.
Q 79. Mr. „Abdulla‟ is a practicing Chartered Accountant working as proprietor of M/s Abdulla
& Co. He went abroad for 3 months. He delegated the authority to Mr. „Yash‟ a Chartered
Accountant his employee for taking care of routine matters of his office. During his absence
Mr. „Yash‟ has conducted the under mentioned jobs in the name of M/s Abdulla & Co.
 He issued the audit queries to client which were raised during the course of audit.
 He issued production certificate to a client under GST Laws.
 He attended the Income Tax proceedings for a client as authorized representative
before Income Tax Authorities.
Please comment on eligibility of Mr. „Yash‟ for conducting such jobs in name of M/s
Abdulla & Co. and liability of Mr. „Abdulla‟ under the Chartered Accountants Act, 1949.
[MTP-April 18, RTP-Nov. 19]

50
 [Nov. 19 (5 marks)]
Ans: Delegation of Certification work:
 As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he
allows a person not being a member of the Institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements”.
 In this case CA „Abdulla‟ proprietor of M/s Abdulla & Co, went to abroad and delegated
the authority in another Chartered Accountant Mr. Yash, his employee, for taking care of
routine matters of his office who is not a partner but a member of the Institute of Chartered
Accountants.
 The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed, may he delegated and such
delegation will not attract provisions of clause 12. Examples of such instances are issue of
audit queries. Asking for information or issue of questionnaire, attending to routine matters
in tax practice etc.
Conclusion:
(i) Issuing audit queries during the course of audit falls under routine work, which can be
delegated by the auditor. Therefore, there is no misconduct in this case.
(ii) Issuance of production certificate to a client under GST Laws by Mr. “Yash” is not a
routine work and it is outside his authorities. Thus, CA „Abdulla‟ is guilty of professional
misconduct under clause 12 of Part I of First Schedule of the Chartered Accountants Act,
1949.
(iii) Attending Income tax proceedings for a client as authorized representative before Income
Tax Authorities falls under routine work, hence Mr. Yash, the employee of M/s Abdulla &
Co. can attend to routine matter in tax practice. Therefore, there is no misconduct in this
case.

Q 80. Mr. Keshav, Chartered Accountant in practice as a sole proprietor at Chennai has an office
in the suburbs of Chennai. Due to increase in the income tax assessment work, he opens
another office near the income tax office, which is within the city and at a distance of 30
kms. From his office in the suburb. For running the new office, he has employed a retired
Income Tax Commissioner who is not a Chartered Accountant. Comment.
[May 19 (4 Marks)]

Ans: Maintenance Of Branch office:

 In terms of Sec. 27 of the CA Act, 1949 if a CA in practice has more than one office in
India, each one of these offices should be in the separate charge of a member of the
Institute.

51
  There is however an exemption from the above if the second office is located in the same
premises, in which the first office is located; or the second office is located in the same city,
in which the first office is located; or the second office is located within a distance of 50
kms from the municipal limits of a city, in which the first office is located.
 In the given case, Mr. Keshav, CA in practice as a sole proprietor at Chennai has an office
in suburbs of Chennai, and due to increase in the work he opened another branch within the
city near the income tax office. He also employed a retired income tax commissioner to run
the new office and the second office is situated within a distance of 30 kilometers from his
office in the suburb.
Conclusion: As the distance between new office and municipal limits of Suburbs (area where
existing office is situated) is less than 50 Km., Mr. Keshav would not be liable for any
misconduct.
However, he is bound to declare which of the two offices is the main office.

Q 81. CA Ravi, a practising Chartered Accountant, was proprietor of M/s. Ravi & Associates, CA
Ravi died on 15th September, 2022 due to cardiac arrest. Only family member left behind
CA Ravi was his wife, Roohi. On 30th September, 2023, Roohi sold the practice of her
husband to CA Dhruv for `25 Lakhs along with right to use the firm name i.e., M/s. Ravi
Associates and requested the Institute to consider the effect of such sale. Give your
comments on the following issues with reference to the Chartered Accountants Act, 1949
and schedules thereto:
(i) Whether Roohi can sell the practice to CA Dhruv?
(ii) Can CA Dhruv continue to practice as proprietor in name of M/s. Ravi &
Associates?
[May 22 (4 Marks)]
Ans: Sharing of Profits with widow of deceased Partner:
With reference to Clause 2 of Part I of First Schedule to CA Act, 1949, in case of sole
proprietorship firm, the Council of ICAI has resolved that the sale / transfer of goodwill shall be
permitted in respect of cases where the death of the proprietor occurred on or after 30.08.1998
provided:
 ICAI‟s permission to practice in the deceased‟s firm name is sought within a year of death.
(In such a case, name of the firm is kept in abeyance till one year from the date of death).
 In case there exist a dispute as to the legal heir of the deceased proprietor, information as to
the existence of the dispute is received by the Institute within a year of the death. (In such a
case, name of the firm is kept in abeyance till one year from the date of settlement of
dispute).
In the given case, CA Ravi, a practising Chartered Accountant, was proprietor of M/s. Ravi &
Associates, CA Ravi died on 15th September, 2022 due to cardiac arrest. Only family member left
behind CA Ravi was his wife, Roohi. On 30th September, 2023, Roohi sold the practice of her
husband to CA Dhruv for `25 Lakhs along with right to use the firm name i.e., M/s. Ravi &
Associates and requested the Institute to consider the effect of such sale.

52
 Conclusion:
 As more than one year elapsed since date of death of Mr. Ravi, Roohi cannot sell the
practice to CA Dhruv on 30.9.2023.
 CA Dhruv cannot practice in the name of M/s Ravi & Associates as the transaction of sale
of goodwill occurs after one year of death of Mr. Ravi.

Q 82. Comment on the following with reference to the Chartered Accountants Act, 1949 and
Schedules thereto: M/s Baghwan, a firm of Chartered Accountants created a website
www.baghwanindia.com, The website besides containing details of the firm and bio-data of
the partners also contains the photographs of all the partners of the firm.
Ans: Hosting Details on Website:
 As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949, a firm of chartered accountant can create its own website
using any format subject to guidelines.
 However, the website should be so designed that it does not solicit clients or professional
work and should not amount to direct or indirect advertisement.
 The guidelines of the ICAI allows a firm to put up the details of the firm, bio-data of
partners and display of a passport size photograph.
Conclusion: M/s Bhagwan had complied with all the guidelines and there does not appear any
violation of the Chartered Accountants Act, 1949 and its Regulations.

Q 83. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
Mr. Vinay, a chartered accountant in practice, created his own website in attractive format
and highlighted the contents in purple colour. The website also displayed the nature of
assignments handled along with the names of clients without such requirement from any of
the regulator. He also circulated the information contained in the website through e-mail to
acknowledge public at large about his expertise. However, he did not intimate his website
address to the Institute.
[Nov. 20 (4 Marks)]
Ans: Circulating Information Contained in Own Website:
 As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.
 Guidelines issued by the Council of the ICAI permit creation of own website by a chartered
accountant in his or his firm name and no standard format or restriction on colours is there.
 As per the guidelines, members or the firm, should ensure that none of the information
contained in the website be circulated on their own or through e-mail or by any other mode
except on a specific “Pull” request.

53
  Further, nature of assignments handled can be displayed on the website only on specific
“pull” request. Names of clients and fee charged cannot be given without such requirement
from any of the regulator.
 The website address of the member be obtained on annual basis in the annual form required
to be filed by the member while paying fee and the same be taken as entry on record.
 In the given case, Mr. Vinay has circulated the information contained in the website
through e-mail to public at large and has displayed the nature of assignments handled along
with the name of clients without such requirement from the regulator.
Conclusion: Mr. Vinay is guilty of professional misconduct under Clause 6 of Part I of First
Schedule as name of clients are displayed on the website without any requirement of regulator,
website information is circulated through e-mail and website address not intimated to the
Institute.

Q 84. Mr. Aayush, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered
Accountants a firm of CA‟s; requesting them to allot him some professional work. As he did
not have a significant practice or clients, he also wrote a letter to M/s ABC, a firm of
Chartered Accountants for securing professional work. Mr. Clever, another CA, informed
ICAI regarding Mr. Aayush‟s approach to secure the professional work. Is Mr. Aayush
wrong in soliciting professional work?
[MTP-March 23]
Ans: Solicitation of professional work from another CA:
 As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement,
personal communication or interview or by any other means.
 However, nothing in clause 6 shall be construed as preventing or prohibiting any Chartered
Accountant from applying or requesting for or inviting or securing professional work from
another chartered accountant in practice.
 Such a restraint has been put so that the members maintain their independence of judgment
and may be able to command respect from their prospective clients.
 In the given case, Mr. Aayush wrote letters only to other CAs, M/s XY and M/s ABC
requesting them to allot some professional work to him, which is not prohibited under
clause 6.
Conclusion: Mr. Aayush is not wrong in soliciting professional work from another CA, hence
there is no professional misconduct.

Q 85. Mr. Purab is a Chartered Accountant accepted the appointment as Statutory Auditor of the
Company Chimna Ltd. Without communicating with the previous auditor before accepting
the audit. He also failed to ascertain the compliance of requirement of Section 139 and 140
of the Companies Act, 2013 in respect of the appointments have been duly complied with.
Ans: Communication with previous auditor and Compliance of Sections 139 & 140:

54
  Clause (8) of Part I of the First Schedule to the CA Act, 1949 requires communication by
the incoming auditor with the previous auditor before accepting a position by him.
 Clause (9) of Part I of the First Schedule to the CA Act, 1949, provides that a member in
practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a company without first ascertaining from it whether the
requirements of Sections 139 and 140 of the Companies Act, 2013, in respect of such
appointment have been duly complied with.
 Under clause (8), it is obligatory on the incoming auditor to communicate with previous
auditor and ascertain from the Company that the appropriate procedure in the matter of his
appointment has been duly complied with so that no shareholder or retiring auditor may, at
a later date, challenge the validity of such appointment.
 In this case Mr. Purab accepted the appointment as Statutory Auditor of the Company
Chimna Ltd. Without communicating with the previous auditor. Further, he accepted the
appointment without first ascertaining whether the requirement of Sections 139 and 140 of
the Companies Act, 2013 in respect of the appointments have been duly complied with.
Conclusion: Therefore, Mr. Purab is liable for misconduct under clause 8 and Clause 9 since he
accepted the appointment without communicating with previous auditor as well as for not
verifying the compliance of statutory requirements.

Q 86. A Chartered Accountant holding certificate of practice and having four articled clerks
registered under him accepts appointment as a full-time lecturer in a college. Also he
becomes a partner with his brother in a business. Examine his conduct in light of CA Act,
1949 and regulations thereunder.
Ans: Partnership with a relative and entering into business:
 Clause (11) of Part 1 of the First Schedule to the CA Act, 1949 debars a CA in practice
from engaging in any business or occupation other than the profession of chartered
accountancy unless permitted by the Council of the Institute so to engage.
 This clause, in effect, has empowered the Council of the Institute to permit chartered
accountants in practice to engage in any other business or occupation considered fit and
proper. Accordingly, the Council had formulated Regulations 190A and 191 to the
Chartered Accountants Regulations, 1988 to provide a basis for considering applications of
chartered accountants seeking permission to engage in other business or occupation.
 A member can accept full-time lecturer-ship in a college only after obtaining the specific
and prior approval of the Council as also becoming a partner in a business with his brother
would require specific permission.
Conclusion: CA is liable for professional misconduct since he failed to obtain specific and prior
approval of the Council in each case.
Q 87. Akash, a chartered accountant in practice is owner of three agriculture lands. He lost his
father due to Covid Pandemic. After death of his father, he started carrying out
agricultural activities. His neighbour Raja who is a farmer, filed a complaint against him to

55
 ICAI that being a member he is carrying out agricultural activities, therefore, he is liable
for misconduct. You are required to examine the same with reference to the CA Act, 1949
and Schedules thereto.
[MTP-April 22]
Ans: Engaging into Agricultural Activity:
 As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
engages in any business or occupation other than the profession of Chartered Accountant
unless permitted by the Council so to engage.
 However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.
 In this case, CA Akash is owner of 3 agriculture lands, and he is carrying out agricultural
activities which is covered under the general permission.
Conclusion: CA Akash is not guilty of professional misconduct and complain of neighbour is not
justified.

Q 88. Write a short note on Other Misconduct.

Ans: Other Misconduct:
 Other misconduct has been defined in Part IV of the First Schedule and Part III of the
Second Schedule. These provisions empower the Council to inquire into any misconduct of
a member even it does not arise out of his professional work. This is considered necessary
because a CA is expected to maintain highest standards of integrity even in his personal
affairs and any deviation from these standards, even in his non-professional work, would
expose him to disciplinary action.
 For example, a member who is found to have forged will of a relative, would be liable to
disciplinary action even though the forgery may not have been done in the course of his
professional duty.
 Other misconduct would also relate to conviction by a competent court for an offence
involving moral turpitude punishable with transportation or imprisonment to an offence not
of a technical nature committed by the member in his professional capacity. [Sec. 8(v)].

Q 89. Mr. Gautam & Mr. Mahaveer, partners of a Chartered Accountant Firm, one in-charge of
Head Office and another in-charge of Branch at a distance of 80 km. from the municipal
limits, puts up a nameboard of the firm in both premises and also in their respective
residences. Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto.
[MTP-Nov. 21]
Ans: Putting up of name-board:
 Council of the Institute has decided that with regard to the use of the name-board, there will
be no bar to the putting up of a name-board in the place of residence of a member with the

56
 designation of chartered accountant, provided, it is a name-plate or board of an individual
member and not of the firm.
 In the given case, partners of CA Firm, put up a name-board of the firm in both offices and
also in their respective residences.
Conclusion: Mr. Gautam & Mr. Mahaveer are guilty of misconduct, as name-board of the firm
cannot be put in place of residence.

Q 90. Mr. Umesh is a practising Chartered Accountant. Mr. Yogesh is a practising advocate
representing matters in the court of law, Umesh and Yogesh decided to help each other in
matters involving their professional expertise. Accordingly, Mr. Umesh recommends Mr.
Yogesh in all litigation matters in the court of law and Yogesh consults Umesh in all matters
relating to finance and other related matters, which come to him in arguing various cases
consequently they started sharing profits of their professional work. Is Mr. Umesh liable
for professional misconduct?
[Nov. 22 (4 Marks)]
Ans: Sharing Fees with Advocate:
 As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
CA in practice is deemed to be guilty of professional misconduct if he pays or allows or
agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees
or profits of his professional business, to any person other than a member of the Institute or
a partner or a retired partner or the legal representative of a deceased partner, or a member
of any other professional body or with such other persons having such qualification as may
be prescribed, for the purpose of rendering such professional services to time in or outside
India.
 As per Clause 3 of Part I of the First Schedule to the CA Act, 1949, a CA in Practice is
deemed to be guilty of professional Misconduct if he accepts or agrees to accept any part of
the profits of the professional work of a person who is not a member of the Institute.
However, such a restriction does not apply in respect of member of any other professional
bodies or with such other persons having prescribed qualifications.
 For the purpose of Clauses (2) & (3), Regulation 53A of CA Regulations, 1988 allows
sharing of profit with an advocate.
Conclusion: Mr. Umesh will not be deemed to be guilty of professional misconduct as Clauses
(2) & (3) permits a CA in practice for profit sharing with members of any other professional
bodies or with such other persons having prescribed qualifications and advocates are prescribed
under Regulation 53A.

Q 91. M/s Supreme a firm of Chartered Accountants in practice develops a website

“supreme.com”. The colour chosen for the website was a very bright green and the website
was to run on a “push” technology where the name of the partners of the firm and the
major clients were to be displayed on the website without any disclosure obligation from
any regulator. Is this website in compliance with guidelines issued by ICAI in this regard?

57
Ans: Posting of Particulars on Website:
 As per guidelines of the ICAI laid down in Clause (6) of Part I of the First Schedule to the
CA Act, 1949, a chartered accountant of the firm can create its own website using any
format subject to guidelines.
 However, the website should be so designed that it does not solicit clients or professional
work and should not amount to direct or indirect advertisement.
 As per guidelines, there is no restriction on the use of colours. However, the website is
required to run on a “pull” technology and not on “push” technology; and the name of
clients and fees charged from them is not permitted to be appear on the website.
 Disclosure of names of clients and/or fees charged, on the website is permissible only
where it is required by a regulator, whether or not constituted under a statute, in India or
outside India, provided that such disclosure is only to the extent of requirement of the
regulator.
 In the present case, M/s Supreme, a firm of Chartered Accountants in practice develops a
website “supreme.com”. The colour chosen for the website was a very bright green and the
website was to run on a “push” technology where the name of the partners of the firm and
the major clients were to be displayed on the website without any disclosure obligation
from any regulator.
Conclusion: The firm would be liable for professional misconduct due to running website on
Push Technology and displaying name of clients on website without any requirement of
regulator.

Q 92. Comment on the following with reference to the Chartered Accountants Act, 1949, Code of
Ethics and Schedules to the Act: M/s XYZ, a firm of Chartered Accountants responded to a
tender from a State Government for computerization of land revenue records. For this
purpose, the firm also paid `50,000 as earnest deposit as part of the terms of the tender.
[Jan. 21 (4 Marks)]
Ans: Solicitation of Work:
 Clause 6 of Part I of First Schedule allows solicitation of client or professional work
through responding to tenders.
 Further Guidelines are being issued by Council allowing therein a member to respond to
tenders where minimum fees of the assignment is prescribed in the tender document itself
or where the areas are open to other professionals along with Chartered Accountants.
 Further, in respect of a non-exclusive area, members are permitted to pay reasonable
amount towards earnest money/security deposits.
 In the present case, since computerisation of property records does not fall within exclusive
areas for Chartered Accountants, M/s XYZ can respond to tenders as well as deposit
`50,000 as earnest deposit and shall not have committed any professional misconduct.
Conclusion: There is no professional misconduct on part of M/s XYZ.

58
Q 93. Discuss whether the following action by a Chartered Accountant would amount to
misconduct or not: A practising Chartered Accountant uses a visiting card in which he
designates himself, besides as Chartered Accountant, as
(i) Tax Consultant
(ii) Cost Accountant.
Ans: Using designation other than Chartered Accountant:
 Clause 7 of Part I of First Schedule to the CA Act, 1949 provides that a CA in practice is
deemed to be guilty of professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letter heads or sign boards.
 As per Section 7 of Chartered Accountants Act, 1949, every member of the institute in
practice shall use the designation of a chartered accountant.
 However, a degree of a university established by law in India or recognized by the Central
Government or a title indicating membership of the ICAI or of any other institution that has
been recognized by the Central Government or may be recognized by the council is
permitted to be mentioned.
 In the given case, a practising Chartered Accountant uses a visiting card in which he
designates himself, besides as Chartered Accountant, as Tax Consultant/Cost Accountant.
Conclusion: Concerned CA shall be held guilty of professional misconduct as per Clause (7) of
Part I of First Schedule to the Chartered Accountants Act, 1949.

Q 94. M/s. Blue & Co., Chartered Accountants were appointed as Auditors of Yellow Ltd. For the
F.Y. 202223. Since they declined to accept the appointment, the Board of Directors
appointed M/s Green & Co., a CA firm as the auditor in the place of M/s. Blue & Co. This
was accepted by M/s Green & Co. Discuss this with reference to CA Act, 1949 and
Companies Act, 2013.
[July 21 (4 Marks)]
Ans: Violation of Clause 9:
 Board can appoint the auditor in the case of casual vacancy u/s 139(8) of the Companies
Act, 2013. The non-acceptance of appointment by CA Blue does not constitute a casual
vacancy to be filled by the Board. In this case, it will be deemed that no auditor was
appointed in the AGM.
 Further, as per Sec. 139(10) of the Companies Act, 2013 when at any AGM, no auditor is
appointed or re-appointed, the existing auditor shall continue to be the auditor of the
company. The appointment of the auditor by the Board Is defective in law.
 Clause (9) of Part I of First Schedule to the CA Act, 1949 states that a CA is deemed to be
guilty of professional misconduct if he accepts an appointment as auditor of a company
without first ascertaining from it whether the requirements of Section 139, 140 and 142

59
 read with Section 141 of the Companies Act, 2013, in respect of such appointment have
been fully complied with.
Conclusion: M/s Green & Co. is guilty of professional misconduct as per clause 9 of the First
Schedule as he accepted the appointment without verification of statutory requirements.

Q 95. CA Zaid, is a leading income tax practitioner and consultant for derivative products. He
resides in Mumbai near to the PQR commodity stock exchange and does trading in
commodity derivatives. Every day, he invests nearly 50% of his time settle the commodity
transactions. Is CA Zaid liable for professional misconduct?
[RTP-May 18]
Ans: Engagement into other occupation:
 As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is
deemed to be guilty of professional misconduct if he “engages in any business or
occupation other than the profession of Chartered Accountant unless permitted by the
Council so to engage".
 However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.
 In this case CA Zaid is engaged in occupation of trading in commodity derivatives which is
not covered under general permission, hence specific permission of the Institute has to be
obtained.
Conclusion: If CA Zaid has obtained specific permission of the council, then there is no
misconduct, otherwise he will be deemed to be guilty of professional misconduct under clause 11
of Part 1 of First Schedule of CA Act, 1949.

Q 96. Give your comments with reference to the Chartered Accountants Act, 1949 and schedules
thereto: Yash & Co., a proprietary firm of Chartered Accountants was appointed as
concurrent auditor of a bank. Yash used his influence for getting some cheques purchased
and thereafter failed to repay the loan/overdraft.
[MTP-March 19]
Ans: Bringing disrepute to profession:
 Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that
member of the Institute, whether in practice or not, shall be deemed guilty of other
misconduct, if he in the opinion of the Council, brings disrepute to the profession or to the
Institute as a result of his action whether or not related to his professional work.
 Accordingly, a CA is also expected to maintain the highest standards and integrity even in
his personal affairs and any deviation from these standards calls for disciplinary action.
 In the present case Yash & Co, being a concurrent auditor used his position to obtain the
funds and failed to repay the same to the bank. This brings disrepute to the profession of a
CA.

60
 Conclusion: Yash & Co will be held guilty of other misconduct under clause 2 of Part IV of First
Schedule of the Chartered Accountants Act, 1949.

Q 97. Comment on the following with reference to the Chartered Accountants Act, 1949 and
schedules thereto: CA Harshil who is contesting Central Council Elections of Institute,
engages his Articled Assistant for his election campaigning promising him that he will come
in contact with influential people which will help to enhance his career after completion of
his training period.
[RTP-May 22]
Ans: Engaging Articled Assistance for personal work:
 As per Part IV of the First Schedule to the Chartered Accountants Act, a member of the
Institute. Whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(i) is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months;
(ii) in the opinion of the Council, brings disrepute to the profession or the Institute as a
result of his action whether or not related to his professional work.
 A member may be found guilty of “Other Misconduct”, as per clause 2, if he uses the
services of articles for personal work.
 In the given case, CA Harshil who is contesting Central Council Elections of Institute,
engages his Articled Assistant for his election campaigning promising him that he will
come in contact with influential people which will help to enhance his career after
completion of his training period.
Conclusion: CA Harshil would be guilty of Other Misconduct under Part IV of First Schedule
and liable to disciplinary action under Section 21.

Q 98. CSK and Associates are the statutory auditor of Human Ltd. Audit of the company is
pending for F.Y 2021-22 and 2022-23 due to a dispute between auditor and company with
respect to certain proposed remarks by the auditor in the audit report for F.Y. 2021-22.
The company removed the auditor on 02.05.2023 in shareholders meeting complying with
all legal formalities. CSK and Associates after coming to know about the removal,
intimated the Registrar of Companies (ROC) through letter highlighting the points of
dispute including non-existence of fixed assets, bogus creditors etc. Human Ltd complained
to ICAI against CSK and Associates for their above letter to ROC. Comment with
reference to the CA Act, 1949 and schedules thereto.
[May 23 (5 Marks)]
Ans: Disclosure of Information to third Party:
 Clause (1) of Part I of the Second Schedule to the CA Act, 1949 states that a chartered
accountant in practice shall be deemed to be guilty of professional misconduct if he
discloses information acquired in the course of his professional engagement to any person
other than his client, without the consent of the client or otherwise than as required by law
for the time being in force.

61
  An accountant in public practice has access to a great deal of information of his client,
which is of a highly confidential character. It is important for the work of an accountant and
for maintaining the dignity and status of the profession that he should treat such information
as having been provided to him, only to facilitate the performance of his professional duties
for which his services have been engaged. To divulge such information would be a breach
of professional confidence, which may give rise to the most serious consequences, even to
an action by the client for the loss suffered by him through such a breach. The accountant‟s
duty not to disclose continues even after the completion of his assignment.
 In the given case, CSK and Associates are the statutory auditor of Human Ltd. and a dispute
exist among auditor and company with respect to certain proposed remarks by the auditor in
the audit report for F.Y. 2021-22. Company removed the auditor on 02.05.2023 in
shareholders meeting complying with all legal formalities. CSK and Associates after
coming to know about their removal, intimated the Registrar of Companies (ROC) through
letter highlighting the points of dispute including non- existence of fixed assets, bogus
creditors etc. human Ltd complained to ICAI against CSK and Associates for their above
letter to ROC.
Conclusion: Applying the above provision, CSK & Associates will be liable for professional
misconduct under clause 1 of Part I of the Second Schedule to the Chartered Accountants Act,
1949.

Q 99. Comment on the following with reference to the with reference to the Chartered
Accountants Act, 1949 and Schedules thereto:
CA Deva started practice in Punjab in the year 2019. CA Deva issued “Turnover
Certificate‟ for M/s. ASAUS Traders to be forwarded to the Bank for the purpose of
availing cash credit facility and machinery term loan. Brother of CA Deva was proprietor
of M/s. ASAUS Traders.
[RTP-Nov. 22]
Ans: Accepting appointment as auditor:
 As per Clause (4) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty if he expresses his opinion on
financial statements of any business or enterprise in which he, his firm, or a partner in his
firm has a substantial interest.
 Further, it is not permissible for a member to undertake the assignment of certification,
wherein the client is relative of the member. The “relative” for this purpose would refer to
the definition mentioned in AS 18.
 In the given situation, CA Deva started practice in Punjab in the year 2019. CA Deva issued
Turnover certificate for M/s. ASAUS Traders to be forwarded to the Bank for the purpose
of obtaining Loan. Brother of CA Deva is proprietor of M/s. ASAUS Traders. Brother is
very well covered in the definition of relative mentioned in Accounting Standard AS 18.
Conclusion: CA Deva is guilty of professional misconduct.

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Q 100. You were the statutory auditor of Speed Ltd., a PSU, for the year 2023-24. In the course of
your audit, you did not observe any fraud having been committed during that year.
However, the C & AG audit staffs during their routine inspection found that chief cashier
of the Company have committed a fraud in Debtor‟s ledger and absconded with the
amount. Investigation made in the fraud revealed that the Auditor did not exercise proper
skill and care and performed his work in an improper way.
Director of the Company, intends to file disciplinary proceeding against the Auditor with
the ICAI. Discuss the position of the auditor with regard to the disciplinary proceeding
under Chartered Accountants Act, 1949 and Regulations there to.
[May 18 (4 Marks)]
OR
The Cashier of a company committed a fraud and absconded with the proceeds thereof.
This happened during the course of the accounting year. The Chief Accountant of the
company also did not know about fraud. In the course of the audit, at the end of the year,
the auditor failed to discover the fraud. After the audit was completed, however, the fraud
was discovered by the Chief Accountant. Investigation made at that time indicate that the
auditor did not exercise proper skill and care and performed his work in a desultory and
haphazard manner. With this background, the Directors of the company intend to file
disciplinary proceedings against the auditor. Discuss the position of the auditor with
regard to the disciplinary proceedings.
[Dec. 21 (4 Marks)]
Ans: Failure to Exercise Reasonable Care and Skill:
 As per clause 7 of Part I of Second Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
“does not exercise due diligence or is grossly negligent in the conduct of his professional
duties”.
 In the present case, it appears that the auditor did not exercise proper skill and care and he
performed his work in a desultory and haphazard manner. Cash is a very significant item in
any situation and the fact that the cashier had left during the year without notice should
have placed the auditor on alert as regards the cash book. In fact, the very fact that the
cashier was absconding, i.e., left without any notice constituted sufficient circumstances to
excite suspicion of the auditor to probe to the bottom.
 Thus, having regard to this and a fraud has actually taken place during the year, committed
by the absconding cashier, it is reasonable to think that prima facie there is a case against
the auditor for gross negligence. Thus, such instances require reference to Disciplinary
Committee of the Council of the Institute.

Q 101. Give your comments with reference to the Chartered Accountants Act, and schedules
thereto: Mr. Aman, a Chartered Accountant was the auditor of „Aman Limited‟. During
the financial year 2023-24, the investment appeared in the Balance Sheet of the company of
` 10 lakhs and was the same amount as in the last year. Later on, it was found that the

63
 company‟s investments were only ` 25,000, but the value of investments was inflated for the
purpose of obtaining higher amount of Bank loan.
[MTP-Oct.18, Oct. 20]
Ans: Negligence in performance of duties:
 As per Clause 2 Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA in
practice shall be deemed to be guilty of professional misconduct, if he, certifies or submits
in his name or in the name of his firm, a report of an examination of financial statements
unless the examination of such statements and the related records has been made by him or
by a partner or an employee in his firm or by another chartered accountant in practice.
 As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA
in practice shall be guilty of professional misconduct if does not exercise due diligence, or
is grossly negligent in the conduct of his professional duties.
 As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to be guilty
of professional misconduct if he fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression
of an opinion.
 The primary duty of physical verification and valuation of investments is of the
management. However, the auditor‟s duty is also to verify the physical existence and
valuation of investments placed, at least on the last day of the accounting year.
 In the instant case, it appears that auditors failed to confirm the value of investments from
any proper source and he simply relied on the management‟s representation.
Conclusion: Mr. Aman, will be held liable for professional misconduct under Clauses (2), (7)
and (8) of Part I of the second Schedule to the Chartered Accountants Act, 1949.

Q 102. Mr. Sumit, a Chartered Accountant in Practice filed his income tax return for the
Assessment Year 2023-24 u/s 44ADA of the Income-tax Act, 1961, declaring his income on
presumptive basis. In a disciplinary proceeding alleged against him for an alleged misuse of
funds of his clients, it was asked that he should submit his books of account for the financial
year ended on 31.3.2023. Mr. Sumit refused to submit books of account on the ground that
he had not maintained any books and even for income tax purposes, he submitted his
Return of Income on a presumptive basis. Is he right in putting such a defence? Analyse the
issue in the lights of Professional Code, if any.
[Nov. 18 (5 Marks)]

Ans: Maintenance of Books of Account:

 As per Clause 1 of Part II of Second Schedule, a member of the Institute will be held guilty
of professional misconduct if he Contravenes any of the provisions of this act or the
regulations made thereunder or any guidelines issued by the council.
 Chapter V of the Council General Guidelines, 2008 specifies that a member of the Institute
in practice or the firm of Chartered Accountants of which he is a partner shall maintain and

64
 keep in respect of his/its professional practice, proper books of account including the
following :
(i) a Cash Book
(ii) a Ledger
 In the instant case, Mr. Sumit, a Chartered Accountant in Practice filed his income tax
return for the u/s 44ADA of the Income-tax Act, 1961, declaring his income on
presumptive basis. In a disciplinary proceeding alleged against him for an alleged misuse of
funds of his clients, it was asked that he should submit his books of account for the
financial year ended on 31.3.2023. Mr. Sumit refused to submit books of account on the
ground that he had not maintained any books and even for income tax purposes, he
submitted his Return of Income on a presumptive basis.
Conclusion: Defence of Mr. Sumit is not admissible and he will be held guilty of professional
misconduct by virtue of Clause 1 of Part II of Second Schedule, due to contravention of Chapter
V of Council General Guidelines, 2008 for non-maintenance of books of account.

Q 103. CA Raguvir, a Chartered Accountant, in practice is specializing in the field of Information

Systems Audit. He is considered to be one of the experts of this field because of his
command over the subject. HCL Limited; a Company engaged in rendering management
consultancy offered him to appoint as its managing director. CA Raguvir accepted the
position of managing director without obtaining prior permission from the Institute. One of
his friends CA Sumir informed him that now he cannot retain full time certificate of
practice, thus cannot do attest function and train articled assistants. Comment with
reference to the provisions of the Chartered Accountants Act, 1949 and schedules thereto.
[July 21 (4 Marks)]
Ans: Engaging into other Occupations (MD of Management Consultancy company):
 As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if
he engages in any business or occupation other than the profession of Chartered Accountant
unless permitted by the Council so to engage.
 As per Chapter XVII of Council General Guidelines, 2008, a member in practice is allowed
to hold the office of Managing Director of a body corporate provided that the body
corporate is engaged exclusively in rendering Management Consultancy and Other Services
permitted by the Council and complies with the conditions (s) as specified by the Council
from time to time in this regard.
 In such cases, members can retain full time Certificate of Practice besides being the
Managing Director of such Management Consultancy Company. Such members shall be
regarded as being in full-time practice and therefore can continue to do attest function and
they are also entitled to train articled assistants.
 In the given case, CA Raguvir accepted the position of managing director of a company
engaged in rendering management consultancy without obtaining prior permission from the

65
 Institute. It is not specified whether the conditions as stated in the guidelines as to name,
registration etc. of management consultancy company are being complied with or not.
Conclusion: Assuming that conditions as regard to name and registration of management
consultancy company, as stated in the guidelines are compiled with, action of CA Raguvir will
stands valid.

Q 104. Mr. Faluda, a Chartered Accountant, gave advisory services to SNK Pvt. Ltd. Further, he
gave them GST consultancy and helped in ERP set up. Later, the company turned out to be
a part of a group of companies involved in money laundering. Mr. Faluda was asked to
provide details of the companies. Mr. Faluda refused on the grounds that he gave only
consultancy services to the company and wasn‟t supposed to keep any information about
the company. Is Mr. Faluda right as per the guidelines issued by the ICAI?
Ans: KYC Norms:
 The financial services industry globally is required to obtain information of their clients and
comply with Know Your Client Norms (KYC norms). Keeping in mind the highest
standards of Chartered Accountancy profession in India, the Council of ICAI issued such
norms to be observed by the members of the profession who are in practice.
 In the given situation, CA Faluda, gave GST consultancy and helped in ERP set up along
with advisory services to PQR Pvt. Ltd. Mr. Faluda was asked to provide details of the
companies as the company, turned out to be a part of a group of companies, involved in
money laundering.
Conclusion: Contention of Mr. Faluda that he gave only consultancy services to the company
and wasn‟t supposed to keep any information about the company is not valid as Mr. Faluda
should have kept following information in compliance with KYC norms which are mandatory in
nature and shall apply in all assignments pertaining to attestation functions.
In the given case of SNK Pvt. Ltd., a Corporate Entity, Mr. Faluda should have kept following
information:
(A) General Information:
 Name and Address of the Entity
 Business Description
 Name of the Parent Company in case of Subsidiary
 Copy of last Audited Financial Statement
(B) Engagement Information:
Type of Engagement
(C) Regulatory Information:
 Company PAN No.
 Company Identification No.
 Directors‟ Names & Addresses
 Directors‟ Identification No.

66
Q 105. Comment on the following with reference to the Chartered Accountants Act, 1949 and
Schedules thereto: Mr. Om, a Chartered Accountant in practice entered into a partnership
with Mr. Swayam, an advocate for sharing of fees for work sent by one to the other.
However, due to some disputes, the partnership was dissolved after 1 month without any
fees having been received.
[RTP-Nov. 18]
Ans: Partnership with an Advocate:
As per Clause 4, Part 1 of First Schedule, a CA in Practice is deemed to be guilty of professional
Misconduct if he enters into partnership in or outside India with any person other than the
following:
 C.A. in practice, or
 Member of any other professional body having prescribed qualifications, or
 a person who but for his residence abroad would be entitled to be registered as member, or
 a person whose qualifications are recognized by CG or Council for the purpose of
permitting such partnerships.
As per Regulations 53A and 53B of Chartered Accountants Regulations, 1988, a member is
permitted to enter into partnership with an advocate, member of Bar council of India, besides
other qualified persons and members of other professional bodies.
Conclusion: Mr. Om will not be deemed to be guilty of professional misconduct as clause (4)
permits a CA in practice for entering into partnership with members of any other professional
bodies or with such other persons having prescribed qualifications and members of bar council of
India and persons having Bachelor of Law are prescribed.

Q 106. During the opening ceremony of a new branch office of CA Krish, his friend CA Harshil
introduced to CA Krish, his friend and client Mr. Enrich, the owner of an Export House
whose accounts had been audited by CA Harshil for more than 15 years. After few days,
Mr. Enrich approached CA Krish and offered a certification work which hitherto had been
done by CA. Harshil CA Krish undertook the work for a fee which was not less than fee
charged by CA Harshil in earlier period.
Comment whether CA Krish had done any professional misconduct.
[Nov. 18 (5 Marks)]
Ans: Soliciting work directly or indirectly:
 As per Clause 6 of Part 1 of First Schedule to the CA Act, 1949, a member shall be held
guilty if a Chartered Accountant in practice solicits clients or professional work either
directly or indirectly by circular, advertisement, personal communication or interview or by
any other means.
 As per Council Guidelines for Advertisement for the members in practice, acceptance of
original professional work emanating from a client introduced by another member is not
permitted.

67
  In the present case, during the opening ceremony of a new branch office of CA Krish, his
friend CA Harshil introduced to CA Krish, his friend and client Mr. Enrich, the owner of an
Export House whose accounts had been audited by CA Harshil for more than 15 years.
After few days, Mr. Enrich approached CA Krish and offered a certification work which
hitherto had been done by CA Harshil CA Krish undertook the work for a fee which was
not less than fee charged by CA Harshil in earlier period.
Conclusion: Mr. Krish will be deemed guilty of professional misconduct under clause 6, Part I of
First Schedule.

Q 107. M/s. SRK & Associates is one of the three firms shortlisted by GT Cooperative Bank for
assignment of Statutory Audit for the F.Y 2023-24. Bank mailed the list of branches to the
audit firms along with the maximum fee per branch and asked them to submit the
quotations. SRK & Associates responded the bank and submitted their quotation.
Comment with reference to the provisions of the Chartered Accountants Act, 1949 and
schedules thereto.
[July 21 (4 Marks)]
Ans: Roving Enquiries:
 As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if
he Solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means.
 Provided that nothing herein contained shall be construed as preventing or prohibiting:
(i) Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of
professional services or organizations from time to time and securing professional
work as a consequence.
 However, as per the guideline issued by the Council of the ICAI, a member of the Institute
in practice shall not respond to any tender issued by an organization or user of professional
services in areas of services which are exclusively reserved for chartered accountants, such
as audit and attestation services.
 However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants.
 In the given case of GT Cooperative Bank, Bank mailed the list of branches to the audit
firms along with maximum fees per branch, in response to which SRK & Associates
responded and submitted their quotation.
Conclusion: Keeping in view the facts, clause 6 and guideline issued by the council, it can be
concluded that SRK & Associates is guilty of Professional misconduct.

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Q 108. Give your comments with reference to Chartered Accountants Act, 1949 and schedules
thereto: Mr. BIMAL, a practicing Chartered Accountant as well as a qualified lawyer, was
permitted by the bar council to practice as a lawyer also. He printed his visiting card where
he mentioned his designation as Chartered Accountant and Advocate.
Ans: Using designation other than Chartered Accountant:
 As per clause 7 of Part 1 of First Schedule, a CA in practice is deemed to be guilty of
professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letter heads or sign boards unless it be a
degree of a university established by law in India or recognized by the Central
Government or a title indicating membership of the ICAI or of any other institution
that has been recognized by the Central Government or may be recognized by the
council.
 Members of the Institute in practice who are otherwise eligible may practice as advocates
subject to the permission of the Bar Council but in such case, they should not use
designation “Chartered Accountant” in respect of the matters involving the practice as an
advocate.
 In respect of other matters, they should use the designation „chartered accountant‟ but they
should not use the designation „chartered accountant‟ and „advocate‟ simultaneously.
 In the present case, Mr. Bimal has printed his visiting card where he mentioned his
designation as Chartered Accountant and Advocate which is prohibited under the clause 7.
Conclusion: Mr. Bimal is guilty of professional misconduct due to use of designation of
advocate in addition to Chartered Accountant.

Q 109. CA Vansh was appointed as the Auditor of CS Ltd. For the year 2023-24 in the place of
retiring auditor CA Taksh. CA Vansh accepted the appointment after obtaining a
certificate from the management that the provisions of the Secs 139 & 140 of Companies
Act, 2013 have been complied with. Comment with reference to the CA Act, 1949 and
schedules thereto.
[Dec. 21 (4 Marks)]
Ans: Non-observance of compliance of Sections 139 & 140 of Companies Act, 2013:
 As per Clause 9 of Part 1 of First Schedule to CA Act, 1949, a CA in practice shall be
deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a
company, without ascertaining whether requirements of Sections 139 & 140 read with Sec.
141 of Companies Act, 2013, in respect of such appointment have been duly complied with.
 For the purpose of ascertaining whether the Company has complied with the provisions of
Sec. 140 of the Companies Act, incoming auditor should verify the records of the Company
in respect of the following matters:

69
 (i) Whether a member of the Company has given special notice of the resolution as
required u/s 140(4) of the Companies Act, 2013. The notice shall be sent by members
to the company not earlier than 3 months but at least 14 days before the date of the
meeting at which the resolution is to be moved, exclusive of the day on which the
notice is given and the day of the meeting. A true copy of this notice should be
obtained by the incoming auditor.
(ii) Whether this special notice has been sent to all the members, of the Company as
required u/s 115 of Companies Act, 2013 at least 7 days before the date of the General
Meeting.
(iii) Whether this special notice has been sent to the retiring auditor forthwith as required
u/s 140(4).
(iv) Whether the representation received from the retiring auditor has been sent to the
members of the Company as required u/s 140(4).
(v) Whether representation received from retiring auditor has been considered at the
general meeting and resolution proposed by the special notice has been properly
passed at the general meeting.
 In the given case, CA Vansh was appointed as the Auditor of CS Ltd. For the year 2023-24
in the place of retiring auditor CA Taksh. CA Vansh accepted the appointment after
obtaining a certificate from the management that the provisions of the Sections 139 and 140
of the Companies Act, 2013 have been complied with.
Conclusion: Misconduct arises on part of CA Taksh as he needs to ascertain compliance of
provisions of Secs. 139 and 140 through verification of records. Obtaining a certificate in this
regard from management will not be suffice.

Q 110. Comment on the following with reference to the Chartered Accountants Act, 1949, and
Schedules thereto: CA. Anurag is practicing since 2008 in the field of company auditing.
Due to his good practical knowledge, he was offered editorship of a „Company Audit‟
Journal which he accepted. However, he did not take any permission from the council
regarding such editorship.
[RTP-Nov. 20, MTP-April 211]
Ans: Engagement in other occupations:
 Clause 11 of Part I of First Schedule to the CA Act, 1949 prohibits a member in practice to
engage in any business or occupation other than the profession of chartered accountants
unless permitted by the Council so to engage.
 It does not prohibit a CA from being a director of a company, except MD or a whole-time
director But if any of the partners is interested in such company as an auditor then he
cannot be director of the said company.
 General permission is granted under Regulation 190A for being appointed as editor of
professional journal.

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  In the present case CA Anurag has accepted the appointment as editor of a “Company
Audit”, which is a professional journal.
Conclusion: Clause 11 permits editorship of professional journals, hence no misconduct arises
on part of Mr. Anurag.

Q 111. Ms. Preet, a CA, had an account with a bank. The normal balance in this account
remained at a level below `5,000. The bank inadvertently credited this account with a
cheque of `2,70,000 belonging to another account holder. When CA Preet came to know
about this she withdrew the amount of `2,75,000 and closed the bank account. After 1 year
the bank noticed the mistake and claimed `2,75,000 with interest. CA Preet contested this
claim. Can the bank approach the Institute of Chartered Accountants of India for
disciplinary action against CA Preet?
[RTP-Nov. 201]
Ans: Bringing disrepute to the Profession:
 As per Clause 2 of Part IV of First Schedule of the CA Act, 1949, a Chartered Accountant
will be deemed to be guilty of other misconduct if he in the opinion of the Council brings
disrepute to the profession or the Institute as a result of his action whether or not related to
his professional work.
 In the instant case, CA Preet, a CA, had an account with a bank from which she withdrew
the amount of `2,75,000 and closed the account. This amount of ` 2,75,000 was pertaining
to ` 5,000 minimum balance and ` 2,70,000 belonging to other account holder and
inadvertently credited to his account by the bank.
 The said act of CA Preet to withdraw the money which does not belongs to her will bring
disrepute to the profession.
Conclusion: Bank can file a suitable complaint under Clause 2 of Part IV of First Schedule of the
CA Act, 1949 with the ICAI for a case of “Other Misconduct”.

Q 112. Mr. Danish, a practicing CA, is appointed as a Director Simplicitor in ZYGON Pvt. Ltd.
After one year of appointment, Mr. Danish resigned as the Director and accepted the
Statutory Auditor position of the company. Is Mr. Danish right in accepting the auditor
position?
Ans: Accepting appointment as auditor:
 As per Clause (4) of Part I of the Second Schedule of the CA Act, 1949, a CA in practice is
deemed to be guilty of professional misconduct if he expresses his opinion on F.S. of any
business or enterprise in which he, his firm, or a partner in his firm has a substantial
interest.
 Sec. 141 of the Companies Act, 2013 specifically prohibits a member from auditing the
accounts of a company in which he is an officer or employee.
 Further, as per clarifications issued by the Council, a member shall not accept the
assignment of audit of a company for a period of 2 years from the date of completion of his
tenure as Director, or resignation as director of the said Company.

71
  In the instant case, Mr. Danish, a practicing CA, is appointed as a Director Simplicitor in
ZYGON Pvt. Ltd. After one year of appointment, Mr. Danish resigned as the Director and
accepted the Statutory Auditor position of the company. In view of above provisions Mr.
Danish cannot accept the Directorship of the company until the completion of two years
after his resignation.
Conclusion: Mr. Danish would be held guilty of professional misconduct under clause 4 of Part
1 of Second Schedule of the Chartered Accountants Act, 1949.

Q 113. A practicing Chartered Accountant was appointed to represent company before the tax
authorities. He submitted certain information and explanations to the authorities on behalf
of his clients, which were found to be false and misleading
OR
D, a Chartered Accountant in practice was appointed by Realty Limited to represent its
cases before GST Authorities under a duty executed power of representation. In the course
of proceedings, he submitted certain statements – written as well as oral which later found
to be false and materially misleading. Comment this in the light of Professional Code.
[Nov. 18 (4 Marks)]
Ans: Failure to disclose the material facts:
 As per clause 5 of Part I of Second Schedule, a member in practice will be deemed to be
guilty of professional misconduct if he fails to disclose a material fact known to him which
is not disclosed in a financial statement, but disclosure of which is necessary to make the
financial statement not misleading, where he is concerned with that financial statement in a
professional capacity.
 As per clause 6 of Part I of Second Schedule, a member in practice will be deemed to be
guilty of professional misconduct if he fails to report a material misstatement known to him
to appear in a financial statement with which he is concerned in a professional capacity.
 In given case, Mr. D had submitted the statements before the GST authorities, which later
found to be false and materially misleading. Although the statements were misleading, the
Chartered Accountant had only submitted them acting on the instructions of his client as his
authorized representative.
Conclusion: D would not be held liable for professional misconduct.

Q 114. Comment on the following with reference to the with reference to the CA Act, 1949 and
Schedules thereto: Aagam Private Limited requested CA Sheetal, a Practicing CA, to
digitally sign the form related to resignation of Mr. Rohit, one of the Director of Aagam
Private Limited, along with the copy of Resignation Letter to be uploaded on the website of
Registrar of Companies. The signature of Mr. Rohit was simply copied and pasted by her
Director of Aagam Private Limited. CA Sheetal, without verifying the genuineness of the
resignation letter, digitally signed the form and the said form was uploaded on the website
of Registrar of Companies.
[RTP-Nov. 22]

72
Ans: Failure to Exercise Reasonable Care and Skill:
 As per Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty if he does not exercise due
diligence or is grossly negligent in the conduct of this professional duties.
 In the given case, Aagam Private Limited requested CA Sheetal, a practicing chartered
accountant, to digitally sign the form related to resignation of Mr. Rohit, one of the Director
of Aagam Private Limited, along with the copy of Resignation Letter to be uploaded on the
website of Registrar of Companies. The signature of Mr. Rohit was simply copied and
pasted by another Director of Aagam Private Limited.
 CA Sheetal, without verifying the genuineness of the Resignation Letter, digitally signed
the Form and the said form was uploaded on the website of Registrar of Companies. Due to
forged resignation letter, the resignation of Mr. Rohit from directorship of the Aagam
Private Limited had been occurred. It was noted that CA Sheetal had not taken any step to
verify forged signature on resignation letter which anyone would have taken in normal
circumstances.
Conclusion: CA Sheetal would be held liable for professional misconduct as per Clause (7) of
Part I of Second Schedule to the Chartered Accountants Act, 1949.

Q 115. Namin & Co., conducted Stock Audit of DANION Ltd. As per instructions issued by
Hiralal Bank. However instead of visiting the site where the stock was lying, the firm relied
on the Management Information Systems report along with inspections reports and
photographs of Stock taken by the employees of DANION Ltd. The photographs were also
carrying the date and time printed on them. Comment with reference to the CA Act, 1949
and its schedules thereto.
[Jan. 2021 (4 Marks)]
Ans: Negligence in performance of duties:
 As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a CA
in practice shall be guilty of professional misconduct if does not exercise due diligence, or
is grossly negligent in the conduct of his professional duties.
 To conduct stock audit, ascertainment of existence and physical condition of stocks, cross
tallying the stock with Stock statement submitted by bank borrower, correct classification
of stocks for valuation purpose etc. is essential. Further submitting stock audit report
without physically verifying the stock amounts to gross negligence.
 As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to be guilty
of professional misconduct if he fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression
of an opinion.
 In the present case, Namin & Co. , did not exercise due diligence and is grossly negligent in
the conduct of his professional duties as instead of visiting the site where the stock was
lying, the firm relied on the Management Information Systems report along with
inspections reports and photographs of Stock taken by the employees of DANION Ltd.

73
 Conclusion: Namin & Co. is guilty of professional misconduct as per Clauses 7 and 8 of Part I of
Second Schedule of CA Act, 1949 due to the reason that stock audit is being done without
examination of related records, failure to exercise due diligence and failure to obtain necessary
information.

Q 116. CA Kartik qualified as Chartered Accountant and started practice as proprietor in the
name of M/s. Kartik & Associates in the year 2015-16. LST Limited, a listed entity,
appointed M/s. Kartik & Associates as Statutory Auditor for the year ended on 31st March,
2022. CA Kartik signed the balance sheet of LST Limited for the year ended on 31 st March,
2022 on 14th May, 2022. M/s. Kartik & Associates never subjected themselves to the Peer
Review process of the Institute since its inception of practice. Comment with reference to
the Chartered Accountants Act, 1949 and schedules thereto.
[May 22 (4 Marks)]
Ans: Departure from generally accepted procedures of audit:
 As per Clause 9 of Part I of Second Schedule to the CA Act, 1949, a CA in Practice shall be
deemed to be guilty of professional misconduct if he fails to invite attention to any material
departure from the generally accepted procedure of audit applicable to the circumstances.
 Pursuant to SEBI Notification, Statutory Audit of Listed Companies under the Companies
Act, 2013 shall be done by only those auditors who have subjected themselves to the Peer
Review process of the Institute, and hold a valid certificate issued by the Peer Review
Board of the ICAI.
 In the given case, CA Kartik is practicing as proprietor in the name of M/s. Kartik &
Associates from the year 2015-16. LST Limited, a listed entity, appointed M/s. Kartik &
Associates as Statutory Auditor for the year ended on 31st March, 2022. CA Kartik signed
the balance sheet of LST Limited for the year ended on 31st March, 2022 on 14th May,
2022. M/s. Kartik & Associates never subjected themselves to the Peer Review process of
the Institute since its inception of practice.
Conclusion: CA Kartik is guilty of professional misconduct by virtue of Clause 9 of Part 1 of
Second Schedule.

Q 117. Comment on the following with reference to the Chartered Accountants Act, 1949 and
Schedules thereto: Mr. Santosh, a Chartered Accountant published a book and gave his
personal details as the author. These details also mentioned his professional experience and
his present association as partner with M/s RST, a firm.

Ans: Solicitation of Professional Work:

 As per clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
CA in practice will be deemed to be guilty of professional misconduct if he solicits client or
professional work either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means.

74
  While elaborating forms of soliciting work, the Council has specified that it is not
permissible for a member to mention in a book or an article published by him, or a
presentation made by him, any professional attainment(s), whether of the member or the
firm of chartered accountants, with which he is associated. However, he may indicate in a
book, article or presentation the designation “Chartered Accountant” as well as the name of
the firm.
 In present case, Mr. Santosh a Chartered Accountant published the book and mentioned his
professional experience and his association as a partner with M/s RST, a firm of chartered
accountants.
Conclusion: Mr. Santosh has violated the restriction imposed under Clause 6 of Part I of First
Schedule by mentioning the professional experience and hence held to be guilty of professional
misconduct.

Q 118. Give your comments with reference to the Chartered Accountants Act, and schedules
thereto: An advertisement was published in a Newspaper containing the photograph of Mr.
Ahmad, a member of the institute wherein he was congratulated on the occasion of the
opening ceremony of his office.
Ans: Solicitation of Client or Professional Work:
 As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement,
personal communication or interview or by any other means.
 In the given case, Mr. Ahmad published an advertisement in a Newspaper containing his
photograph on the occasion of the opening ceremony of his office.
 In this context, it may be noted that the advertisement which had been put in by the member
is quite prominent. If soliciting of work is allowed, the independence and forthrightness of a
CA in discharge of duties cannot be maintained.
 This kind of advertisement will amount to soliciting professional work by advertisement
directly or indirectly.
Conclusion: Mr. Ahmad would be guilty under Clause 6 of Part-I of the First Schedule to the
Chartered Accountants Act, 1949.

Q 119. CA Pradesh has recently qualified and has obtained COP. In the initial years, it is taking
time to set up his clientele base. He is also conducting audit of few entities. Simultaneously,
he plans to provide coaching to CA students online taking advantage of his fresh reservoir
of knowledge. Therefore, he advertises his classes on various social media platforms.
Comment with reference to the Chartered Accountants Act, 1949, and Schedules thereto.
[MTP-Oct. 22]
Ans: Solicitation of Client or professional Work:
 Regulation 190A of the Chartered Accountants Regulations, 1988 provides that a chartered
accountant in practice shall not engage in any business or occupation other than the

75
 profession of accountancy except with the permission granted in accordance with a
resolution of the Council.
 The Council has passed a resolution under Regulation 190A granting general permission for
private tutorship and part time tutorship under coaching organization of the Institute. Such
general permission is subject to the condition that direct teaching hours devoted to such
activities taken together should not exceed 25 hours a week in order to be able to perform
attest functions.
 Clause 6 of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 states that
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct,
if he solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means.
 An advertisement of online coaching activities through social media platforms amounts to
indirect solicitation as well as solicitation by another means and is, therefore, violative of
Clause 6 of Part I of the First Schedule to Chartered Accountants Act, 1949.
 Therefore, although a member in practice can engage in private tutorship subject to Council
Guidelines but he cannot advertise by any means for coaching activities as it amounts to
indirect solicitation of clients and professional work. In the given case, CA Pradesh is
providing coaching to CA students online and also advertising his classes on various social
media platforms.
Conclusion: Based on above stated provisions, CA Pradesh is guilty of professional misconduct
under Clause (6) of Part I of First Schedule to the Chartered Accountants Act 1949 for
advertising his classes on various social media platforms.

Q 120. Comment on the following with reference to the Chartered Accountants Act, 1949, Code of
Ethics and Schedules to the Act: Prince, a Chartered Accountant in practice is a partner in
3 firms. While printing his personal letter heads, Prince gave the names of all the firms in
which he is a partner.
Ans: Mentioning Firm‟s Name on Letter Heads:
 Clause 7 of Part I of First Schedule to the CA Act, 1949 provides that a CA in practice is
deemed to be guilty of professional misconduct if he
(i) advertises his professional attainments or services or
(ii) uses any designation or expressions other than “Chartered Accountant” on
professional documents, visiting cards, letter heads or sign boards.
 However, a degree of a university established by law in India or recognized by the Central
Government or a title indicating membership of the ICAI or of any other institution that has
been recognized by the Central Government or may be recognized by the council is
permitted to be mentioned.
 There is no prohibition for printing names of all firms on the personal letter heads in which
a member holding certificate of practice is a partner.
Conclusion: Mr. Prince is not guilty of any professional misconduct in the above case.

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Q 121. CA Abhiskek, a practicing chartered accountant, is a t, is a promoter director of
ABG Pvt. Ltd. And moreover he is also a sleeping partner in his family business of
garments manufacturing firm. Is CA Abhiskek liable for professional misconduct as per
Chartered Accountants Act, 1949?
[Jan. 21 (4 Marks)]
Ans: Engagement into other occupation:
 As per clause 11 of Part I of First Schedule of CA Act, 1949, a Chartered Accountant is
deemed to be guilty of professional misconduct if he “engages in any business or
occupation other than the profession of Chartered Accountant unless permitted by the
Council so to engage".
 There is no bar for a member to be a promoter/signatory to the Memorandum and Articles
of Association of any company. There is also no bar for such a promoter/signatory to be a
Director Simplicitor of that company irrespective of whether the object of the company
include areas which fall within the scope of the profession of chartered accounts. Therefore,
members are not required to obtain specific permission of the Council in such cases.
 However, to acquire interest in family business concerns (including such interest devolving
on the members as a result of inheritance/succession/partition of the family business) or
concerns in which interest has been acquired as a result of relationships and in the
management of which no active part is taken, prior approval from Council is required.
 In the given case, CA Abhishek is a promoter director of ABG Pvt Ltd. And also he is a
sleeping partner in his family business of garments manufacturing firm.
Conclusion: Applying the abovementioned provisions, it can be concluded that no misconduct
arises on part of CA Abhishek if prior approval from council obtained as to acquiring interest in
family business. However, if prior approval from Council is not obtained to be a sleeping partner
in family business he will be considered as guilty of professional misconduct.

Q 122. Afroze, a Chartered Accountant availed a loan against his securities held as investments
from a nationalised bank. He issued 2 cheques towards repayment of the said loan. Both the
cheques were returned unpaid by the bank with the remark “Refer to Drawer”. Comment
with reference to the CA Act, 1949 and schedules thereto.
[Jan. 21 (4 Marks)]

Ans: Bringing disrepute to the profession:

 As per Clause 2 of Part IV of First Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if in the opinion of the council, that member brings disrepute to the profession
or the Institute, as a result of his action, whether or not related to his professional work.
 Accordingly, a CA is also expected to maintain the highest standards and integrity even in
his personal affairs and any deviation from these standards calls for disciplinary action.

77
  Under Negotiable Instruments Act, 1881, where any cheque drawn by a person for the
discharge of any liability returned by the bank unpaid, either for insufficiency of funds or
the cheque amount exceeds the arrangements made by the drawer of the cheque, the drawer
of such cheque shall be deemed to have committed an offence.
 In the present case, Afroze, a Chartered Accountant availed a loan against his securities
held as investments from a nationalised bank. He issued 2 cheques towards repayment of
the said loan. Both the cheques were returned unpaid by the bank with the remark “Refer to
Drawer”.
Conclusion: As the cheque was dishonoured with the remark “refer to drawer”, such dishonour
need not necessarily be only due to insufficiency of funds. If it is proved that the cheques were
dishonoured due to insufficiency of funds, the CA would be held guilty of “other misconduct”.

Q 123. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
CA Nikunj, a practicing Chartered Accountant, was appointed as a simplicitor Director in
a Pvt. Ltd. Company on 1.1.2021. After serving 18 months, Mr. Nikunj resigned as the
Director. He accepted the appointment as the Statutory Auditor of the company with effect
from 1-10-2022.
Is CA Nikunj right in accepting the audit?
[Dec. 21 (4 Marks)]
Ans: Accepting the appointment as auditor:
 As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949,
a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
expresses his opinion on financial statements of any business or enterprise in which he, his
firm, or a partner in his firm has a substantial interest.
 Sec. 141 of the Companies Act, 2013 specifically prohibits a member from auditing the
accounts of a company in which he is an officer or employee. Although the provisions of
the aforesaid section are not specifically applicable in the context of audits performed under
other statutes, e.g., tax audit, yet the underlying principle of independence of mind is
equally applicable in those situations also. Therefore, Council clarifications need to be
considered in such situations.
 As per the clarifications issued by the Council, a member shall not accept the assignment of
audit of a Company for a period of 2 years from the date of completion of his tenure as
Director, or resignation as Director of the said Company.
 In the given case, CA Nikunj, a practicing Chartered Accountant, was appointed as a
simplicitor Director in a Pvt. Ltd. Company on 1.1.2021. After serving 18 months, Mr.
Nikunj resigned as the Director. He accepted the appointment as the Statutory Auditor of
the company with effect from 1-10-2022. Mr. Nikunj cannot accept the Directorship of the
company as tenure of two years after his resignation is not completed.
Conclusion: Mr. Nikunj will be deemed to be guilty of professional misconduct as he accepts the
statutory auditor position of the company before completion of 2 years after his resignation as
directorship.

78
Q 124. Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto:
CA David had signed the Balance sheet of QR Ltd. For the year ended on 31 st March, 2022
which failed to give disclosure of the charge created for ` 4.35 crores against the Corporate
Guarantee given in favour of a Group Company. The Balance Sheet size of the company
filed with the Registrar of Companies was ` 26.12 crores.
[Nov. 20 (4 Marks)]
Ans: Failure to disclose material facts:
 As per Clause (5) of Part I of Second Schedule to the CA Act, 1949, a member in practice
will be held liable for misconduct if he fails to disclose a material fact known to him which
is not disclosed in a F.S., but disclosure of which is necessary in making such F.S. not
misleading where he is concerned with that F.S. in a professional capacity.
 It may be observed that this clause refers to failure to disclose a material fact, which is
known to him, in a financial statement reported on by the auditor. It is obvious, that before
a member could be held guilty of misconduct, materiality has to be established. The
determination of materiality has been provided in SA 320, “Materiality in Planning and
Performing an Audit”.
 FRFs often discuss the concept of materiality in the context of the preparation and
presentation of F.S. Although FRFs may discuss materiality in different terms, they
generally explain, among other points, that Judgments about materiality are made in light of
surrounding circumstances, and are affected by the size or nature of a misstatement, or a
combination of both.
 In this case, CA David has signed a Balance Sheet which failed to give disclosure of ` 4.35
crores (considered material fact applying above SA 320 principle) against the corporate
guarantee given in favour of a Group Company. Size of Balance Sheet of QR Ltd. is `
26.12 crore. This material fact has to be disclosed in the financial statements.
Conclusion: Based on above discussion, it may be concluded that Mr. David is attracted by
provisions of professional misconduct under Clause (5) of Part 1 of Second Schedule to the CA
Act, 1949.

Q 125. Mr. Avi, a newly qualified Chartered Accountant, started his practice and sought clients
through telephone calls from his family and friends, almost all of them employed in one or
the other retail trade business. One of his friends Mr. Ravi gave him an idea to start online
services and give stock certifications to traders with Cash Credit Limits in Banks. Mr.
Avinash started a website with colourful catchy designs and shared the website address on
his all social media posts and stories and tagged 30 traders of his local community with the
caption “Easy Online Stock Certification Services”. Besides, Mr. Avinash entered in an
agreement with a Digital Marketer to give him 5% commission on each service procured
through him. Discuss if the actions of Mr. Avinash are valid in the light of the Professional
Ethics and various pronouncements and guidelines issued by ICAI.
[RTP-May 22]

79
Ans: Solicitation of Client and Professional Work:
 As per clause (2) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
CA in practice is deemed to be guilty of professional misconduct if he pays or allows or
agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees
or profits of his professional business, to any person other than a member of the Institute or
a partner or a retired partner or the legal representative of a deceased partner, or a member
of any other professional body or with such other persons having such qualification as may
be prescribed, for the rendering such professional services to time in or outside India.
Purpose of
 As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.
 In the given case, Mr. Avinash entered in an agreement with a Digital Marketer to give him
5% commission on each service procured through him, which is a violation of restriction
imposed under Clause 2 as stated above.
 Mr. Avinash is also wrong in seeking clients through family and friends.
 Creating a website is not a non-compliance provided it is in line with the guidelines issued
by the Institute in this regard. One of the guidelines is that the website should not be in push
mode. Further, mentioning of clients‟ names is also prohibited as per the guidelines. Mr.
Avinash also contravenes guidelines on website issued by the ICAI as he shares the website
address on his all social media posts and stories and tagged 30 traders of his local
community with the caption “Easy Online Stock Certification Services” mentioning his
current clients as well.
Conclusion: CA. Avinash would be held guilty of professional misconduct under clause 6 of Part
1 of First Schedule of the Chartered Accountants Act, 1949.

Q 126. Comment on the following with reference to CA Act, 1949 and schedules thereto: A
charitable institution entrusted ` 10 lakhs with its auditor‟s M/s Ramanujan and Co., a
Chartered Accountant firm, to invest in a profitable portfolio. The auditors pending investment
of the money, deposited it in their Savings bank account and no investment was made in the
next three months.
Ans: Deposit of Client‟s Money in Separate Bank account:
 As per Clause 10 of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if
he fails to keep moneys of his client other than the fees or remuneration or money meant to
be expended in a separate banking account or to use such moneys for purposes for which
they are intended within a reasonable time.

80
  The term reasonable time would depend upon the circumstances of the case. Moneys which
are intended to be spent within a reasonably short time need not be put in a separate bank
account.
 In the instant case, M/s Ramanajan & Co. should have deposited the amount into a separate
bank account. Further, they are not permitted to provide the service of portfolio
management to the client.
Conclusion: M/s Ramanujan & Co. will be held guilty of professional misconduct as he
deposited the client money in his saving bank account.

Q 127. A film artist who was going abroad for long shooting, deposited a sum of ` 20 lakhs with
his tax consultant Mr. Gaju, a practicing chartered accountant for payment of GST
monthly when they were due. Mr. G duly remitted all but one instalment. He utilized the
amount of instalment which he did not pay, to remit his own advance of income tax.
However, while filing return of GST of the film artist, he duly remitted on her behalf the
tax payable with interest due for late payment of GST out of money lying with him. He also
bore for himself the interest due to short fall in remittance of tax of his client. Comment on
the above in the light of Code of Conduct.
[May 18 (4 Marks)]

Ans: Deposit of Client‟s Money in separate Bank account:

 Clause 10 of Part I of Second Schedule to the CA Act, 1949 states that a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if “he fails
to keep money of his clients other than fees or remuneration or money meant to be
expended in separate banking account or to use such money for the purpose for which they
are intended”.
 In the present case, a film artist who was going abroad, deposited a sum of ` 20 lakhs with
Mr. Gaju, a Practicing CA for payment of GST monthly when they were due. Mr. Gaju
duly remitted all but one instalment. He utilized the amount of instalment which he did not
pay, to remit his own advance of income tax. However, while filing return of GST of the
film artist, he duly remitted on her behalf tax payable with interest due for late payment of
GST out of money lying with him.
Conclusion: Since Mr. Gaju uses the client money for payment of personal taxes, he will be
deemed to be guilty of professional misconduct under clause 10 of part I of Second Schedule.

81
 MULTIPLE CHOICE QUESTIONS

Q 1. Mr. R, (friend of Mr. P) a CA in practice invited Mr. P to set up a „Network Firm‟ along
with 2 more friends. All the four auditors agreed to the same and decided to start a network
firm by the name M/s RP & Co. However, one of the auditors suggested that they cannot
use the term „& Co.‟ and it needs to be changed. But Mr. R informed that there is no such
Regulation regarding the firm‟s name. Which among the name shall be suitable to the
newly started „Network Firm‟, in accordance with the provisions of Chartered Accountant
Act and Regulation?
[MTP-April 21]
(a) RP & Associates.
(b) RP and Co.
(c) RP and Networks.
(d) RP & Affiliates.

Q 2. CA Dev, a chartered accountant in practice, availed of a loan against his personal

investments from a bank. He issued 2 cheques towards repayment of the said loan as per
the instalments due. However, both the cheques were returned back by the bank with the
remarks “Insufficient funds”. As per Chartered Accountants Act, 1949, under which clause
CA Dev is liable for misconduct?
(a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(b) Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Clause (12) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(d) Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949.

Q 3. Mr. Sujal one of the partners of the firm is facing a dilemma as to whether the firm BMY
LLP should accept the appointment as Statutory Auditors of M/s Unity Limited wherein
Mr. Sujal had sent a communication in writing addressed to the outgoing auditor Mr.
Halva under certificate of posting and the outgoing auditor has sent an acknowledgement
vide their official email, but this email address of the outgoing auditor is not registered with
the Institute of Chartered Accountants of India. Mr. Sujal is of the opinion that this is not
positive evidence of delivery and violates the provisions of Code of Ethics if the firm accepts
the audit assignment.

With respect to the dilemma being faced by Mr. Sujal, partner of the firm regarding
acknowledgment of the communication from the retiring auditor‟s vide their official email
is not positive evidence of delivery?
[RTP Nov. 22]
(a) The dilemma of Mr. Sujal is correct as it is not positive evidence of delivery.

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 (b) The dilemma of Mr. Sujal is not correct as it is positive evidence of delivery as the same is
received from the official email of the outgoing auditor, as per the Code of Ethics.
(c) The dilemma of Mr. Sujal is not correct as statutory auditors are not required to
communicate with the retiring or outgoing auditors in this case.
(d) The dilemma of Mr. Sujal is correct as the email address of the outgoing auditor from
acknowledgement has come is not registered with the Institute of Chartered Accountants
of India.

Q 4. CA Samarth, a Chartered Accountant in practice, provides part-time tutorship under the

coaching organization of the Institute. On 30th June, 2023, he was awarded „Best Faculty of
the year‟ as gratitude from the Institute. Later on, CA Samarth posted his framed
photograph on his website wherein he was receiving the said award from the Institute. As
per Chartered Accountants Act, 1949, under which clause Samarth is liable for
misconduct?
(a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(b) Clause (9) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(d) Clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Q 5. MD & Co LLP is a firm of Chartered Accountants. The firm has 10 Partners. The firm has
a good portfolio of clients for statutory audits, but the same clients had some other firms as
their tax auditors. In the current year (FY 2023-24), many existing clients for whom MD &
Co LLP happens to be the statutory auditor have requested the firm to carry out their tax
audits as well. The firm is expecting the number of tax audits to increase significantly this
year. One of the partners of the firm has also raised a point that the firm can accepts tax
audits up to the maximum limit. However, other partners are of the strong view that limits
on audits is applicable in case of statutory audits and not for tax audits. This needs to be
decided as soon as possible so that the appointment formalities can also be completed. You
are requested to advise the firm in this matter.
[RTP May 19]
(a) There is no limit on number of tax audits in case of LLP.
(b) All the partners of the firm can collectively sign 450 tax audit reports.
(c) All the partners of the firm can collectively sign 600 tax audit reports.
(d) All the partners of the firm can collectively sign 450 tax audit reports. However, one
partner can individually sign maximum 60 tax audit reports.
[RTP-May. 19]

Q 6. Letter head of CA Ravi, a Practicing Chartered Accountant, is reproduced below:

PANAJ De RAVI ACS, LLB, FCA
Chartered Accountant & Member of Parliament

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 As per Chartered Accountants Act, 1949 you are required to choose the appropriate
answer.
[MTP Oct. 20]
(a) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act,1949 he shall
not use the designation „Member of the Parliament‟ in addition to that of a „Chartered
Accountant‟.
(b) He shall not use the designation „LLB‟ in addition to that of a „Chartered Accountant‟ as
he has not enrolled as an Advocate as per clause 7 of Part I of First Schedule to the
Chartered Accountants Act, 1949.
(c) He can use designations such as Member of Parliament, Member of the Legislative
Assembly in addition to that of a „Chartered Accountant‟ as these are specifically allowed
as per clause 7 of Part I of First Schedule to the Chartered Accountants Act, 1949.
(d) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act, 1949 he can
designate himself as „Chartered Accountant and Company Secretary‟ as he is a member of
the Institute of Company Secretaries of India also.

Q 7. Mr. Vikas Rathi, a Chartered Accountant is a sole proprietor of Rathi & Co. which has
been appointed as a statutory auditor of Kraftic Ltd. From F.Y. 2023-24, for a term of 5
years. Mr. Vikas is a director simplicitor of Kalaveer Ltd. which acquired 55% shares of
Kraftic Ltd., for the first time, on 25th May, 2023. Mr. Vikas‟s term as a director of
Kalaveer Ltd. got expired on 31st March, 2024 and he was not re-appointed. Kalaveer Ltd.
made a proposal to Mr. Vikas for appointing Rathi & Co. as its statutory auditor from F.Y.
2023-24, for a term of 5 years, which was accepted by Mr. Vikas. Is there any violation of
the Code of Ethics by Mr. Vikas Rathi?
[MTP Nov. 21]
(a) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is
an auditor and also he cannot accept appointment of auditor of a Kalaveer Ltd. Without
finishing of the cooling period for the same.
(b) There is no bar in being a director simplicitor of a company, the subsidiary of which the
person is an auditor. However, by accepting appointment as an auditor of Kalaveer Ltd.
Without finishing of the cooling period for the same, he has violated the Code of Ethics.
(c) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is
an auditor. However, there is no bar in becoming an auditor of a company of which a
person has been its director.
(d) There is no bar in being a director simplicitor of a company, the subsidiary of which the
person is an auditor and also there is no requirement of following the cooling period by a
director simplicitor who on expiry of its term, wants to become auditor of such company.

Q 8. CA Shyam is practicing in the field of financial management planning for over 12 years. He
has gained expertise in this domain over others. Mr. Pawan, a student of Chartered
Accountancy course, is very much impressed with the knowledge of CA Shyam. He

84
 approached CA Shyam to take guidance on some topics of financial management subject
related to his course. CA Shyam, on request, decided to spare some time and started
providing private tutorship to Mr. Pawan along with some other aspirants for 3 days in a
week and for 2 hours in a day. However, he forgot to take specific permission for such
private tutorship from the Council. Later on, he came to know that the Council has passed
a Resolution under Regulation 190A granting general permission (for private tutorship,
and part-time tutorship under Coaching organization of the Institute) and specific
permission (for part-time or fulltime tutorship under any educational institution other than
Coaching organization of the Institute). Such general and specific permission granted is
subject to the condition that the direct teaching hours devoted to such activities taken
together should ........................ in order to be able to undertake attest functions.
[MTP Oct. 19]
(a) not exceed 25 hours a week.
(b) not exceed 21 hours a week.
(c) not exceed 25 hours a month.
(d) not exceed 21 hours a month.

Q 9. KP Associates a chartered accountant firm has been appointed as an auditor of the

company for the financial year 2023-24. It consists of two partners CA Kalank & CA Bhuj.
CA Kalash is brother of the father of the finance director of the company. CA Bhuj is an
old friend of the finance director of the company. What kind of ethical threat is associated
with appointment of KP Associates as an auditor of Awesome LTD.?
[MTP April 21]
(a) Self Interest Threat
(b) Advocacy Threat.
(c) Familiarity Threat.
(d) Self-Review Threat.

Q 10. CA Dharma has established another branch in the same city. Branch was inaugurated on
3rd October 2023 and on 4th October 2023, friends of CA Dharma gave an article on the
front page of local newspaper congratulating CA Dharma on opening of another branch
which also includes half page photograph of CA Dharma with his consent. In your opinion
was the news in newspaper a misconduct on the part of CA Dharma and what actions can
be taken against him?
[MTP March 21]
(a) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be
reprimanded, his name can be removed from the register of members for 3 years and fine
upto ` 5,00,000.

85
 (b) Yes, it is a misconduct under clause 5 Part I of First Schedule and he can be reprimanded,
his name can be removed from the register of members for 3 months and fine upto
` 1,00,000.
(c) Yes, it is a misconduct under clause 7 of Part 1 of First Schedule and he can be
reprimanded, his name can be removed from the register of members for 3 months and
fine upto ` 1,00,000.
(d) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be
reprimanded, his name can be removed from the register of members permanently and fine
upto ` 5,00,000.

Q 11. Ramesh Ltd. Is a listed company having business of production of motion pictures. For the
year ended 31 March 2024, the company wanted to appoint Tax Auditor. For the purpose,
somebody who is familiar with the business of the company/industry was to be preferred
for appointment i.e. who would have worked with the company in the past to avoid
efforts/duplication in terms of providing the information to get the Tax Audit completed.
The company had following options for the same. Select the correct one.
[MTP Oct. 19]
(a) Internal auditors can be appointed for this work.
(b) Both statutory and internal auditors can be jointly appointed for this work.
(c) Internal Auditors along with the tax consultants of the company can be appointed for this
work.
(d) Statutory auditors can be appointed for this work.

Q 12. Mr. Babu, an aspiring student of ICAI, approached Mr. Kitty, a practicing Chartered
Accountant, for the purpose of articleship. Mr. Kitty, the principal, offered him stipend at
the rate of ` 2,000 per month to be paid every sixth month along with interest at the rate of
10% per annum compounded monthly to compensate such late payment on the plea that
cycle of professional receipts from clients is six months. Mr. Babu agreed for such late
payment in the hope of getting extra stipend in the form of interest. Mr. Witty, however,
used to disburse salary to all of his employees on time. As per Chartered Accountants Act,
1949, under which clause Mr. Kitty is liable for misconduct.
(a) Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.
(b) Clause (4) of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949.
(c) Mr. Witty is paying interest thus he is not liable for misconduct.
(d) Clause (10) of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949.

Q 13. Nakul Sehdev & Co LLP is a firm of Chartered Accountants. The firm has 12 Partners.
The firm has a good portfolio of clients for statutory audits but the same clients had some
other firms as their tax auditors. In the current year (Financial Year 2023-24), many
existing clients for whom Nakul Sehdev & Co LLP happens to be the statutory auditor have
requested the firm to carry out their tax audits as well. The firm is expecting the number of

86
 tax audits to increase significantly this year. One of the partners of the firm has also raised
a point that the firm can accepts tax audits upto a maximum limit. However, other partners
are of the strong view that limits on audits is applicable in case of statutory audits and not
for tax audits. This needs to be decided as soon as possible so that the appointment
formalities can also be completed. You are requested to advise the firm in this matter.
[MTP May 20]
(a) There is no limit on number of tax audits in case of LLP.
(b) All the partners of the firm can collectively sign 540 tax audit reports.
(c) All the partners of the firm can collectively sign 720 tax audit reports.
(d) All the partners of the firm can collectively sign 540 tax audit reports. However, one
partner can individually sign maximum 60 tax audit reports.

ANSWER KEY
Q. No. Answer
1 (d) RP & Affiliates.
2 (d) Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act,
1949.
3 (b) The dilemma of Mr. Sujal is not correct as it is positive evidence of delivery as
the same is received from the official email of the outgoing auditor, as per the
Code of Ethics.
4 (a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act,
1949.
5 (c) All the partners of the firm can collectively sign 600 tax audit reports.
6 (a) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act,
1949 he shall not use the designation „Member of the Parliament‟ in addition to
that of a „Chartered Accountant‟.
7 (a) Yes, as he cannot be continued to be director of a company, the subsidiary of
which he is an auditor and also he cannot accept appointment of auditor of a
Kalaveer Ltd. without finishing of the cooling period for the same.
8 (a) not exceed 25 hours a week.
9 (c) Familiarity Threat.
10 (c) Yes, it is a misconduct under clause 7 of Part I of First Schedule and he can be
reprimanded, his name can be removed from the register of members for 3
months and fine upto ` 1,00,000.
11 (d) Statutory auditors can be appointed for this work.
12 (a) Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act,
1949.
13 (c) All the partners of the firm can collectively sign 720 tax audit reports.

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 INTEGRATED CASE SCENARIO
M/s. IM & Co. is a newly started CA firm. Their first assignment was to conduct statutory audit of M/s.
CD Crackers Ltd. (a cracker manufacturing company). Since it was their first audit, the partners
immediately accepted the work, without paying attention to the relevant procedures. They started their
audit work from 25th May 2023 for the financial year (say previous year) ended on 31st March 2023.
During the course of the audit,
(A) The auditors requested for the financials of the preceding previous year, along with the details
of transactions till 25th May of the current year. The management however argued that both the
details are out of the scope of audit and hence told that they can‟t provide the details. However,
after repeated request from the auditors, they finally provided in September 2023.
(B) It was suspected that the senior accountant could have indulged in a fraud amounting to ` 117
lakh. However, on further investigation by management it was found that there was a gross
mistake on part of the accountant, who had wrongly debited and credited certain accounts by
mistake, which amounted to ` 18 lakh. The company provided proper and correct evidence for
the balance amount; hence the auditors were strongly convinced that no fraud had taken place.
Due to the absence of an audit committee, the auditors suggested to the Director (Finance) to
replace the existing accountant as he was poor in basic accounting skills.
Initially, the company thought of handing over the tax audit work to the previous auditor. However,
since they had a bad expience last year, in form of an argument regarding the contents to be included in
the tax audit report, especially with respect to the disclosure of key ratios, it was decided that the IM &
Co. shall also act as tax auditors.
After the conclusion of the audit, Mr. I, one of the partners of the firm was confused as to whether the
firm could be held guilty of professional miscount for a plausible violation of any of the provisions of
the Chartered Accountants Act. He contacted Mr. M, his partner, to get clarified about the doubt.
M/s. Hire (P) Ltd., a recruitment agency contacted Mr. I regarding a vacancy in one of the leading
manufacturing company. Eventually Mr. I resigned as the partner of IM & Co. and joined the company.
The agency raised an invoice for the service rendered by them, which amounted to 0.2% of the CTC
offered. Mr. I agreed to pay the amount. However, since his friend was a manager at the agency, he
received full discount on the invoice.
Angered by the act of resignation, Mr. M filed a complaint with the Institute of Chartered Accountants
of India (ICAI) stating that Mr. I had violated the provisions of the Chartered Accountants Act and is
guilty of professional misconduct. Having come to know that Mr. M was the one who had filed a
complaint against him, Mr. I decided to take revenge. While thinking for a suitable reason to file a
complaint, he recalled the fact that Mr. M was engaged as a Registration Authority for obtaining digital
signatures for his clients. Quoting the same, he filed a complaint against Mr. M stating that he was
guilty of misconduct for violating the provisions of the Chartered Accountant Act.

88
Based on the above facts, answer the following:
Q 1. Is Mr. I guilty of professional misconduct, if so, under what clause?
(a) Clause 1 of Part I of First Schedule.
(b) Clause 2 of Part II of Second Schedule.
(c) No. Mr. I is not guilty of professional misconduct.
(d) Clause 1 of Part II of First Schedule.

Q 2. What can you infer from the situation given in Point I?

(a) Management was right. Both the details asked by the auditors were out of the scope of
audit.
(b) The auditors have the right to ask only the details of preceding previous year and not the
details of transactions till 15th May of current year.
(c) Both the auditors and the management have the right to ask both the details and the right
to not provide both the details.
(d) The auditors have the right to ask both the details. The management‟s contention that it is
out of the scope of audit is wrong.

Q 3. Is Mr. M guilty of professional misconduct, if so, under what clause?

(a) No. Mr. M is not guilty of professional misconduct.
(b) Clause 11 of Part I of First Schedule.
(c) Part III of Second Schedule.
(d) Clause 1 of Part II of Second Schedule.

Q 4. Is M/s. IM & Co. guilty of professional misconduct for violating any of the provisions of
Chartered Accountants Act? If so, as per which clause?
(a) Clause 1 of Part 1 of Second Schedule.
(b) Clause 8 of Part I of First Schedule.
(c) Clause 2 of Part II of Second Schedule.
(d) No. The firm has not violated any of the provisions and hence not guilty of professional
misconduct.

ANSWER KEY
Q. No. Answer
1. (d) Clause 1 of Part II of First Schedule.
2. (d) The auditors have the right to ask both the details. The management‟s contention
that it is out of the scope of audit is wrong.
3. (a) No. Mr. M is not guilty of professional misconduct.
4. (b) Clause 8 of Part I of First Schedule.

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 SA 200 "OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR and
CONDUCT OF AUDIT IN ACCORDANCE WITH SAs"
Overall Objectives of the Auditor
In conducting an audit of financial statements, the overall objectives of the auditor are:
 To obtain reasonable assurance about whether the F.S. as a whole are free from material
misstatement, whether due to fraud or error, in accordance with an applicable FRF, and
 To report on the F.S. and communicate as required by the SA’s
Special Note- Auditor obtains Reasonable assurance when he obtain SAAE.
Requirements of Standard
(a) Ethical Requirements Relating to an Audit of F.S.
 The auditor shall comply with relevant ethical requirements, including independence.
 Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI.
The fundamental principles are:
(i) Objectivity;
(ii) Integrity;
(iii) Professional behaviour
(iv) Confidentiality; and
(v) Professional competence and due care;
 Independence comprises both independence of mind and independence of appearance.
 Independence enhances the auditor's ability to act with integrity, to be objective and
Confidential and to maintain an attitude of professional skepticism and appropriate
professional behaviour.
(b) Professional Skepticism
(1) Meaning:
 An attitude that includes
 A questioning mind, being alert to conditions (which indicate possible misstatement
due to error or fraud), and critical assessment of audit evidence.
 The auditor shall plan and perform an audit with professional skepticism.
 Professional skepticism includes being alert to:
(i) Contradictory audit evidence.
(ii) Questions on reliability of documents.
(c) Professional Judgement
(1) Meaning
 The application of relevant knowledge, training, and experience,
 In making informed decisions about the courses of action
 The auditor shall exercise professional judgment in planning andperforming an audit of
financial statements.
 Professional Judgment is important when deciding about:
(i) Materiality and audit risk.
(ii) NTE of audit procedures.
(iii) Evaluating sufficiency and appropriateness of audit procedures.
(iv) Evaluating management judgment in applying applicable FRF.
(v) Drawing conclusions based on audit evidence.

1
 (d) Risk of Material Misstatement
 The risks of material misstatement may exist at two levels:
(i) The overall financial statement level; and
(ii) The assertion level for account balances, classes of transactions, and disclosures.
 Risks of material misstatement at the overall financial statement level refer to risks of
material misstatement that relate pervasively to the financial statements as a whole and
potentially affect many assertions.
 The risks of material misstatement at the assertion level consist of two component inherent
risk and control risk.
 Special Note- The SAs do not ordinarily refer to inherent risk and control risk separately,
but rather asks auditor for assessment of the "risks of material misstatement".

Inherent Limitations for an Audit

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error.
This is because there are inherent limitations of an audit, which result in most of the audit evidence
on which the auditor draws conclusions and bases the auditor's opinion being persuasive rather than
conclusive. The inherent limitations of an audit arise from:
(a) The nature of financial reporting:
 The preparation of F.S. involves judgment by management in applying the requirements of
the applicable FRF to the facts and circumstances of the entity. For example Accounting
estimates.
(b) The nature of audit procedures:
 Management and others do not provide complete information intentionally unintentionally.
 Audit procedures used to gather audit evidence may be ineffective against fraud detection.
 Audit is not an official investigation into alleged wrongdoings.
(c) Balance between Benefit and Cost
 User expectation that the auditor will form an opinion on the F.S. within a reasonable period
of time and at a reasonable cost.
 It results into use of Test checking and putting most of efforts over the areas having risk of
material misstatement with corresponding less efforts in other areas.
(d) Other Matters that Affect the Limitations of an Audit:
In the case of certain assertions or subject matters, the potential effects of the limitation on the
auditor's ability to detect material misstatements are particularly significant such assertions or
subject matters include:
 Fraud, particularly fraud involving senior management or collusion.
 The existence and completeness of related party relationships and transactions.
 The occurrence of non-compliance with laws and regulations.
 Future events or conditions that may cause an entity to cease to continue as a going concern.

2
 1. “Quality Control (QC)”
1.1-Audit Quality
Standards dealing framework audit quality with of audit quality
▪ SQC 1 = all engagements and deals with quality at firm level
▪ SA 220 = audit quality at individual audit engagement level.
▪ There also exists mechanism for review of QC through Peer Review Board , Quality Review
Board and National Financial Reporting Authority.

1.2-SQC 1 “Quality Control for Firms that Perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements”
Purpose of SQC
▪ The firm should establish a system of QC (policy & procedures) designed to provide it with
reasonable assurance that:
(a) the firm and its personnel comply with PLR, and
(b) reports issued are appropriate in the circumstances.
▪ Firm’s system of QC should consist of policies designed to achieve these objectives. SQC 1
applies to all firms irrespective of their constitution.
Elements of a System of Quality Control
▪ The firm should establish system of QC should include policies and procedures addressing each
of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
▪ The QC policies and procedures should be documented and communicated to the firm’s
personnel.
REQUIREMENTS OF SQC
Leadership Responsibilities
▪ The firm should establish policies and procedures designed to promote an internal culture based
on the recognition that quality is essential in performing engagements.
▪ Such policies and procedures should require the firm’s CEO (or managing partner), to assume
ultimate responsibility for the firm’s system of QC.
Considerations to be taken into account while upholding quality of firm
(i) Commercial considerations do not override quality of work performed.
(ii) The firm’s policies and procedures in relation to its personnel are designed to demonstrate its
overriding commitment to quality.
(iii) The firm devotes sufficient resources for development of its QC policies and procedures.
(iv) A firm before accepting an engagement should acquire vital information about the client. Such
an information should help firm to decide about :- (bachpan)
• Integrity of Client, promoters and key managerial personnel,

1
• Competence (including capabilities, time and resources) to perform engagement and
• Compliance with ethical requirements.
Ethical requirements
▪ The firm should establish quality control policies and procedures designed to provide it with
reasonable assurance that the firm and its personnel comply with relevant ethical requirements.
▪ Code establishes the fundamental principles of professional ethics, which include: (bachpan)
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behaviour.
▪ Fundamental principles should be emphasized by: (thoda imp)
(a) Actions of the leader of the firm
(b) Spreading awareness and training
(c) Monitoring
(d) Process for dealing with non-compliance.
Independence
▪ The firm should establish Quality control policies and procedures designed to provide it with
reasonable assurance that the firm, its personnel maintain independence where required by the
Code.
▪ Such Quality control policies and procedures should enable the firm to:
(a) Communicate its independence requirements to its personnel
(b) identify and evaluate circumstances and relationships that create threats to independence,
and:-
• to take appropriate action to eliminate those threats or
• reduce them to an acceptable level by applying safeguards, or,
• if considered appropriate, to withdraw from the engagement.
▪ At least annually, the firm should obtain written confirmation of compliance with its Quality
control policies and procedures on independence from all firm personnel required to be
independent in terms of the requirements of the Code. (NICE)

Policies to reduce Familiarity threat (time pass)

Firm should establish criteria for determining the need for safeguards to address the familiarity threat.
In determining appropriate criteria, the firm considers such matters as:
(a) the nature of the engagement, including the extent to which it involves a matter of public interest
and
(b) the length of service of the senior personnel on the engagement.
Examples of safeguards: Rotating the senior personnel or requiring an engagement quality control
review (EQCR).
Other Points
▪ For listed entity audits, EP should be rotated after a period not more than 7 years (except a sole
practitioner).
▪ However, to ensure QC exists in such firms and appropriate reports are issued, there is a process
for mandatory peer review of such firms.

2
Acceptance and Continuance of Client Relationships & Specific Engagements
▪ A firm before accepting an engagement should acquire vital information about the client. Such
an information should help firm to decide about: (again bachpan)
(a) Integrity of Client, promoters and key managerial personnel.
(b) Competence (including capabilities, time and resources) to perform engagement.
(c) Compliance with ethical requirements.
(d) Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.
▪ The firm should obtain such information as it considers necessary in the circumstances
✓ Before accepting an engagement with a new client, (New- new)
✓ When deciding whether to continue an existing engagement, and (old-old)
✓ When considering acceptance of a new engagement with an existing client. (new-old)
▪ Establish Quality control Policies w.r.t. withdrawal from engagement and communication
requirements, if circumstances warrant. Policies and procedures on withdrawal from an
engagement or from both the engagement and the client relationship address issues that include
the following:
(a) Discussing with appropriate level of mngt. & TCWG regarding the appropriate action that
the firm might take based on the relevant facts and circumstances.
(b) If the firm determines that it is appropriate to withdraw, discussing with the appropriate
level of the client’s management and TCWG withdrawal from the engagement or from both
the engagement and the client relationship.
(c) Considering whether there is a professional, legal or regulatory requirement (PLR) for the
firm to remain in place, or for the firm to report the withdrawal from the engagement,
together with the reasons for the withdrawal, to regulatory authorities.
(d) Documenting significant issues, consultations, conclusions and the basis for the
conclusions.
Considerations as to integrity of clients
With regard to the integrity of a client, matters that the firm considers include, for example:
1. The identity and reputation of the client’s principal owners, key management, and TCWG.
2. The nature of the client’s operations.
3. Information concerning the attitude of the client’s owners, key management and TCWG.
4. Indications of an inappropriate limitation in the scope of work.
5. Indications that the client might be involved in money laundering or other criminal activities.
6. The reasons for the proposed appointment of the firm and non-reappointment of the previous
firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow
within the context of an ongoing relationship with that client.
Matters to be considered to determine whether firm has the capabilities, competence, time and
resources to undertake an engagement (very easy)
1. Firm personnel have knowledge of relevant industries or subject matters;
2. Firm personnel have experience with relevant regulatory or reporting requirements, or the ability
to gain the necessary skills and knowledge effectively;
3. The firm has sufficient personnel with the necessary capabilities and competence;
4. Experts are available, if needed;
5. The firm would be able to complete the engagement within the reporting deadline.

3
Human Resources (time pass)
Firm should establish quality control policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to
ethical principles necessary to perform its engagements in accordance with professional standards
and legal and regulatory requirements, and to enable the firm or engagement partners to issue reports
that are appropriate in the circumstances.
Assignment of Engagement Teams (time pass)
Firm should assign responsibility for each engagement to an engagement partner. The firm should
establish quality control policies and procedures requiring that:
(a) The identity and role of the engagement partner are communicated to key members of the
client’s management and those charged with governance;
(b) The EP has the appropriate capabilities, competence, authority and time to perform the role; and
(c) The responsibilities of the EP are clearly defined and communicated to that partner.
Engagement Performance
Consistency in quality of engagement performance is achieved through briefing of ET:-
✓ their objectives, (comply- PLR, reports- appro)
✓ processes for complying with engagement standards, (SA, SRE, SRS, SAE)
✓ processes of engagement Direction, Review , supervision and, (DRS)
✓ appropriate documentation of work performed. (210)
1. Consultation
▪ Consultation should take place in difficult matters pertaining to an engagement (within or
outside the firm)
▪ Consultation procedures require consultation with those having appropriate knowledge,
seniority and experience within the firm (or outside the firm).
▪ A firm needing to consult externally may take advantage of advisory services provided by other
firms or professional & regulatory bodies.
▪ Complete and proper documentation should be maintained on issues involved and results of
consultation.
2. Engagement Quality Control Review (EQCR)
▪ Significant judgments made in an engagement should be reviewed by EQC reviewer for taking
an objective view before the report is issued.
▪ The extent of the review depends on
✓ the complexity of the engagement and
✓ the risk that the report might not be appropriate in the circumstances.
▪ The review does not reduce the responsibilities of the EP.
▪ EQCR is mandatory for all audits of F.S. of listed entities. In respect of other engagements,
firm should devise criteria to determine cases requiring performance of EQCR.
Matters to be considered in an EQCR for audits of F.S. of listed entities
(1) The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement.
(2) Significant risks identified during the engagement and the responses to those risks.
(3) Judgments made, particularly with respect to materiality and significant risks.
(4) Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult matters, and the conclusions arising from those consultations.

4
(5) The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
(6) The matters to be communicated to management and TCWG and, where applicable, other parties
such as regulatory bodies.
(7) Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
(8) The appropriateness of the report to be issued.
Engagement Quality Control Reviewer (EQC Reviewer)
▪ EQC reviewer should be a suitably qualified external person such as a partner or employee (who
should be member of ICAI) or can be from another firm with similar background.
▪ It is necessary to maintain objectivity of such reviewer. Therefore, participation in engagement
or making decisions for ET is to be avoided at all costs. However, EP may consult EQC
reviewer during the engagement so as not to compromise his objectivity and eligibility to
perform the role. Where the nature and extent of the consultations become significant, care is
taken by both the ET and the reviewer to maintain the reviewer’s objectivity. Where this is not
possible, another individual within the firm or a suitably qualified external person is appointed
to take on the role of either the EQC reviewer or the person to be consulted on the engagement.
▪ The firm’s policies should provide for the replacement of the EQC reviewer where the ability to
perform an objective review may be impaired.
3. Differences of opinion
▪ There might be difference of opinion within ET, with those consulted and between EP and EQC
reviewer. The report should only be issued after resolution of such differences.
▪ In case, recommendations of EQC reviewer are not accepted by EP and matter is not resolved to
reviewer’s satisfaction, the matter should be resolved by following established procedures of
firm like by consulting with another practitioner or firm, or a professional or regulatory body.
▪ In case, recommendations of EQC reviewer are not accepted by EP and matter is not resolved to
reviewer’s satisfaction, the matter should be resolved by following established procedures of
firm like by consulting with another practitioner or firm, or a professional or regulatory body.
4. Engagement documentation
▪ Firm should establish policies and procedures for ETs assembly of final engagement files on a
timely basis after the engagement reports have been finalized. Engagement files should be
completed in not more than 60 days after date of auditor’s report.
▪ Where two or more different reports are issued in respect of the same subject matter information
of an entity, firm’s policies and procedures relating to time limits for assembly of final
engagement files should be considered separately. This may be the case when the firm issues an
auditor’s report on a component’s financial information for group consolidation purposes and, at
a subsequent date, an auditor’s report on the same financial information for statutory purposes.
▪ Firm should establish policies and procedures designed to maintain the confidentiality, safe
custody, integrity, accessibility and retrievability of engagement documentation.
▪ Unless otherwise specified by law or regulation, engagement documentation is the property of
the firm. The firm may, at its discretion, make portions of, or extracts from, engagement
documentation available to clients, provided such disclosure does not undermine the validity of
the work performed, or, in the case of assurance engagements, the independence of the firm or
its personnel.
▪ Engagement documentation has to be retained for a period of time sufficient to permit those

5
 performing monitoring procedures to evaluate the firm’s compliance with its system of QC, or
for a longer period if required by law or regulation.
▪ In specific case of audit engagements, the retention period ordinarily is no shorter than 7 years
from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
Policies and procedures on documentation of the EQCR
Policies & procedures on documentation of the EQCR should require documentation that:
(a) Procedures required by firm’s policies on EQCR have been performed.
(b) EQCR has been completed before the report is issued and
(c) Reviewer is not aware of any unresolved matters that would cause the reviewer to believe that
the significant judgments the ET made and the conclusions they reached were not appropriate.
Monitoring
▪ The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of QC are relevant, adequate,
operating effectively and complied within practice.
▪ Such policies and procedures should include an ongoing consideration and evaluation of the
firm’s system of QC, including a periodic inspection of a selection of completed engagements.
Factors to be considered in monitoring of QC of engagements
(i) Deciding whether QC system of the firm has been appropriately designed and effectively
implemented.
(ii) Examining whether new developments in the professional standards, legal and regulatory
requirements have been reflected in the QC policies.
(iii) Conducting monitoring by entrusting responsibility of monitoring process to a partner or other
persons with sufficient and appropriate experience and authority in the firm.
(iv) Dealing with complaints and allegations against the firm or any employees of it of non-
compliance with professional standards or appropriate regulatory requirements by a person
within or outside the firm.
(v) Taking appropriate remedial actions against the personnel who did not conform to QC policies.
(vi) Taking action when deficiencies in the design or operation of the firm’s QC policies and
procedures, or non-compliance with the firm’s system of QC are identified.
Illustrations for Practice
Illustration 1: MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a
borrower. It deputes one of its paid Chartered accountant employees, Sudhanshu, to conduct above
said stock audit. He leverages it as an opportunity to prevail upon the client to get the accounts
audited from their firm. He also assures the client of a clean stock audit report without adverse
comments as a quid pro quo. Is approach of Sudhanshu proper? How does it reflect upon quality
control system of firm?
HINT: Approach of Sudhanshu is not proper. Such practices blatantly violate code of ethics and its
spirit. It reflects poorly upon quality control system of firm envisaged in SQC 1 which requires that
quality control policies and procedures should be documented and communicated to the firm’s
personnel. It shows that firm’s personnel are not properly sensitized regarding requirements of
SQC 1.
Illustration 2: CA M is introduced to a prospective client in a social function. He assures to visit
office of CA M very soon in relation to professional work. During discussions over a cup of coffee
next week, it transpires that there was a search by Enforcement Directorate in his premises about a

6
month back resulting in recovery of huge sum of cash. The income tax department had also searched
his premises in relation to bogus capital gains on penny stocks. Lamenting poor quality of services
provided by his present auditor, he offers appointment as tax auditor of his five family-owned firms
to CA M in lieu of handsome fees. What are the factors to be evaluated by CA M if he wants to take
up the engagement?
HINT: As per SQC 1, before accepting a new engagement, integrity of client should be considered
including matters that indicate involvement in money laundering or criminal activities. There has
been search of ED on the said party leading to recovery of huge amount of cash. The above coupled
with actions of income tax department relating to bogus capital gains on penny stocks indicates that
client might be involved in money laundering activities. Therefore, offer should not be accepted.
Illustration 3: Beta Private Limited has approached a firm of Chartered accountants to assist them in
preparation of financial statements and issue a compilation report in this regard. Does CA firm have
responsibility in relation to quality control for above said engagement? Discuss with reasons.
HINT: Such kind of services fall in category of “related services”. SQC 1 is applicable to all type of
engagements including engagement pertaining to “related services”.

1.3-SA 220 “Quality Control for an Audit of F.S.”

Objectives of the auditor (same)
The objective of the auditor is to implement system of quality control policy & procedures at the
engagement level that provide the auditor with reasonable assurance that:
(a) Audit complies with professional standards legal and regulatory requirements; &
(b) Auditor’s report issued is appropriate in the circumstances.
Points to remember
SA-220 is premised on the basis that the firm is subject to SQC 1. Within the context of the firm’s
system of QC, ETs have a responsibility to implement QC procedures that are applicable to the audit
engagement. Based upon QC system of firm, QC policies pertaining to audit engagements are
decided by ETs. EP of a team is responsible for QC procedures of a particular audit engagement in
accordance with SA-220.
Requirements to implement QC Procedures
Leadership Responsibilities for Quality in Audits (easy che)
EP is to take responsibility for overall quality on each audit engagement. As a part of this
responsibility, EP should emphasize the following to the engagement team (ET):
▪ Compliance with professional Standards and legal and regulatory requirements.
▪ Issuance of appropriate audit report.
▪ Quality is essential & indispensable in engagement performance.
▪ Compliance with firm’s Quality Control Policies and procedures as applicable.
▪ Ability to raise concerns without fear.
Relevant Ethical requirements (Same)
In relation to ethical requirements in an audit engagement, EP is responsible for:
▪ Identifying a threat to independence regarding the audit engagement that safeguards may not be
able to eliminate or reduce to an acceptable level or withdrawing from the audit engagement,
where withdrawal is legally permitted.
Acceptance & Continuance of Client Relationship & audit Engagement

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 ▪ Responsibility of EP is in line with SQC 1 which requires that the firm should obtain such
information as it considers necessary in the circumstances before
✓ accepting an engagement with a new client,
✓ when deciding whether to continue an existing engagement, &
✓ when considering acceptance of a new engagement with an existing client.
Examples of information which may cause the firm to withdraw (Same)
▪ The integrity of the principal owners, key management and TCWG of the entity;
▪ Competency of engagement team to perform the audit engagement and availability of necessary
capabilities, including time and resources;
▪ Compliance with relevant ethical requirements by firm and the ET; and
▪ Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.
Assignment of Engagement team (time pass)
EP should ensure that the ET and any auditor’s experts who are not part of the ET, collectively have
the appropriate competence and capabilities to perform the engagement in accordance with
professional standards and regulatory and legal requirements.
Engagement Performance (not imp)
EP has the responsibility for the following:
(a) Direction, supervision and performance of audit engagement in accordance with professional
standards legal and regulatory requirements;
(b) Auditor’s report being appropriate in circumstances.
(c) Review of audit documentation before issue of audit report.
(d) Undertaking appropriate consultation on difficult matters not only within the team but also with
others at appropriate level within or outside the firm.
Engagement Quality Control Review (EQCR)
For audits of F.S. of listed entities, and those other audit engagements, if any, for which firm has
determined that an EQCR is required, EP shall:
(a) Determine that an EQC reviewer has been appointed.
(b) Discuss significant matters arising during the audit engagement
(c) Not to date the auditor’s report until the completion of the EQCR.
Matters to be evaluated by EQC Reviewer
EQC reviewer shall perform an OBJECTIVE EVALUATION of the significant judgments made by
the engagement team, and the conclusions reached in formulating the auditor’s report. This
evaluation shall involve:
(a) Review of the F.S.
(b) Review of the proposed auditor’s report
(c) Review of selected audit documentation relating to the significant judgments
(d) Discussion of significant matters with the EP.
(e) Evaluation of the conclusions reached.
(f) Whether appropriate consultation has taken place
(g) ET’s evaluation of firm’s independence in relation to audit engagement.

Points to remember

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Performance of EQCR does not reduce the responsibilities of the EP for the audit engagement and its
performance.
Differences of opinion
If differences of opinion arise within the ET, with those consulted or, where applicable, between the
EP and the EQC reviewer, the ET shall follow the firm’s policies and procedures for dealing with and
resolving differences of opinion.
Monitoring
▪ An effective system of QC includes a monitoring process designed to provide the firm with
reasonable assurance that its policies and procedures relating to the system of QC are relevant,
adequate, and operating effectively.
▪ EP shall consider the results of the firm’s monitoring process as evidenced in the latest
information circulated by the firm and, if applicable, other network firms and whether
deficiencies noted in that information may affect the audit engagement.
Documentation
By Auditor
▪ Issues identified w.r.t. compliance with relevant ethical requirements and how they were
resolved.
▪ Conclusions on compliance with applicable independence requirements and any relevant
discussions with the firm that support these conclusions.
▪ Conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements.
▪ The nature and scope of, and conclusions resulting from, consultations undertaken during the
course of the audit engagement.
By EQC Reviewer
▪ Procedures required by firm’s policies on EQCR have been performed.
▪ EQCR has been completed on or before the date of auditor’s report.
▪ Reviewer is not aware of any unresolved matters that would cause him to believe that the
significant judgments the engagement team made and the conclusions they reached were not
appropriate.
SQC 1 vs. SA 220
Basis SQC 1 SA 220
Scope & SQC 1 applies to entire firm & fixes the SA 220 applies to a particular audit
Respon responsibility of firm to be assumed by engagement & EP takes responsibility of
CEO or managing partners. the same.
Type of SQC 1 is applicable to audits, reviews, SA 220 is applicable to audit engagements
Engage other assurance & related services only.
ments engagements.
ork SQC 1 relates to setting up of a quality SA 220 deals with responsibilities of ET
control system consisting of policies and to implement QC Policy & procedures
procedures for firm as a whole. (QCSPP) that are applicable to audit engagements.
Relation SQC 1 pertains to establishing a system of SQC 1 is a sine qua non (mandatory) for
ship QC designed to provide firm with a applicability of SA 220. It is within
reasonable assurance that a firm and its overall context of a firm’s system of QC,

9
 personnel comply with professional ETs implement QC procedures applicable
standards & regulatory & legal engagements. to audit
requirements so that reports issued by
firm/EPs are appropriate. (Objective)
Illustrations for Practice
Illustration 4: GVN & Associates are auditors of a listed company involved in “fin-tech” sector. The
engagement team is stuck up with some issue pertaining to a particular Ind-AS applicable to the
company. They have framed a query and sent to ICAI for expert opinion on the matter. The issue was
resolved upon receipt of expert opinion. Since expert opinion was provided by ICAI, engagement
team was of the view that appointment of engagement quality control reviewer has lost its relevance.
Do you agree?
HINT: Engagement quality control review in listed entities is a mandatory requirement. Expert
opinion of ICAI pertains to issue of interpretation. The appointment of reviewer is a separate and
mandatory requirement in audits of listed companies.
Illustration 5: RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged
in manufacturing of heavy machinery components. The audit report for year 2023-24 also included
report on matters listed in CARO, 2020. While reporting under clause vii(a) of the said order relating
to regularity of undisputed statutory dues by the company, the auditors have commented that
company is “generally regular” in depositing statutory dues to appropriate authorities. Is above
reporting qualitative and in line with requirements of SA-220?
HINT: Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the
objectives of the auditor, as per SA 220, is to implement quality control procedures at the
engagement level that provide the auditor with reasonable assurance that the audit complies with
professional standards and regulatory and legal requirements. The reporting under CARO, 2020 is not
proper. Hence, the audit does not comply with regulatory and legal requirements.
Illustration 6: PQR & Associates are statutory auditors of a listed company. There arose an issue
during the course of audit relating to related party transactions. The engagement partner wants to
consult engagement quality control reviewer on this matter during the course of audit process itself.
Can he consult with engagement quality control reviewer? Discuss.
HINT: It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or
making decisions for engagement team is to be avoided at all costs. However, engagement partner
may consult EQC Reviewer during the engagement so as not to compromise his objectivity and
eligibility to perform the role.
Illustration 7: BNE & Co. are in midst of audit process of a listed company. During the course of
audit, an issue arose relating to revenues from contracts with customers in terms of Ind AS 115. The
engagement partner took a certain stand. However, engagement quality control reviewer
recommended otherwise review. The engagement partner is not willing to accept recommendations of
reviewer. How can the stalemate be ended?
HINT: In case, recommendations of EQC Reviewer are not accepted by engagement partner and
matter is not resolved to reviewer’s satisfaction, the matter should be resolved by following
established procedures of firm like by consulting with another practitioner or firm, or a professional
or regulatory body. The audit report should be issued only after resolution of matter.

1.4-Mechanisms for review of Quality Control

10
Peer Review Board (PRB)
PRB is constituted by Council of ICAI. Main objective of PRB is to ensure that, in carrying out
assurance assignments:
(a) Technical, professional and ethical standards including regulatory requirements are complied
with by members of ICAI. (PSLR)
(b) Proper systems are in place including documentation thereof which amply demonstrate quality of
assurance services provided by members. (SQC 1)
Points to remember
▪ Peer review means an examination and review of the systems and procedures to determine
whether the same have been put in place by the Practice Unit (PU matlab CA FIRM) for
ensuring the quality of assurance services as envisaged by the technical, professional and ethical
Standards or any other regulatory requirements. (PSLR)
▪ Peer review is meant to enhance quality of professional work resulting in more reliable and
useful audit reports.
▪ Once a PU is subjected to Peer review (Gehri baat), its assurance engagement records pertaining
to the Peer review period are subject to examination and review by the Peer Reviewer. On
completion of this exercise, a “Peer Review Certificate” is issued in case of unqualified report
issued by Peer Reviewer. In case of a qualified report, it is informed to the PU that same cannot
be issued along with the reasons therefore as well as inform about the due date for conducting a
follow-on review as may be decided by the Board.
Quality Review Board
▪ Quality review Board has been set up by C.G. It consists of members nominated by C.G. and
Council of ICAI. The functions of QRB are:
(a) To make recommendations to the Council regarding the quality of services provided by the
members of the Institute;
(b) To review the quality of services provided by the members of the Institute including audit
services and
(c) To guide the members of the Institute to improve the quality of services and adherence to
the various statutory and other regulatory requirements.
▪ Statutory auditors in respect of the companies are identified for their audit quality review based
upon risk-based approach. The review is carried out by technical reviewers who are empanelled
by QRB on engagement basis from across the country.
National Financial Reporting Authority (NFRA)
▪ NFRA has been constituted in terms of Sec. 132(1) of Companies Act, 2013. Duties of NFRA
also include the following:
(a) Monitor & enforce compliance with ASs and auditing standards.
(b) Oversee the quality of service of the professions associated with ensuring compliance with
such standards and suggest measures for improvement in the quality of service.
▪ NFRA has power to monitor and enforce compliance with ASs and auditing standards and
oversee the quality of service u/s 132(2) or undertake investigation (Dardddd) u/s 132(4) of the
auditors of certain class of companies. Such companies include listed companies, insurance
companies, banking companies and other companies as provided for in Rule 3 of NFRA Rules,
2018.

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 SA 210 “AGREEING THE TERMS OF AUDIT ENGAGEMENT”

Pre-conditions for an Audit

(a) Determine whether the financial reporting framework to be applied in the preparation of the
financial statements is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its
responsibilities for:
(i) The preparation of the F.S. in accordance with the applicable FRF.
(ii) Design, Implement & maintain internal control to enable the preparation of F.S. that
are free from material misstatement, whether due to fraud or error.
(iii) To provide the auditor with:
▪ Access to all relevant information such as records, documentation and other
matters;
▪ Additional information that the auditor may request from management for the
purpose of the audit; and
▪ Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
NOTE
Additional information that the auditor may request from management for the purpose
of the audit may include when applicable, matters related to other information in
accordance with SA 720.

Limitation on Scope Prior to Audit Engagement Acceptance

If management or TCWG impose a limitation on the scope of the auditor's work in the terms of a
proposed audit engagement such that the auditor believes the limitation will result in the auditor
disclaiming an opinion on the F.S., the auditor shall not accept such a limited engagement as an
audit engagement, unless required by law or regulation to do so.

Agreement on Audit Engagement Terms

(a) The auditor shall agree the terms of the audit engagement with management or TCWG, as
appropriate.
(b) The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
(1) The objective and scope of the audit of the F.S.;
(2) The responsibilities of the auditor;
(3) The responsibilities of management;
(4) Identification of the applicable FRF for the preparation of the F.S.; and

1
 (5) Reference to the expected form and content of any reports to be issued by the auditor and
a statement that there may be circumstances in which a report may differ from its
expected form and content.
(c) If law or regulation prescribes in sufficient detail the terms of the audit engagement referred
above, the auditor need not record them in a written agreement, except for the fact that such
law or regulation applies and that management acknowledges and understands its
responsibility. (Gajab)

Recurring Audits
(a) In case of recurring audits, the auditor shall assess whether circumstances require revision in
terms of the audit engagement and whether there is a need to remind the entity of the existing
terms of the audit engagement.
(b) The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, the following factors may make it appropriate to revise the terms of
the audit engagement or to remind the entity of existing terms:
▪ Any indication that the entity misunderstands the objective and scope of the audit.
▪ Any revised or special terms of the audit engagement.
▪ A recent change of senior management.
▪ A significant change in ownership.
▪ A significant change in nature or size of the entity's business.
▪ A change in legal or regulatory requirements.
▪ A change in the financial reporting framework adopted in the preparation of the F.S.
▪ A change in other reporting requirements.

Acceptance of a Change in the Terms of the Audit Engagement

(a) The auditor is requested to change the terms= determine whether there is reasonable
justification.
(b) Not agree to a change in the terms = where there is no reasonable justification for doing so.
(c) If the auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall:
▪ Disclaim or Withdraw from the audit engagement where possible under applicable law
or regulation; and
▪ Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as TCWG, owners or regulators.

2
 SA 240: AUDITOR'S RESPONSIBILITIES RELATING TO FRAUD IN A
AUDIT OF FINANCIAL STATEMENTS

Objective of SA 240
 To identify and assess the RMM in the F.S. due to fraud; (RISK)
 To obtain SAAE about the assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses (RESPONSE)
 To respond appropriately to identified fraud. (SPECIFIC RESPONSE -IDENTIFIED RISK)

Meaning and Nature of Fraud

(a) Fraud may be defined as an intentional act by one or more individuals among management,
TCWG, employees, or third parties, involving the use of deception (Dhoka) to obtain an
unjust or illegal advantage.
(b) The auditor is concerned with fraud that causes a material misstatement in the financial
statements. Two types of intentional misstatements are relevant to the auditor:
 Misstatements -fraudulent financial reporting; (unlimited manipulate) (mgt fraud)
 Misstatements - misappropriation of assets. (limited to cover fraud) (yee fraud)

Note- SA 240, CARO Clause (ix), Sec- 143(12)= total 3 topics related to fraud in our syllabus.

Characteristics of Fraud
Fraud, whether fraudulent financial reporting or misappropriation of assets, involves
 Pressure to commit fraud: It may exist when management is under pressure, from sources
outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target
or financial outcome.
 Opportunity to do so: It may exist when an individual believes internal control can be
overridden, for example, because the individual is in a position of trust or has knowledge of
specific weaknesses in internal control.
 Attitude: Individuals may be able to rationalize committing a fraudulent act. Some
individuals possess an attitude, character or set of ethical values that allow them knowingly
and intentionally to commit a dishonest act.

Possible Sources of Misstatements

(a) Fraudulent Financial Reporting
 Manipulation, falsification or alteration of accounting records or source
documentation.
 Misrepresentation
 Intentional misapplication of accounting principles.
Involvement of management override of controls in Fraudulent Financial Reporting

3
  Engaging in complex transactions that are structured to misrepresent the financial
position
 Altering records and terms related to significant and unusual transactions.
 Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
 Recording fictitious journal entries, particularly close to the end of an accounting
period, to manipulate operating results or achieve other objectives.
 Inappropriately adjusting assumptions and changing judgments used to estimate
account balances.
(b) Misappropriation of Assets
 Stealing physical assets or intellectual property.
 Using an entity’s assets for personal use.
 Embezzling Receipts
 Causing an entity to pay for goods and services not received.

Examples of Fraud Risk Factors relating to Misstatements arising from Fraudulent Financial
Reporting
(a) Incentives/Pressures
Financial stability or profitability is threatened by economic, industry, or entity operating
conditions, such as (or as indicated by):
 High degree of competition or market saturation, accompanied by declining margins.
 High vulnerability to rapid changes, such as changes in technology, product
obsolescence, or interest rates.
 Significant declines in customer demand and increasing business failures in either
the industry or overall economy.
 Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover
imminent.
 Recurring negative cash flows from operations or an inability to generate cash flows
from operations while reporting earnings and an earnings growth.
 Rapid growth or unusual profitability especially compared to that of other companies
in the same industry.
 New accounting, statutory, or regulatory requirements.

(b) Opportunities
The nature of the industry or the entity’s operations provides opportunities to engage in
fraudulent financial reporting that can arise from the following:
 Significant related-party transactions not in the ordinary course of business.
 A strong financial presence or ability to dominate a certain industry a sector that
allows the entity to dictate terms or conditions to suppliers or customers that may
result in inappropriate or non-arm’s-length transactions.
4
  Assets, liabilities, revenues, or expenses based on significant estimates that involve
subjective judgments or uncertainties that are difficult to corroborate.
 Significant, unusual, or highly complex transactions, especially those close to period
end that pose difficult “substance over form” questions.
 Significant operations located or conducted across international borders in
jurisdictions where differing business environments and cultures exist.
 Significant bank accounts or subsidiary or branch operations in tax haven
jurisdictions for which there appears to be no clear business justification.
(c) Attitudes/Rationalizations
 Communication, implementation, support, or enforcement of the entity’s values or
ethical standards by management, or the communication of inappropriate values or
ethical standards, that are not effective.
 Non-financial management’s excessive participation in the selection of accounting
policies or the determination of significant estimates
 Known history of violations of securities laws or other laws and regulations, or
claims against the entity, its senior management, or TCWG alleging fraud or
violations of laws and regulations.
 Excessive interest by management in maintaining or increasing the entity’s stock
price or earnings trend.
 The practice by management of committing to analysts, creditors, and other third
parties to achieve aggressive or unrealistic forecasts.
 Management failing to correct known material weaknesses in internal control on a
timely basis.
 An interest by management in employing inappropriate means to minimize reported
earnings for tax-motivated reasons.
 Low morale among senior management.
 The owner-manager makes no distinction between personal and business
transactions.
 Dispute between shareholders in a closely held entity.
 Recurring attempts by management to justify marginal or inappropriate accounting
on the basis of materiality.
 The relationship between management and the current or predecessor auditor is
strained, as exhibited by the following:
(1) Frequent disputes with the current or predecessor auditor on accounting,
auditing, or reporting matters.
(2) Unreasonable demands on the auditor, such as unrealistic time constraints
regarding the completion of the audit or the issuance of the auditor’s report.
(3) Restrictions on the auditor that inappropriately limit access to people or
information or the ability to communicate effectively with those charged with
governance.
5
 (4) Domineering management behavior 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.

Examples of Fraud Risk Factors relating to Misstatements arising from Misappropriation of Assets
(a) Incentives/Pressures
Personal financial obligations may create pressure on management or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other assets
susceptible to theft may motivate those employees to misappropriate those assets. For
example, adverse relationships may be created by the following:
 Known or anticipated future employee layoffs.
 Recent or anticipated changes to employee compensation or benefit plans.
 Promotions, compensation, or other rewards inconsistent with expectations.
(b) Opportunities
Certain characteristics or circumstances may increase the susceptibility of assets to
misappropriation. For example, opportunities to misappropriate assets increase when there
are the following:
 Large amounts of cash on hand or processed
 Inventory items that are small in size, of high value, or in high demand.
 Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
 Fixed assets which are small in size, marketable, or lacking observable identification
of ownership.
 Inadequate internal control over assets may increase the susceptibility of
misappropriation of those assets. For example, misappropriation of assets may occur
because there is the following:
 Inadequate segregation of duties or independent checks.
 Inadequate oversight of senior management expenditures, such as travel and other
reimbursements.
 Inadequate management oversight of employees responsible for assets, for example,
inadequate supervision or monitoring of remote locations.
 Inadequate job applicant screening of employees with access to assets.
 Inadequate record keeping with respect to assets.
 Inadequate system of authorization and approval of transactions (for example, in
purchasing).
 Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
 Lack of complete and timely reconciliations of assets.
 Lack of timely and appropriate documentation of transactions, for example, credits
for merchandise returns.
 Lack of mandatory vacations for employees performing key control functions.
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  Inadequate management understanding of information technology, which enables
information technology employees to perpetrate a misappropriation.
 Inadequate access controls over automated records, including controls over and
review of computer systems event logs.

(c) Attitudes/Rationalizations
 Disregard for the need for monitoring or reducing risks related to misappropriations
of assets.
 Disregard for internal control over misappropriation of assets by overriding existing
controls or by failing to correct known internal control deficiencies.
 Behaviour indicating displeasure or dissatisfaction with the entity its treatment of the
employee.
 Changes in behaviour or lifestyle that may indicate assets have been misappropriated.
 Tolerance of petty theft

Responsibility for Prevention and Detection of Fraud

 The primary responsibility for the prevention and detection of fraud rests with both TCWG
and the management.
 To ensure prevention of fraud, management must have a commitment to create a culture of
honesty and ethical behaviour.

Risk Associated for non-detection of material misstatements (Inherent limitation)

 Owing to inherent limitations of an audit there is unavoidable risk that some material
misstatements of the F.S. may not be detected, even though the audit is properly planned
and performed in accordance with the SAs.
 The risk of not detecting a material misstatement resulting from fraud is higher than the risk
of not detecting one resulting from error. This is because fraud may involve sophisticated
and carefully organized schemes designed to conceal it, such as forgery.
 The risk of the auditor not detecting a material misstatement resulting from management
fraud is greater than for employee fraud as management is in a position to directly or
indirectly manipulate accounting records or present fraudulent financial information.

Auditor's duties for prevention and detection of fraud

(a) Maintaining Professional Skepticism
 An auditor is responsible for obtaining reasonable assurance that the F.S. taken as a
whole are free from material misstatement, whether caused by fraud or error.
 When obtaining reasonable assurance, the auditor is responsible for maintaining an
attitude of professional skepticism throughout the audit.

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  The auditor should recognize the possibility that a material misstatement due to fraud
could exist, notwithstanding his past experience of the honesty and integrity of the
entity’s management and those charged with governance.
 Unless doubtful situations are present, the auditor may accept records and documents
as genuine.
 If conditions cause the auditor to believe that a document may not be authentic or
that terms in a document have been modified, the auditor shall investigate further.
 Where responses to inquiries of management or TCWG are inconsistent, the auditor
shall investigate the inconsistencies.
(b) Communication
 If the auditor has identified a fraud or has indication of fraud, the auditor should
communicate that information to management, TCWG and,
 In some circumstances, when so required by the laws and regulations, to regulatory
and enforcement authorities also.
(c) Management Representation (WR)
(1) Acknowledges their responsibility for the DIM of internal control to PDC fraud.
(2) Have disclosed results of management’s fraud risk assessment w.r.t. the FS.
(3) Have disclosed their knowledge of fraud or suspected fraud affecting the entity
involving:
 Management;
 Employees who have significant roles in internal control; or
 Others where the fraud could have a material effect on the FS.
(4) Have disclosed their knowledge of any allegations of fraud, or suspected fraud,
affecting the entity’s FS
(d) Documentation (time pass)
 Understanding of the Entity and its environment as per SA 315.
 Responses to the Assessed Risks.
 Communications with management and TCWG.
 Reasons for non-applicability of presumption of risk of material misstatement
relating to revenue recognition

(e) Responses to the Assessed ROMM due to Fraud (330) (FAP)

(1) Overall Responses
The auditor shall:
 Assign and supervise personnel as per their capability;
 Evaluate whether accounting policies adopted by the entity indicate fraudulent
financial reporting resulting from management’s effort to manage earnings; and
 Incorporate surprise element in the selection of the NTE of audit procedures.
(2) Responses at the Assertion Level

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  The auditor shall design and perform FAP whose NTE are responsive to the
assessed risks of material misstatement due to fraud at the assertion level.
 In doing so, the auditor may change NTE of audit procedures to obtain audit
evidence that is more reliable and relevant or to obtain additional corroborative
information.

(3) Responses to Risks Related to Management Override of Controls

 Management is in a unique position to perpetrate fraud because of management’s
ability to manipulate accounting records and prepare fraudulent financial
statements by overriding controls.
 It is a risk of material misstatement due to fraud and thus a significant risk.
 The auditor shall determine whether the auditor needs to perform extra audit
procedures.
(4) Designing and performing Audit Procedures
Irrespective of the auditor’s assessment of the risks of management override of
controls, the auditor shall design and perform audit procedures to:
 Test the appropriateness of journal entries recorded in the general ledger and
other adjustments made in the preparation of the F.S.
 Review accounting estimates for biases and evaluate whether the circumstances
producing the bias, if any, represent a RMM due to fraud.
 For significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual given the auditor’s understanding
of the entity and its environment and other information obtained during the audit,
the auditor shall evaluate whether the business rationale (or the lack thereof) of
the transactions suggests that they may have been entered into to engage in
fraudulent financial reporting or to conceal misappropriation of assets.

(f) Evaluation of Audit Evidence

 When the auditor identifies misstatement, the auditor shall evaluate whether such a
misstatement is indicative of fraud.
 If there is such an indication, the auditor shall evaluate the implications of the
misstatement in relation to other aspects of the audit, particularly the reliability of
management representations.
 If the auditor identifies a misstatement, whether material or not, and the auditor has
reason to believe that it is or may be the result of fraud and that management (in
particular, senior management) is involved, the auditor shall re-evaluate the
assessment of the ROMM due to fraud and its resulting impact on the NTE of audit
procedures to respond to the assessed risks.

(g) Auditor Unable to Complete the Engagement (Report + Withdraw)

9
If the auditor concludes that it is not possible to continue performing the audit as a result
of a misstatement resulting from fraud, the auditor should:
 Consider the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities.
 Consider the possibility of withdrawing from the engagement; and
 If the auditor withdraws:
(1) Discuss with the appropriate level of management and TCWG the auditor’s
withdrawal from the engagement and the reasons for the withdrawal; and
(2) Consider whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the engagement and the
reasons for the withdrawal.

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SA 250 "CONSIDERATION OF LAWS and REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS"
To ensure compliance of laws and regulations that determine the reported amounts and disclosures in
F.S. is the responsibility of the management, with the oversight of TCWG. This SA deals with the
auditor's responsibilities to consider laws and regulations when performing an audit. Accordingly, an
auditor is not responsible for preventing non-compliance and cannot be expected to detect non-
compliance with all laws and regulations.

Management Responsibility for compliance with laws and regulation

It is the responsibility of management, with the oversight of TCWG, to ensure that the entity’s
operations are conducted in accordance with the provisions of laws and regulations.
The following are the procedures an entity may implement to assist in the prevention and detection of
non-compliance with laws and regulations:
▪ Monitoring legal requirements and ensuring that operating procedures are designed to meet
these requirements.
▪ Instituting and operating appropriate systems of internal control.
▪ Developing, publicizing and following a code of conduct.
▪ Ensuring Employees are properly trained and understand the code of conduct.
▪ Monitoring compliance with the code of conduct and acting appropriately to discipline
employees who fail to comply with it.
▪ Engaging legal advisors to assist in monitoring legal requirements.
▪ Maintaining a register of significant laws and regulations with which the entity has to comply
within its particular industry and a record of complaints.

Potential effects of inherent limitations on the auditor’s ability to detect material (Bakwaas)
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements in the financial statements may not be detected, even though the audit is properly
planned and performed in accordance with the SAs.
In the context of laws and regulations, the potential effects of inherent limitations on the auditor’s
ability to detect material misstatements are greater for such reasons as the following:
▪ There are many laws and regulations, relating principally to the operating aspects of an entity
that typically do not affect the financial statements and are not captured by the entity’s
information systems relevant to financial reporting.
▪ Non-compliance may involve conduct designed to conceal it, such as collusion, forgery,
deliberate failure to record transactions, management override of controls or intentional
misrepresentations being made to the auditor.
▪ Whether an act constitutes non-compliance is ultimately a matter for legal determination by a
court of law.

Auditor's Responsibility in relation to Compliance with Laws and Regulations

This SA distinguishes the auditor’s responsibilities in relation to compliance with two different
categories of laws and regulations as follows:

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 ▪ The provisions of those laws and regulations having a direct effect on the determination of
material amounts and disclosures in the F.S. such as tax and labour laws; and
▪ Other laws and regulations that do not have a direct effect on the determination of the amounts
and disclosures in the financial statements, but compliance with which may be fundamental to
the operating aspects of the business.
For the first category referred, the auditor’s responsibility is to obtain sufficient appropriate audit
evidence about compliance with the provisions of those laws and regulations.
For the second category, the auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those laws and regulations that may have a material effect on
the financial statements.

Auditor's Consideration of Compliance with Laws and Regulations

▪ The auditor shall obtain a general understanding of:
(a) The legal and regulatory framework applicable to the entity and the industry or sector in
which the entity operates; and
(b) How the entity is complying with that framework.
▪ The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
▪ The auditor shall perform the following audit procedures to identify instances of noncompliance
with other laws and regulations that may have a material effect on the financial statements:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.
▪ During the audit, the auditor shall remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance or suspected non-compliance with laws and
regulations to the auditor’s attention.
▪ Obtain written representation that all known instances of non-compliance or suspected non-
compliance with laws and regulations have been disclosed to the auditor.

Audit Procedures when Non-Compliance is Identified or Suspected

▪ If the auditor becomes aware of information concerning an instance of non-compliance of
compliance with laws and regulations, the auditor shall obtain:
(a) An understanding of the nature of the act and the circumstances in which it has
(b) Further information to evaluate the possible effect on the financial statements.
▪ If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and TCWG.
▪ If management or TCWG do not provide sufficient information the auditor shall consider the
need to obtain legal advice.
▪ If sufficient information about suspected non-compliance cannot be obtained, the auditor shall
evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
▪ The auditor shall evaluate the implications of non-compliance in relation to other aspects of the
audit, including the auditor’s risk assessment and the reliability of written representations, and take
appropriate action

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Reporting of Identified or Suspected Non-Compliance
(a) Reporting Non-Compliance to TCWG
▪ Unless all of those charged with governance are involved in management of the entity,
the auditor shall communicate with those charged with governance matters involving
non-compliance with laws and regulations that come to the auditor’s attention.
▪ If, in the auditor’s judgment, the non-compliance is believed to be intentional and
material, the auditor shall communicate the matter to those charged with governance as
soon as practicable.
▪ If the auditor suspects that management or those charged with governance are involved
in non-compliance, the auditor shall communicate the matter to the next higher level of
authority at the entity, if It exists, such as an audit committee or supervisory board. Where
no higher authority exists, or if the auditor believes that the communication may not be
acted upon, the auditor shall consider the need to obtain legal advice.
(b) Reporting Non-Compliance in the Auditor’s Report on the Financial Statements
▪ If the auditor concludes that the non-compliance has a material effect on the financial
statements and has not been adequately reflected in the financial statements, the auditor
shall, express a qualified or adverse opinion on the financial statements.
▪ If the auditor is precluded by management or those charged with governance from
obtaining sufficient appropriate audit evidence, the auditor shall express a qualified
opinion or disclaim an opinion.
▪ If the auditor is unable to determine whether non-compliance has occurred because of
limitations imposed by the circumstances rather than by management or those charged
with governance, the auditor shall evaluate the effect on the auditor’s opinion.
(c) Reporting Non-Compliance to Regulatory and Enforcement Authorities
If the auditor has identified or suspects non-compliance with laws and regulations, the auditor
shall determine whether the auditor has a responsibility to report the identified or suspected
non-compliance to parties outside the entity.

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 SA 260 "COMMUNICATION WITH THOSE CHARGED WITH
GOVERNANCE"(W.E.F. 01.04.2017)

Meaning of "TCWG"
The person or organization with responsibility for -
▪ overseeing the strategic direction of the entity, and
▪ Obligations related to the accountability of the entity.

Role of Communication
Effective two-way communication is important in assisting:
(a) Auditor and TCWG in understanding matters related to the audit in context, and developing
a constructive working relationship;
(b) The auditor in obtaining from TCWG information relevant to the audit. For example-
TCWG may assist the auditor in understanding the entity and its environment, in identifying
appropriate sources of audit evidence, and in providing information about specific
transactions or events; and
(c) TCWG in fulfilling their responsibility to oversee the financial reporting process, thereby
reducing the RMM of the F.S.

Auditor's Objective
▪ To communicate clearly with TCWG, responsibilities of auditor and planned scope &
timing of audit.
▪ To obtain information from TCWG relevant to audit.
▪ To provide TCWG with timely observations that are significant and relevant in overseeing
final reporting process.
▪ To promote effective two-way communication between auditor and TCWG.

Requirements of SA 260
(a) Determine the appropriate person to whom communication is made
▪ The auditor shall determine the appropriate person within the entity's governance
structure with whom to communicate.
▪ Communication with a sub-group of TCWG: If the auditor communicates with a
sub-group of TCWG, for example, an audit committee, or an individual, the auditor
shall determine whether the auditor also needs to communicate with the governing
body.
(b) Matters to be communicated to TCWG (260)
(1) The Auditor's Responsibilities in Relation to the F.S. Audit
The auditor shall communicate with TCWG that:
▪ The auditor is responsible for forming and expressing an opinion on the F.S.;
and

1
 ▪ The audit of the F.S. does not relieve management or TCWG of their
responsibilities.
NOTE (aacha MCQ ban sakta hai)
▪ Auditor’s responsibilities in relation to F.S. audit is often included in engagement
letter that records the agreed terms of the engagement.
▪ If EL as per SA 210 has been discussed & agreed with TCWG then no separate
communication as per SA 260.
▪ If EL has been agreed only with management, then forward a copy with TCWG

(2) Planned Scope and Timing of Audit (KAM)

▪ The auditor shall communicate with TCWG an overview of the planned scope
and timing of the audit.
▪ Such communication may assist TCWG to understand better the consequences
of the auditor’s work, to discuss issues of risk and the concept of materiality with
the auditor, and to identify any areas in which they may request the auditor to
undertake additional procedures.
(3) Significant Findings of an Audit (KAM)
The auditor shall communicate with TCWG:
(i) The auditor’s views about significant qualitative aspects of the entity’s accounting
practices (accounting policies, accounting estimates and accounting disclosures).
(ii) Significant difficulties, if any, encountered during the audit;
Examples of Significant difficulties:
▪ Significant delays by management to provide required information.
▪ An unnecessarily brief time within which to complete the audit.
▪ Extensive unexpected effort required to obtain SAAE.
▪ Unavailability of expected information.
▪ Restrictions imposed on the auditor by management.
▪ Management’s unwillingness to make or extend its assessment of the
entity’s ability to continue as a going concern when requested.
(iii) Unless all of TCWG are involved in managing the entity:
▪ Significant matters, arising from the audit that were discus or subject to
correspondence with management; and
▪ Written representations the auditor is requesting.
(iv) Circumstances that affect the form and content of the auditor report, if any.
(v) Any other significant matters that in the auditor’s professional judgment, are
significant to the oversight of the financial reporting process.
Examples of Significant Matters
▪ Significant events or transactions that occurred during the year.
▪ Business plans and strategies that may affect the RMM.
▪ Concerns about management’s consultations with other accountants on
accounting or auditing matters.
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 ▪ Discussions or correspondence in connection with the initial or recurring
appointment of the auditor regarding accounting practices, the application of
auditing standards, or fees for audit or other services.
▪ Significant matters on which there was disagreement with management, except
for initial differences of opinion because of incomplete facts or preliminary
information that are later resolved by the auditor obtaining additional relevant
facts or information.
Circumstances in which auditor is required or may otherwise consider it
necessary to include additional information in the auditor’s report in accordance
with the SA’s, and for which communication with TCWG is required
(700 ke dushman).
▪ The auditor expects to modify the opinion in the auditor’s report in accordance
with SA 705.
▪ A material uncertainty related to going concern is reported accordance with SA
570.
▪ Key audit matters are communicated in accordance with SA 701,
▪ The auditor considers it necessary to include an Emphasis Matter paragraph or
Other Matter paragraph in accordance with In SA 706 or is required to do so by
other SAs.
The auditor has concluded that there is an uncorrected material misstatement of the
other information in accordance with SA 720.
(4) Auditor Independence
In the case of listed entities, the auditor shall communicate with TCWG:
(i) A statement that the engagement team and others in the firm has complied with
relevant ethical requirements regarding independence;
(ii) All relationships and other matters between the firm, network firms, and the
entity that bear on independence; and
(iii) Related safeguards applied to eliminate identified threats to independence or
reduce them to an acceptable level.
(c) Communication Process
▪ Auditor shall communicate with TCWG the form, timing and expected general
content of communications.
▪ Auditor shall communicate in writing with TCWG regarding significant findings
from the audit if, in the auditor’s professional judgment, oral communication would
not be adequate.
▪ Written communications need not include all matters that arose during the course of
the audit.
▪ Auditor shall communicate in writing with TCWG regarding auditor independence
when required in case of listed entities.
▪ Auditor shall communicate with TCWG on a timely basis.

3
SA 265 "COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO
THOSE CHARGED WITH GOVERNANCE and MANAGEMENT"

Deficiency in Internal Control

This exists when:
▪ A control is designed, implemented or maintained in such a way that it is unable to prevent,
or detect and correct, misstatements in the financial statements on a timely basis; or
▪ A control necessary (to prevent, or detect and correct, misstatements) in the financial
statements on a timely basis is missing.

Requirements of SA 265
(a) Identification of deficiencies in Internal Control
(1) The auditor shall determine whether, on the basis of the audit work performed, the
auditor has identified one or more deficiencies in internal control.
(2) If the auditor has identified one or more deficiencies in internal control, the auditor
shall determine, on the basis of the audit work performed, whether, individually or in
combination, they constitute significant deficiencies.

(b) Indicators of Significant Deficiencies

▪ Evidence of ineffective aspects of control environment.
▪ Entity’s Risk assessment process – Absent/ineffective.
▪ Ineffective response to identified significant Risks.
▪ Correction of prior period misstatements arising due to fraud/error.
▪ Management inability to oversee F.S. Preparation.

Examples of matters that the auditor may consider in determining whether a

deficiency constitutes a significant deficiency
(1) The likelihood of the deficiencies leading to material misstatements in the financial
statements in the future.
(2) The susceptibility to loss or fraud of the related asset or liability.
(3) The subjectivity and complexity of determining estimated amounts, such as fair
value accounting estimates.
(4) The financial statement amounts exposed to the deficiencies.
(5) The volume of activity that has occurred or could occur in the account balance or
class of transactions exposed to the deficiency.
(6) The importance of the controls to the financial reporting process; for example:

4
 NOT IMP- Read Only
(i) General monitoring controls (such as oversight of management).
(ii) Controls over the prevention and detection of fraud.
(iii) Controls over the selection and application of significant accounting policies.
(iv) Controls over significant transactions with related parties.
(v) Controls over significant transactions outside the entity’s normal course of
business.
(vi) Controls over the period-end financial reporting process (such as controls
over nonrecurring journal entries).
(7) The interaction of the deficiency with other deficiencies in internal control.

(c) Communications of Deficiencies in Internal Control (MCQ aa sakta hai)

(1) The auditor shall communicate in writing significant deficiencies in internal
control identified during the audit to TCWG on a timely basis.
(2) The auditor shall also communicate to management at an appropriate level of
responsibility on a timely basis:
(i) In writing, significant deficiencies in internal control that the auditor has
communicated or intends to communicate to TCWG and
(ii) Other deficiencies (jo SD nahi hai) in internal control identified during the
audit, in the auditor’s professional judgment, are of sufficient importance to
merit management’s attention.

(d) Contents of written communication of significant deficiencies in Internal Control (Pyaar se

bolte hai - Letter of weakness {chugli karni hai} )
(1) A description (voh kaun hai) of the deficiencies and an explanation of their potential
effects (kya kar sakti hai); and
(2) Sufficient information to enable TCWG and management (Sawdhaan!!) to
understand the context of the communication. In particular, the auditor shall also
explain that:
(i) The purpose of the audit was for the auditor to express an opinion on the F.S.;
(ii) The audit included consideration of internal control relevant to the preparation
of the F.S. in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control and;
(iii) The matters being reported are limited to those deficiencies that the auditor
has identified during the audit are of sufficient importance of merit being
reported to TCWG and management.

5
 SA 299 "JOINT AUDIT OF FINANCIAL STATEMENTS"

Requirements of SA 299
(a) Audit Planning, Risk Assessment and Allocation of Work
(1) Engagement Letter and WR
Joint auditors shall obtain common engagement letter and common management
representation letter.
(2) Establishing of Audit Strategy
Joint auditors shall jointly establish an overall audit strategy (common) that sets
the scope, timing and direction (STD) of the audit, and that guides the development of
the audit plan.
(3) Development of Audit Plan
The joint auditors shall discuss and develop a joint audit plan to determine NTE of
Audit procedures. (common)
In developing the joint audit plan, the joint auditors shall:
(i) Ascertain the reporting objectives of the engagement to plan the timing of the
audit. (Humara scope)
(ii) Identify division of audit areas and common audit areas(GAJAB) amongst the
joint auditors that define the scope of the work of each joint auditor; (mera
scope)
(iii) Ascertain the NTE of resources necessary to perform the engagement. (article)
(iv) Consider in their professional judgment, are significant in directing the
engagement team’s efforts; (Kaam karvao)
(v) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other or similar engagements
performed earlier by the respective engagement partner(s) for the entity is
relevant. (PEA ko yaad karo)
(4) Allocation Of Work
 After identification and allocation of work among the joint auditors, the work
allocation document shall be signed by all the joint auditors and the same shall
be communicated to TCWG of the entity.
 Documentation of allocation of work helps in avoiding any dispute or confusion
which may arise among the joint auditors regarding the scope of work to be
carried out by them.
(5) Assessment of ROMM (alag alag)
ROMM need to be considered and assessed by each of the joint auditors and shall be
communicated to other joint auditors, whether pertaining to the overall F.S. level or
to the area of allocation among the other joint auditors.
(6) Further Audit Procedures (Separate)
(7) Review (Not necessary/ Not required)
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 (8) Reporting (common audit report, Disagreement= Separate audit report)
(b) Responsibility and Co-ordination among Joint Auditors
(1) Responsibilities of Joint Auditors
(i) In respect of audit work divided (& doc bhi likhna chaiye) among the joint
auditors, each joint auditor shall be responsible only for the work allocated to such
joint auditor including proper execution of the audit procedures.
(ii) All the joint auditors shall be jointly and severally responsible for: (attiiii imp)
 The audit work which is not divided among the joint auditors
 Decisions taken by all the joint auditors under audit planning.
 Matters which are brought to the notice of the joint auditors by any one of
them and on which there is an agreement among the joint auditors;
 Ensuring that the audit report complies with the requirements of the relevant
statutes, the applicable Standards on Auditing and the other relevant
pronouncements issued by ICAI.
 Examining that the F.S. of the entity comply with the requirements of the
relevant statutes;
 Preparation of the F.S. as required by the applicable FRF; (Basic point)
(iii)It shall be the responsibility of each joint auditor to determine the NTE of audit
procedures to be applied in relation to the areas of work allocated to the said joint
auditor. (thankyou)
(iv) It is the individual responsibility of each joint auditor to study and evaluate the
prevailing system of internal control and assessment of risk relating to the areas of
work allocated to the said joint auditor. (thankyou again)
(2) Co-ordination among Joint Auditors (dusre ke kaam ka milla, comm. Karo)
Where, in the course of the audit, a joint auditor comes across matters which are
relevant to the areas of responsibility of other joint auditors and which deserve their
attention, or which require disclosure or require discussion with, or application of
judgment by other joint auditors, the said joint auditor shall communicate the same to
all the other joint auditors in writing (play safe) prior to the completion of the audit.
(c) Audit Conclusion and Reporting
(1) Reporting Requirement(common audit report, Disagreement= Separate audit report)
 Joint auditors are required to issue common audit report.
 However, in case of any disagreement among joint auditors with regard to the
opinion or any matters to be covered by the audit report, they shall express their
opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors
regarding the opinion or matters to be covered in the audit report and shall
express opinion formed by the said joint auditor in separate audit report in case
of disagreement.

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  In case of separate reports, the audit report issued by the joint auditor shall make
a reference to the separate audit report(s) issued by the other joint auditor(s).
(Other Matter Paragraph)
(2) Review of work by other Joint Auditor (not necessary)
 Each joint auditor is entitled to assume that the other joint auditors have carried
out their part of the audit work and the work has actually been performed in
accordance with the SAS.
 It is not necessary for a joint auditor to review the work performed by other joint
auditors or perform any tests in order to ascertain whether the work has actually
been performed in such a manner.
 Each joint auditor is entitled to assume that the other joint auditors have brought
to said joint auditor’s notice any departure from applicable FRF or significant
observations that are relevant to their responsibilities noticed in the course of the
audit.
(3) Discussion of Conclusion (time pass)
Before finalizing audit report, the joint auditors shall discuss and communicate with
each other their respective conclusions that would form the content of the audit report.
(d) Communication with TCWG (time pass)
 When the joint auditors expect to modify the opinion in the auditor’s report, they
shall communicate with TCWG the circumstances that led to the expected
modification and the proposed wording of the modification to ensure compliance
with SA 705.
 If the joint auditors expect to include an EOM or an OM paragraph in the auditor's
report’ the joint auditors shall communicate with TCWG regarding this expectation
and the proposed wording of this paragraph to ensure compliance with SA 706.

Special Point- Audit Strategy vs Audit Plan

Audit Strategy= Audit (Overall audit strategy) (STD) (FIRST)
Audit Plan= NTE of Audit Procedures

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 1. “Quality Control”
PART- I DESCRIPTIVE QUESTIONS
1.1 -SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements”
Q.1. M/s. NK & Co., Chartered Accountants were appointed as Statutory Auditors of Fresh Juice
Limited for the FY 2023-24. The previous year’s audit was conducted by M/s LP &
Associates. After the audit was completed and report submitted, it was found that closing
balances of last financial year i.e., 2022-23 were incorrectly brought forward. It was found
that M/s NK & Co. did not apply any audit procedures to ensure that correct opening balances
have been brought forward to the current period.
Accordingly, a complaint was filed against NK & Co. in relation to this matter.
You are required to inform what policies are required to be implemented by NK & Co. for
dealing with such complaints and allegations as required by Standard on Quality Control
(SQC). [Jan. 21 (5 Marks), MTP-March 22]
Ans: Complaints and Allegations:
 As required by SQC-1 “Quality Control for Firms that Perform Audits & Reviews of
Historical Financial Information, and Other Assurance & Related Services Engagements”
the firm should establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with:
(a) Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
(b) Allegations of non-compliance with the firm’s system of quality control.
 Complaints and allegations (which do not include those that are clearly frivolous) may
originate from within or outside the firm. They may be made by firm personnel, clients or
other third parties. They may be received by engagement team members or other firm
personnel.
 As part of this process, the firm establishes clearly defined channels for firm personnel to
raise any concerns in a manner that enables them to come forward without fear of
reprisals.
 The firm investigates such complaints and allegations in accordance with established
policies and procedures. The investigation is supervised by a partner with sufficient and
appropriate experience and authority within the firm but who is not otherwise involved in
the engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use the services of a suitably qualified external person or another firm
to carry out the investigation. Complaints, allegations and the responses to them are
documented.
 Where the results of the investigations indicate deficiencies in the design or operation of
the firm’s quality control policies and procedures, or non-compliance with the firm’s
system of quality control by an individual or individuals, the firm shall take appropriate
action.

Q.2. AP & Associates, Chartered Accountants, are Statutory Auditors of XP Limited for the last
four years. XP Limited is engaged in the manufacture and marketing of FMCG Goods in
India. During 2023-24, the Company has diversified and commenced providing software

1
 solutions in the area of “e-commerce” in India as well as in certain European countries. AP &
Associates, while carrying out the audit for the current financial year, came to know that the
company has expanded its operations into a new segment as well as new geography. AP &
Associates does not possess necessary expertise and infrastructure to carry out the audit of
this diversified business activities and accordingly wishes to withdraw from the engagement
and client relationship. Discuss the issues that need to be addressed before deciding to
withdraw. [Nov. 22 (5 Marks)]
Ans: Issues to be addressed before withdrawing from audit engagement:
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical
Financial Information, and other Assurance and Related Services Engagements”, firm should
establish the policies w.r.t. withdrawal from engagement and communication requirements, if
circumstances warrant. Policies and procedures on withdrawal from an engagement or from
both the engagement and the client relationship address issues that include the following:
(a) Discussing with the appropriate level of mngt. & TCWG regarding the appropriate action
that the firm might take based on the relevant facts and circumstances.
(b) If the firm determines that it is appropriate to withdraw, discussing with the appropriate
level of the client’s management and TCWG withdrawal from the engagement or from
both the engagement and the client relationship, and the reasons for the withdrawal.
(c) Considering whether there is a professional, regulatory or legal requirement for the firm
to remain in place, or for the firm to report the withdrawal from the engagement, or from
both the engagement and the client relationship, together with the reasons for the
withdrawal, to regulatory authorities.
(d) Documenting significant issues, consultations, conclusions and the basis for the
conclusions.

Q.3. BSS & Associates is a partnership firm of Chartered Accountants which was established five
years back. The firm was offering only advisory services at the beginning, however, after
audit rotation and advent of GST, firm sees lot of potential in these areas also and started
looking for opportunities in these areas. These services being assurance in nature, the firm
required some internal restructuring and set up some policies and procedures for compliance
year on year.
The firm started getting new clients for these new services and is now looking to obtain such
Information as it considers necessary in the circumstances before accepting an engagement
with a new client, when deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client. Where issues have been
identified, and the firm decides to accept or continue the client relationship or a specific
engagement, it has been setting up a process to document how the issues were resolved.
The firm is now looking to work with only select clients which are in line with the policies of
the firm. The firm understands that the extent of knowledge it will have regarding the
integrity of a client will grow within the context of an ongoing relationship with that client.
With regard to the integrity of a client, you are required to give some examples of the matters
to be considered by the firm as per the requirements of SQC 1. [RTP-May 19]
Or
MB & Associates is a partnership firm of the Chartered Accountants which was established
seven years back. The firm is getting new clients and has also been offered new engagement
services with existing clients. The firm is concerned about obtaining such information as it

2
 considers necessary in the circumstances before accepting an engagement with a new client
and acceptance of a new engagement with an existing client. The firm is looking to work with
only select clients to adhere to the Quality Control Standards. Guide MB & Associates about
the matters to be considered with regard to the integrity of a client, as per the requirements of
SQC 1. [Nov. 19 (4 Marks)]
Ans: Considerations as to integrity of clients:
As per SQC-1 “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements”, a firm
should obtain such information as it considers necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new engagement with an existing client.
Where issues have been identified, and the firm decides to accept or continue the client
relationship or a specific engagement, it should document how the issues were resolved.
Considerations as to integrity of clients:
With regard to the integrity of a client, matters that the firm considers include, for example:
1. The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance.
2. The nature of the client’s operations, including its business practices.
3. Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible.
5. Indications of an inappropriate limitation in the scope of work.
6. Indications that the client might be involved in money laundering or other criminal
activities.
7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally
grow within the context of an ongoing relationship with that client.

Q.4. J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon
Ltd. after ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr.
Jay was the engagement partner for the aforesaid audit and prior to commencement of the
audit, Mr. Jay had called for a meeting of the engagement team in order to direct them and
assign them their responsibilities. At the end of meeting, Mr. Jay assigned review
responsibilities to two of the engagement team members who were the most experienced
amongst all, for reviewing the work performed by the less experienced team members. While
reviewing the work performed by the less experienced members of the engagement team,
what shall be the considerations of the reviewers? [MTP-March 21]
Ans: Consideration to be given while reviewing the work:
 As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements”, review
responsibilities are determined on the basis that more experienced team members,
including the engagement partner, review work performed by less experienced team
members.

3
  While reviewing the work performed by less experienced members of the engagement
team, the reviewers should consider whether:
(i) The work has been performed in accordance with professional standards and
regulatory and legal requirements.
(ii) Significant matters have been raised for further consideration.
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented.
(iv) There is a need to revise the nature, timing and extent of work performed.
(v) The work performed supports the conclusions reached and is appropriately
documented.
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.

Q.5. PQR & Associates Chartered Accountants, is partnership having 3 partners CA P, CA Q and
CA R. PQR & Associates are appointed as Statutory Auditors of ABC Limited, a listed entity
for the financial year 2023-24 and CA P is appointed as Engagement Partner for the audit of
ABC Limited. Before issuing the Audit Report of ABC Limited, CA P asked CA R to
perform Engagement Quality Control Review and is of the view that his responsibility will be
reduced after review by CA R. Whether the contention of CA P is correct? What are the
aspects that need to be considered by CA R while performing Engagement Quality Control
Review for audit of financial statements of ABC Limited? [May 22 (5 Marks)]
Ans: Engagement Quality Control Review (EQCR):
As per SQC 1, “Quality Control for Firms that Perform Audit and Reviews of Historical
Financial Information, and other Assurance and Related Services Engagements”, the review
does not reduce the responsibilities of the engagement partner. Hence, contention of CA. P
that after engagement quality control review by CA. R, his responsibility will be reduced, is
not correct.
Aspects to be considered while performing EQCR for audit of F.S.:
CA. R needs to consider the following aspect while performing EQCR for audit of F.S. of
ABC Ltd.:
(1) The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement.
(2) Significant risks identified during the engagement and the responses to those risks.
(3) Judgments made, particularly with respect to materiality and significant risks.
(4) Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters, and the conclusions arising from those
consultations.
(5) The significance and disposition of corrected and uncorrected misstatements identified
during the engagement.
(6) The matters to be communicated to management and those charged with governance and,
where applicable, other parties such as regulatory bodies.
(7) Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
(8) The appropriateness of the report to be issued.

4
Q.6. ABC & Associates, Chartered Accountants has a policy to accept the clients wherein the risk
evaluation is conducted with respect to the Company and the promoter. XYZ Limited
approached ABC & Associates. Promoter of XYZ Limited is a close associate and family
friend of Mr. A, Managing Partner of ABC & Associates. XYZ Limited is in news in the
previous year for certain inquiries from the regulatory authorities in relation to certain
matters. The existing auditor of XYZ Limited has resigned and has created a casual vacancy.
XYZ Limited is ready to offer 25% more than the existing fees and has approached ABC &
Associates for appointment as Auditor. Mr. A has strong recommendation to the Firm to
accept the audit.
What is your understanding of the functioning of the tone at the top of the Firm ABC &
Associates, Chartered Accountants.? What are the considerations one should exercise to
uphold Quality of the Firm?
Ans: Implementation of Quality Control Procedures:
 SQC 1 requires that firm should establish a system of quality control designed to provide
it with reasonable assurance that firm and its personnel comply with professional
standards and legal and regulatory requirements. It further requires that firm’s business
strategy is subject to overriding requirement of firm to achieve quality in all
engagements. However, in the given situation, commercial considerations seem to be
overriding factor. It reflects poorly regarding functioning at top of the firm as regards to
quality control.
 The managing partner of firm is close associate and family friend of promoter. The
matter should have been brought to knowledge of firm in accordance with requirements
of SQC 1 as it involves issue of independence of managing partner of the firm with
respect to proposed audit engagement. Further, matters of inquiries from regulators and
resignation of previous auditor raise question about integrity of the proposed client. SQC
1 further requires firm to consider before acceptance of an engagement that client does
not lack integrity. All these factors need to be taken into consideration before accepting
engagement.
Conclusion: Overall, such a situation reflects lack of proper establishment of quality control
framework at top of the firm.
Considerations to be taken into account while upholding quality of firm:
(i) Firm assigns its management responsibilities so that commercial considerations do not
override quality of work performed.
(ii) Firm’s policies and procedures in relation to its personnel are designed to demonstrate its
overriding commitment to quality.
(iii) Firm devotes sufficient resources for development and documentation of its quality
control policies and procedures.
(iv) Firm before accepting an engagement should acquire vital information about the client.
Such an information should help firm to decide about integrity of Client, promoters and
key managerial personnel, competence (including capabilities, time and resources) to
perform engagement and compliance with ethical requirements.

Q.7. You are an audit senior working for the firm Bohra & Company. You are currently carrying
out the audit of Wisdom Ltd., a manufacturer of waste paper bins. You are unhappy with
Wisdom Ltd.’s inventory valuation policy and have raised the issue several times with the
audit manager. He has dealt with the client for a number of years and does not see what you

5
 are making an objection about. He has refused to meet you on site to discuss those issues.
As the audit manager had dealt with Wisdom Ltd. for so many years, the other partners have
decided to leave the audit of Wisdom Ltd. in his capable hands. Comment on the situation
outlined above.
Ans: Quality Control Issues in an engagement:
 SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical
Financial Information and Other Assurance and Related Services Engagements” requires
a firm to establish the policies & procedures for dealing/resolving differences of opinion
with in engagement team.
 An engagement partner is usually appointed to each audit engagement undertaken by the
firm, to take responsibility for the engagement on behalf of the firm. Assigning the audit
to an experienced audit manager is not sufficient.
 SA 220 “Quality Control for an Audit of Financial Statement”, requires that the audit
engagement partner takes responsibility for settling disputes in accordance with the
firm’s policy in respect of resolution of difference of opinion required by SQC 1.
 In the present case, partners of the firm have decided to leave the audit in the hands of
Audit manager and no engagement partner has been assigned. The lack of an audit
engagement partner also means that several of the requirements of SA 220, about
ensuring that engagements in relation to independence and directing, supervising and
reviewing the audit are not in place.
 Further, the audit manager and senior have conflicting views about the valuation of
inventory. This does not appear to have been handled well, with the manager refusing to
discuss the issue with the senior.
Conclusion: Failure to resolve the difference of opinion is a breach of the firm’s policy under
SQC 1. It indicates that the firm does not have a suitable policy concerning such disputes
required by SQC 1.

Q.8. HK & Co. Chartered Accountants have been auditors of SAT Ltd (a listed entity) for the last
8 financial years. CA H, partner of the firm, has been handling the audit assignment very well
since the appointment. The audit work of CA H and her team is reviewed by a senior partner
CA K to assure that audit is performed in accordance with professional standards and
regulatory and legal requirements. CA K was out of India for some personal reasons, so this
year CA G has been asked to review the audit work. In your opinion, what areas CA G should
consider at the time of review. List any four areas and also comment whether firm is
complying with Standard on Quality Control or not. [July 21 (5 Marks), MTP-Oct. 22]
Ans: Areas to be considered in review of audit work:
As per SQC 1, review responsibilities are determined on the basis that more experienced
engagement team members, including the engagement partner, review work performed by
less experienced team members.
Reviewers consider whether:
(a) The work has been performed in accordance with professional standards and regulatory
and legal requirements;
(b) Significant matters have been raised for further consideration;
(c) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
(d) There is a need to revise the nature, timing and extent of work performed;

6
 (e) The work performed supports the conclusions reached and is appropriately documented;
(f) The evidence obtained is sufficient and appropriate to support the report; and
(g) The objectives of the engagement procedures have been achieved.
Compliance with SQC:
The firm should establish policies and procedures:
(i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat
to an acceptable level when using the same senior personnel on an assurance engagement
over a long period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the
engagement partner after a specified period in compliance with the Code.
The familiarity threat is particularly relevant in the context of financial statement audits of
listed entities. For these audits, the engagement partner should be rotated after a pre-defined
period, normally not more than 7 years.
Conclusion: Firm is not complying with SQC 1 as Engagement Partner H is continuing for
more than 7 years.

1.2 - SA 220 “Quality Control for an Audit of Financial Statements”

Q.9. OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started
its operations 5 years back. The field work during the audit of the financial statements of the
company for the year ended on March 31, 2023 got completed on July 1, 2023. The auditor’s
report was dated July 12, 2023. During the documentation review of the engagement, it was
observed that the engagement quality control review was completed on July 15, 2023.
Engagement partner had completed his reviews in entirety by July 10, 2023. Comment.
[MTP-Oct. 18, March 19]
Ans: Review by Engagement Partner:
 As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement
partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures. For audits of financial statements of listed entities,
the engagement partner shall:
(a) Determine that an engagement quality control reviewer has been appointed;
(b) Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer; and
(c) Not date the auditor’s report until the completion of the engagement quality control
review.
 Further, SA 700, “Forming an Opinion and Reporting on Financial Statements”, requires
the auditor’s report to be dated not earlier than the date on which the auditor has obtained
sufficient appropriate evidence on which to base the auditor’s opinion on the financial
statements.
 In the present case, OP & Associates are the statutory auditors of a listed company which
started its operations 5 years back. The field work during the audit of the financial
statements of the company for the year ended on March 31, 2023 got completed on July
1, 2023. The auditor’s report was dated July 12, 2023. During the documentation review
of the engagement, it was observed that the engagement quality control review was
completed on July 15, 2023.

7
 Conclusion: Signing of auditor’s report i.e. on July 12, 2023 which is before the completion
of review engagement quality control review i.e. July 15, 2023, is not in order.

Q.10. M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year
2022-23. CA Suresh, one of the partners of M/s Sureshchandra & Co., completed entire
routine audit work by 29th May, 2023. Unfortunately, on the very next morning, while roving
towards office of SC Ltd. to sign final audit report, he met with a road accident and died. CA
Chandra, another partner of M/s Sureshchandra & Co., therefore, signed the accounts of SC
Ltd., without reviewing the work performed by CA Suresh.
State with reasons whether CA Chandra is right in expressing an opinion on financial
statements the audit of which is performed by another auditor. [MTP-April 18]

Ans: Review of Work performed by others:

 As per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement
partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures. Review procedures consists of the considerations,
whether:
1. the work has been performed in accordance with professional standards and
regulatory and legal requirements;
2. significant matters have been raised for further consideration;
3. appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
4. the work performed supports the conclusions reached and is appropriately
documented;
5. the evidence obtained is sufficient and appropriate to support the auditor’s report;
and
6. the objectives of the engagement procedures have been achieved.
 When the auditor delegates work to assistants or uses work performed by other
auditors/experts he will continue to be responsible for forming and expressing his
opinion on the financial statements. However, he will be entitled to rely on the work
performed by others, provided he exercises adequate skill and care and is not aware of
any reason to believe that he should not have so relied.
 The auditor should carefully direct, supervise and review work delegated to assistants.
He should obtain reasonable assurance that work performed by other auditors/experts and
assistants is adequate for his purpose.
 In the instant case, Mr. Suresh, a partner of the firm had completed routine audit work
and died before signing audit report. Mr. Chandra another partner of the firm has signed
the accounts of SC Ltd, relying on the work performed by Mr. Suresh.
Conclusion: CA Chandra is allowed to sign the audit report, though, will be responsible for
expressing the opinion. He may rely on the work performed by CA Suresh provided he
further exercises adequate skill and due care and review the work performed by him.

Q.11. Ace Limited (manufacturer of textile goods) got an order of manufacturing of PPE kits in
December 2023. But there was shortage of machinery and manpower to accomplish the
ordered requirement of PPE kits. Ace Limited approached another manufacturing unit Jack
Limited for purchase of the unit. Jack Limited was interested in the sale of unit, so the deal

8
 went through and Ace Limited acquired ninety five percent shares of Jack Limited. The new
management of Jack Limited proposed and appointed NKB Associates, Chartered
Accountants, (already auditors of Ace Limited) as new auditors of Jack Limited. NKB
Associates accepted the assignment without considering information whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit
engagements are appropriate.
Comment with respect to appropriate Standard of Auditing what type of information assists
the engagement partner in determining whether the conclusions reached regarding the
acceptance and continuance of client relationships and audit engagements are appropriate or
not? [Dec. 21 (5 Marks); MTP-Sep. 22]
Ans: Information assisting auditor in accepting and continuing of relationship with the client:
 SA 220, “Quality Control for an Audit of F.S.” and SQC 1, “Quality Control for Firms
that Perform Audits and Reviews of Historical Financial Information, and Other
Assurance and Related Services Engagements”, requires the firm to obtain information
considered necessary in the circumstances before accepting an engagement with a new
client, when deciding whether to continue an existing engagement, and when considering
acceptance of a new engagement with an existing client.
 Information such as the following assists the engagement partner in determining whether
the conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements are appropriate:
(i) The integrity of the principal owners, key management and TCWG of the entity;
(ii) Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources.
(iii) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(iv) Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.

Q.12. During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his
reviews and also ensured compliance with independence requirements that apply to the audit
engagement. The engagement files were also reviewed by the Engagement Quality Control
Reviewer (EQCR) except the independence assessment documentation. Engagement Partner
was of the view that matters related to independence assessment are the responsibility of the
Engagement Partner and not Engagement Quality Control Reviewer. Engagement Quality
Control Reviewer objected to this and refused to sign off the documentation. Please advise as
per SA 220. [RTP-May 19, May 22; MTP-Oct. 19]
Ans: Responsibilities of EP and EQCR in relation to assessment of independence:
 As per SA 220 “Quality control for an Audit of Financial Statements” the engagement
partner shall form a conclusion on compliance with independence requirements that
apply to the audit engagement. In doing so, the engagement partner shall:
(a) Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence;
(b) Evaluate information on identified breaches, if any, of the firm’s independence
policies and procedures to determine whether they create a threat to independence
for the audit engagement; and

9
 (c) Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the
audit engagement, where withdrawal is permitted by law or regulation. The
engagement partner shall promptly report to the firm any inability to resolve the
matter for appropriate action.
 For audits of financial statements of listed entities, the engagement quality control
reviewer, on performing an engagement quality control review, shall also consider
among other things, the engagement team’s evaluation of the firm’s independence in
relation to the audit engagement.
Conclusion: View of EP that matters related to independence assessment are the
responsibility of the EP and not EQCR is not correct. The independence assessment
documentation should also be given to EQCR for his review.

PART- II MULTIPLE CHOICE QUESTIONS

1. PMP Ltd. is an associate of PMP Inc., a company based in Kuwait. PMP Ltd is listed in India
having its corporate office at Assam. The company’s operations have remained stable over
the years and the management is looking to expand the operations for which the management
is considering different business ventures.
The company’s auditors issued clean audit report on the audit of the financial statements for
the year ended 31 March 2022.
For the financial year ended 31 March 2023, the auditors made some changes in their audit
team. While the audit partner remained the same, the field in charge has been replaced, as the
field incharge who was engaged in the audit of the financial statements for the year ended 31
March 2022 has left the firm. The audit team has a new person as External Quality Control
Reviewer (EQCR) who has specialized knowledge of the industry in which the company is
operating. EQCR has been employed with the firm for over 2.5 years and is yet to clear his
CA (Chartered Accountancy) final exams. The changes were made on the basis of the
consideration that the firm has enough experience of engagement with this client.
The audit team commenced the work for audit of the year ended 31 March 2023 after detailed
planning and it was observed that EQCR had various comments on certain matters which
were not accepted by the audit partner. Audit partner had better understanding of the client
and after assessing the comments of the EQCR did not find those relevant.
The audit partner without concurrence of the EQCR finalized the audit and issued the audit
report. In the given situation, please advise which one of the following is correct?
(a) The changes in the audit team were not appropriate except for the field in charge who
had left the firm. EQCR should have been a member of the Institute of Chartered
Accountants of India (ICAI).
(b) The audit partner did the right thing by ignoring the comments of EQCR as he is the final
authority to decide on any matter and take decisions. Further EQCR was junior to the
audit partner.
(c) The audit partner must discuss each and every comment of EQCR with the client and
ensure that a proper disclosure in respect of those points should be made either in the
financial statements or the audit report.
(d) EQCR had sufficient and appropriate experience. He should have been given the
authority to objectively evaluate various matters, before the report is issued, the

10
 significant judgments the engagement team made and the conclusions they reached in
formulating the report. By ignoring the comments of the EQCR, audit partner took
additional professional responsibility on himself. By considering the comments of
EQCR, he could have passed the responsibility to EQCR.

2. Ram & Associates, a firm of Chartered Accountants, have been operating for the last 10 years
having Its office in Delhi with staff of around 30 persons with 4 Partners.
The firm has been offering statutory audit, risk advisory and tax services to its various clients.
The major work of the firm is for taxation services. The audit partners also discussed that the
firm needs to work significantly to improve the quality of the services they offer and that
would also help the firm to grown its business. Considering this objective, the firm started
training programmes for the staff which were made mandatory to be attended.
During one of the training programmes on quality, a topic was discussed regarding the
information that should be obtained by the firm before accepting an engagement with a new
client, when deciding whether to continue an existing engagement, and when considering
acceptance of a new engagement with an existing client. It was explained that the following
points may assist the engagement partner in determining whether the conclusions reached
regarding the acceptance and continuance of client relationships and audit engagements are
appropriate (as per SA 220):
(i) The integrity of the principal owners, key management and those charged with
governance of the entity;
(ii) The qualification of all the employees of the entity;
(iii) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;
(iv) The remuneration offered by the entity to its various consultants;
(v) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(vi) Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.
Which of the above-mentioned points are relevant for the topic under discussion?
(a) (i), (ii), (iv) and (v)
(b) (ii), (iv), (v) and (vi)
(c) (iii), (iv), (v) and (vi)
(d) (i), (iii), (v) and (vi) [RTP-Nov.19]

Answer Key

1. (a) The changes in the audit team were not appropriate except for the field incharge who had
left the firm. EQCR should have been a member of the Institute of Chartered
Accountants of India (ICAI).

2. (d) (i), (iii), (v) and (vi)

11
 PART- III INTEGRATED CASE SCENARIO

CA Mritunjay in statutory auditor of a listed company engaged in providing services relating to

“tourism sector”, he is practicing in sole-proprietorship capacity. The audit of abovesaid listed
company was conducted by his proprietary firm and report was issued for year 2021-22.
Subsequently, audit report was selected by NIRA to oversee quality of service and compliance with
Standards. Necessary information was called from auditor towards above objective.
It was required of him to produce audit working papers to show that audit was carried out in
accordance with Standards on auditing. Details of the audit plan and details of risk assessment
procedures carried out to identify and assess risk of material misstatement in financial statements
were called. It was also required to show how response to assessed risks was designed and
implemented and communicated with those charged with governance.
Audit working papers sent by him through email included procedures on how some balances in
financial statements were verified. Also included in working papers were procedures performed by
him relating to verification of inventories, trade receivables and trade payables.
The working papers sent by him to the authority did not include details on audit plan and manner of
identifying and assessing risks of material misstatement. On being asked to respond, it was reasoned
by him that audit was properly planned and required procedures were carried out in relation to
material items on test check basis.
It has been further clarified by him to the authority that audit was carried out in accordance with
Standards and it was practically not feasible for a firm of small size to make a detailed audit plan. It
was also put on record with authority that he had assessed risk of material misstatement to be low
based upon his understanding of the company. He has further reasoned that assessing risks is a matter
of professional judgment. Representation has also been made by him stating that communications as
necessary were made orally with those charged with governance.
It was also pointed out to him that engagement quality control review was not carried out. He has
answered that no contentious matter arose during the course of audit and therefore, no need was felt
to carry out this exercise.
Attention was also drawn to the fact that financial statements of company were required to be
prepared on basis of Ind-AS. However, at some places in notes to accounts, reference is made to
accounting standards which are not applicable to the company. These errors have been attributed to
data feeding entry errors by Junior staff.
Based upon above, answer the following questions:
Q.1. It has been contended by auditor that audit was properly planned. He has further stated that it
was practically not feasible for fires of small size to prepare a detailed audit plan. Which of
the following views is most appropriate in this regard?
(a) Audit was, in fact, planned as evidenced by auditor’s submissions.
(b) Although auditor has no record of audit plan, it does not affect compliance with SA 220.
(c) Since auditor has no record of audit plan, it goes on to show non-compliance with SA
220.
(d) Audit was, in fact, planned as evidenced by auditor’s submissions. However, there is an
exemption for small CA firms doing away with cumbersome documentation in relation to
audit plan.

Q.2. The auditor has reasoned that risk of material misstatement has been assessed to be low based
upon his understanding of the company and it is a matter of professional judgment. Identify

12
 the most appropriate statement from below in this regard.
(a) Assessing risks of material statement is a matter of professional judgment. It cannot be
demanded from him how his judgment was arrived at.
(b) Although auditor has not submitted record of how risk of material misstatement was
arrived at, it does not affect compliance with SA 220.
(c) Since auditor has no record of how risk of material misstatement was arrived at, it goes
on to show non-compliance with SA 220.
(d) Such a query, itself, is outside the mandate of authority.

Q.3. Considering auditor’s point of view regarding engagement quality control review, identify the
most appropriate statement from below:
(a) Engagement quality control review is mandatory in such type of engagement. It was not
proper for auditor to bypass such review. He has violated mandatory requirement of
SA 220.
(b) Engagement quality control review is optional in such type of engagement. Therefore,
question of not following SA 220 does not arise.
(c) No contentious matter arose during the course of engagement. Therefore, question of not
following SA 220 does not arise in respect of engagement quality control review.
(d) Engagement quality control review is dependent upon benchmarks established under
SQC 1. If those bench marks are satisfied, such a review is necessary.

Q.4. Considering auditor’s reply regarding errors in data feeding entry by junior staff in relation to
accounting standards, which of the following statements is proper?
(a) Such are examples of clerical errors encountered during preparation of reports. There is
no question of non-compliance with SA 220.
(b) Such are examples of clerical errors encountered during preparation of reports. There is
no effect on auditor’s opinion and consequently question of non-compliance with SA 220
does not arise.
(c) Such are examples of serious lapses on part of auditor showing non-compliance with
SA 220.
(d) Such are examples of serious lapses on part of auditor. However, these are not related to
compliance with SA 220.

Q.5. On your overall reading of the case study, which of the following statements appears to
be true?
(a) The firm has an effective system of quality control described in SQC 1. Audit
engagement has also been performed in accordance with SA-220.
(b) The firm does not have effective system of quality control described in SQC 1. Audit
engagement has as not been performed in accordance with SA 220.
(c) SQC 1 is not applicable in the case. Audit engagement has not been performed in
accordance with SA 220.
(d) SQC 1 is not applicable in the case. Audit engagement has been performed in accordance
with SA 220.

Answer Key
1. (c) Since auditor has no record of audit plan, it goes on to show non-compliance with SA
220.

13
2. (c) Since auditor has no record of how risk of material misstatement was arrived at it goes on
to show non-compliance with SA 220.

3. (a) Engagement quality control review is mandatory in such type of engagement. It was not
proper for auditor to bypass such review. He has violated mandatory requirement of
SA 220.

4. (c) Such are examples of serious lapses on part of auditor showing non-compliance with
SA 220.

5. (b) The firm does not have effective system of quality control described in SQC 1. Audit
engagement has also not been performed in accordance with SA 220.

14
 2. “General Auditing Principles &
Auditor Responsibilities”
PART- I DESCRIPTIVE QUESTIONS
2.1 - SA 240 “The Auditor’s Responsibilities relating to Fraud in an Audit of F.S.”
Q.1. CA. Ridhima, internal auditor of Track Store Limited, has pointed out following deficiencies
in internal control of the company, in her reports:
(i) Receivables are not reconciled at stipulated intervals.
(ii) Customers are provided a credit limit based upon their track record. However, no review
of customer credit limits is undertaken at required intervals.
The statutory auditor of the company finds that no action has been taken by the company on
the said deficiencies pointed out in reports of internal auditor. What does above situation
allude to statutory auditor of company?
Ans: Risk of material misstatement due to fraudulent financial reporting:
 Management failing to remedy known significant deficiencies in internal control on a
timely basis is a fraud risk factor for misstatements arising from fraudulent financial
reporting.
 When management does not correct significant deficiencies in internal control on a
timely basis, it reflects an attitude, character or set of ethical values that allow them
knowingly and intentionally to commit a dishonest act.
 Failure to rectify known control deficiencies pertaining to reconciliation of receivables
and review of customer credit limits has the potential to fraud. Lack of timely
reconciliation of receivables may lead to intentional misstatements. Further, non-
reviewing customer limit may lead to grant of credit beyond creditworthiness of
customers. It may result in intentional tying up of company‟s funds with risky customers
due to collusion.
 The above situation is a fraud risk factor for fraudulent financial reporting.

Q.2. M/s Honest Ltd. has entered into a transaction on 5th March, 2024, near year-end, whereby it
has agreed to pay ` 5 lakhs per month to Mr. Y as annual retainership fee for “engineering
consultation”. No amount was actually paid, but ` 60 lakhs are provided in books of account
as on March 31, 2024. Your inquiry elicits a response that need-based consultation was
obtained round the year, but there is no documentary or other evidence of receipt of the
service. As the auditor of M/s Honest Limited, what would be your approach? [RTP-Nov. 18]
Ans: Auditor’s duties in case of suspected fraud:
 As per SA 240 on “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, fraud can be committed by management by various means
including therein recording of fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other objectives.
 In the given case, Honest Ltd. has entered into an agreement with Mr. Y at year-end, for
engineering consultation. It also provides ` 60 lakhs in the books of account, however, no
documentary or other evidence of receipt of such service is available. It appears that
company has passed fictitious journal entries, near year-end, to manipulate the operating
results.

1
  SA 240 further provides that if, as a result of a misstatement resulting from fraud or
suspected fraud, the auditor encounters exceptional circumstances that bring into
question the auditor‟s ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
 Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies
(Audit & Auditor‟s) Rules, 2014 requires that if an auditor of a company, in the course of
the performance of his duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by officers or employees of
the company, he shall immediately report the matter to the audit committee within 2 days
of his knowledge (as amount involved is less than ` 1 Cr.) mentioning the following:
(i) Nature of Fraud with description:
(ii) Approximate amount involved; and
(iii) Parties involved etc.
 Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud
by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year, If yes, the nature and the amount involved is to be
indicated.

Q.3. In the course of audit of Quick Ltd, you suspect that the management has made misstatements
in the financial statements intentionally to deceive the users and to succumb to pressures to
meet market expectations.
Elucidate how the fraudulent financial reporting may be accomplished and also discuss
the techniques of committing fraud by management overriding controls.
[Nov. 20 (5 Marks), MTP-Oct. 21]
Ans: Ways to accomplish Fraudulent Financial Reporting:
SA 240, “The Auditor‟s responsibilities relating to Fraud in an Audit of Financial
Statements”, discusses how fraudulent financial reporting may be accomplished and also
discusses techniques of committing fraud by management overriding controls. Accordingly,
fraudulent financial reporting may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of events,
transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that otherwise
may appear to be operating effectively. Fraud can be committed by management overriding
controls using such techniques as:
(i) Recording fictitious journal entries, particularly close to the end of an accounting period,
to manipulate operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.

2
 (iii) Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
(iv) Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements.
(v) Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
(vi) Altering records and terms related to significant and unusual transactions.

Q.4. Arihant Limited was engaged in the business of owning and managing hotels & resorts,
selling tourism packages and performing airline bookings for corporate and individuals. It
appointed Upadhyay & Co. as its statutory auditor for the financial year 2023-24. While
planning the audit, the audit team decided that the risk of improper revenue recognition from
hotel business should not be treated as a fraud risk. This conclusion was based on the
assessment of earlier years, wherein no fraud was identified in revenue recorded from such
business. While testing the internal financial controls over the process of revenue
recognition, it was identified that the controls are not properly designed to mitigate the risk of
fraud & risk of improper revenue recognition. As a result, the audit team decided to
perform additional substantive testing. However, the audit team still were to the conclusion
that there is no risk of fraud in revenue recognition. During the course of substantive testing,
it was identified that the management did not account for revenue received from
corporate hotel bookings amounting to ` 35 crore. These amounts were partially received in
the company‟s bank accounts and partially received in the CFO‟s personal account. The
amounts received in the bank account of the company were disclosed as advances received
against the future bookings.
In the light of above scenario, kindly guide the statutory auditors with respect to their
responsibility relating to fraud in an audit of a financial statement. [RTP-Nov. 22]
Ans: Auditor’s responsibility relating to fraud in an audit of F.S.:
 As per SA 240, “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements” and SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment”, auditor
shall identify and assess the risks of material misstatement (RMM) due to fraud at the
financial statement level, and at the assertion level for classes of transactions, account
balances and disclosures.
 When identifying and assessing the RMM due to fraud, the auditor shall, based on a
presumption that there are risks of fraud in revenue recognition, evaluate which types of
revenue, revenue transactions or assertions give rise to such risks.
 In accordance with SA 240 and SA 330, auditor shall determine overall responses to
address the assessed RMM due to fraud at the F.S. level and assertion level. The
presumption that there are risks of fraud in revenue recognition may be rebutted. For
example, the auditor may conclude that there is no RMM due to fraud relating to revenue
recognition in the case where there is a single type of simple revenue transaction, for
example, leasehold revenue from a single unit rental property. However, when there is a
complex revenue structure or when there is lack of controls on revenue recognition, then
there is a high probability of fraud risk in revenue recognition.
 Obtaining an understanding of the entity and its environment, including the entity‟s
internal control is a continuous, dynamic process of gathering, updating and analysing

3
 information throughout the audit. In the current scenario, the company was earning
revenue from multiple streams. Also, it was identified that the controls are not properly
designed to mitigate the risk of fraud and risk of improper revenue recognition. During
the year it was identified that the management did not account for revenue from
corporate hotel bookings amounting to ` 35 crore. These amounts were partially received
in the company‟s bank accounts and partially received in the CFO‟s personal account.
The amounts received in the bank account of the company were disclosed as advances
received against future bookings.
 Therefore, the auditor while performing the risk assessment procedures should consider
the complexity and nature of the revenue for determining the fraud risks in revenue
recognition. Also, there were no adequate controls addressing the risk of improper
revenue recognition or fraud risk, the audit team rebutted the fraud risk. Moreover, the
audit team should have recognised fraud risk by identifying the deficiencies of internal
control over the revenue recognition process and should have treated the risk of improper
revenue recognition as a significant risk.
 Also, as per Sec. 143(12) of the Companies Act, 2013, the auditor is required to report all
the frauds identified during the course of the audit involving amounts above 1 crore
within the prescribed time frame to the C.G.

Q.5. M/s Kumar & Co, Chartered Accountants were appointed as statutory auditors of PC limited
for the financial year 2023-24. During the course of audit, one of the partners CA Kumar
observed that there is misappropriation of assets in the form of theft of entity‟s inventory and
is perpetrated by employees in relatively small and immaterial amounts. CA Kumar is
concerned with the existence of certain circumstances for increasing the susceptibility of
assets to misappropriation.
Guide CA Kumar with respect to Risk factors related to misstatements arising from
misappropriation of assets with reference to relevant Standard on Auditing
[Dec. 21 (5 Marks), MTP-March 23]
Ans: Risk Factors relating to misstatements arising from misappropriation of Assets:
As per SA 240, “The Auditor‟s Responsibilities Relating to Fraud in an audit of Financial
Statements”, misappropriation of assets involves the theft of entity‟s assets and is often
perpetrated by employees in relatively small and immaterial amounts. However, it can also
involve management who are usually more able to disguise or conceal misappropriations in
ways that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including stealing
physical assets or intellectual property (for example, stealing inventory for personal use or for
sale, stealing scrap for resale, colluding with a competitor by disclosing technological data in
return for payment).
Risk factors that relate to misstatements arising from misappropriation of assets are also
classified according to the three conditions generally present when fraud exists:
incentives/pressures, opportunities, and attitudes/rationalization.
(a) Incentives/Pressures
Personal financial obligations may create pressure on management or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other
assets susceptible to theft may motivate those employees to misappropriate those assets.

4
 For example, adverse relationships may be created by the following:
(i) Known or anticipated future employee layoffs.
(ii) Recent or anticipated changes to employee compensation or benefit plans.
(iii) Promotions, compensation, or other rewards inconsistent with expectations.
(b) Opportunities:
Certain circumstances may increase susceptibility of assets to misappropriation. For
example, opportunities to misappropriate assets increase when there are the following:
(i) Large amounts of cash on hand or processed.
(ii) Inventory items that are small in size, of high value, or in high demand.
(iii) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
(iv) Fixed assets which are small in size, marketable, or lacking observable identification
of ownership.
Inadequate internal control over assets may increase the susceptibility of
misappropriation of those assets. For example, misappropriation of assets may occur
because there is the following:
(1) Inadequate segregation of duties or independent checks.
(2) Inadequate oversight of senior management expenditures, such as travel and other
reimbursements.
(3) Inadequate management oversight of employees responsible for assets, for example,
Inadequate supervision or monitoring of remote locations.
(4) Inadequate job applicant screening of employees with access to assets.
(5) Inadequate record keeping with respect to assets.
(6) Inadequate system of authorization & approval of transactions (for example, in
purchasing).
(7) Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
(8) Lack of complete and timely reconciliations of assets.
(9) Lack of timely and appropriate documentation of transactions, for example, credits
for merchandise returns.
(10) Lack of mandatory vacations for employees performing key control functions.
(11) Inadequate management understanding of information technology, which enables
information technology employees to perpetrate a misappropriation.
(12) Inadequate access controls over automated records, including controls over and
review of computer systems event logs.
(c) Attitudes/Rationalizations:
(i) Disregard for need for monitoring or reducing risks related to misappropriations of
assets.
(ii) Disregard for internal control over misappropriation of assets by overriding existing
controls or by failing to take appropriate remedial action on known deficiencies in
internal control.
(iii) Behaviour indicating displeasure or dissatisfaction with entity or its treatment of
employee.
(iv) Changes in behaviour or lifestyle that may indicate assets have been
misappropriated.
(v) Tolerance of petty theft.

5
Q.6. Comment on the following: On 15th March, 2024, the directors of Phony Ltd. instructed
their accountant to enter purchases amounting ` 1.02 Crores from a company incorporated
dated 11th March, 2024. However, no amount was actually paid and ` 1.02 Crores was
provided in the books of account as purchases for the year ending on 31st March, 2024.
On inspection, no documentary or other evidence of such purchases was found. As the auditor
of Phony Ltd., what would be your approach regarding reporting of such bogus purchases?
[MTP-May 20]
Ans: Auditor’s duties in case of suspected fraud:
 As per SA 240 on “The Auditor‟s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, fraud can be committed by management by various means
including therein recording of fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other objectives.
 In the given case, directors of Phony Ltd. instructed their accountant to enter purchases
amounting ` 1.02 Crores from a company incorporated dated 11th March, 2024.
However, no amount was actually paid and ` 1.02 Crores was provided in the books of
account as purchases for the year ending on 31st March, 2024. On inspection, no
documentary or other evidence of such purchases was found. It appears that company has
passed fictitious journal entries, near year-end, to manipulate the operating results.
 SA 240 further provides that if, as a result of a misstatement resulting from fraud or
suspected fraud, the auditor encounters exceptional circumstances that bring into
question the auditor‟s ability to continue performing the audit, the auditor shall:
(1) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
(2) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
 Further, Sec. 143(12) of the Companies Act, 2013 read with Rule 13 of Companies
(Audit & Auditor‟s) Rules, 2014 requires that if an auditor of a company, in the course of
the performance of his duties as statutory auditor, has reason to believe that an offence of
fraud, which involves or is expected to involve individually an amount of 1 Cr. or above,
is being or has been committed against the company by its officers or employees, the
auditor shall report the matter to the C.G.
 Para 3(xi) of CARO, 2020 also requires the company auditor to report whether any fraud
by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year; If yes, the nature and the amount involved is to be
indicated.

Q.7. MN & Associates are the statutory auditors of ABC Ltd. for the FY 2021-22. During the
course of audit, the engagement partner, Mr. Manohar notices a misstatement resulting from a
suspected fraud that brings into question the audit team‟s ability to continue performing the
audit. How should the audit team deal with the situation?
Ans: Auditor Unable to Complete the Engagement:
As per SA 240 “Auditor‟s Responsibilities relating to fraud in an audit of financial
statements”, if the auditor concludes that it is not possible to continue performing the audit as
a result of a misstatement resulting from fraud or suspected fraud, the auditor should:
(i) consider the professional and legal responsibilities applicable in the circumstances,

6
 including whether there is a requirement for the auditor to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities;
(ii) consider the possibility of withdrawing from the engagement; and
(iii) If the auditor withdraws:
 discuss with the appropriate level of management and TCWG, the auditor‟s
withdrawal from the engagement and the reasons for the withdrawal; and
 consider whether there is a professional or legal requirement to report to the person
or persons who made the audit appointment or, in some cases, to regulatory
authorities, the auditor‟s withdrawal from the engagement and the reasons for the
withdrawal.

Q.8. My Décor Limited, presently engaged in manufacturing of fabrics, wants to set up a new
plant for manufacturing of special kind of fabric providing an altogether different texture and
feel. This kind of fabric has become a hit with retail customers. The company needs to set up
plant for manufacturing the above kind of fabric involving huge capital outlays to stay
competitive in the market. You are auditor of the company and find that company‟s revenue
has increased in financial year 2023-24 to ` 1000 crore from ` 750 crore in last year. By the
time, you started the audit, there was no change in plant capacity and information regarding
need to set up new plant has become known to you during inquiry of company‟s personnel.
Discuss, how you should proceed to deal with above situation, as auditor of the company,
paying special attention to risk of material misstatement due to fraudulent financial reporting?
Ans: Risk of material misstatement due to fraudulent financial reporting:
 Given situation highlights need for the company to set up new plant for manufacturing of
special kind of fabric to stay competitive in the market. Setting up of such plant involves
huge capital outlays which could entail financing arrangements. Therefore, excessive
pressure exists for management to be involved in fraudulent financial reporting. In such a
situation, management may be tempted to inflate its revenues to show rosy picture. It is a
fraud risk factor and needs to be evaluated by the auditor.
 Revenues of company have jumped from ` 750 crore in last year to ` 1000 crore in year
2023-24 without any change in plant capacity. The auditor may consider above said fraud
risk factor for assessing risk of material misstatement due to fraud.
 In case of auditor assessing risk of material misstatement due to fraudulent financial
reporting, audit procedures to address such risk like performing SAP relating to revenue,
use of CAATs to identify unusual revenue transactions and testing controls pertaining to
revenue transactions need to be performed.

2.2-SA 250 “Considerations of Laws & Regulations in an Audit of Financial Statements”

Q.9. You are auditor of a social media company. Of late, government has tightened noose around
companies operating in this segment by bringing in a maze of regulatory legislations to
protect interests of users. How you can proceed to verify that company is compliant with new
regulatory requirements? Besides, what does above situation underscore to you as an auditor?
Ans: Aspects to be considered to ensure compliance of laws and regulations:
 SA 250 “Consideration of laws and regulations in an Audit of Financial statements”
requires auditor to obtain SAAE regarding the compliance with the provisions of those
laws and regulations generally recognized to have a direct impact on the determination of
material amounts and disclosures in the financial statements including tax and labour

7
 laws. For other laws, auditor‟s responsibility is limited to undertake specified audit
procedures to help identify non-compliance with those laws and regulations that may
have a material effect on the financial statements.
 In the present case, auditor needs to verify whether the company has put in place systems
and procedures to meet with new regulatory requirements. It can be verified by
examining policies and procedures developed by company in this regard like-
(a) devising appropriate system of internal control,
(b) sensitizing employees regarding new rules,
(c) engaging legal advisors etc.
 Further, financial stability of company may be threatened due to new regulatory
requirements. The management may be under pressure. It is also a fraud risk factor and
may need to be evaluated by auditor.

Q.10. CA Anand is the engagement partner for the audit assignment of NHT Ltd. engaged in
manufacture of Iron and Steel bars. The company has its plants in the state of Sikkim. While
verifying the wages record of the company, CA Anand found that maximum of the labour
employed in the plants of the company was child labour. He questioned the management of
the company about the same to which the management replied that looking into the
compliance of such law is outside his scope of financial audit. Give your comments with
respect to such situation.
Or
As a statutory auditor of a company, comment on the following: While verifying the
employee records in a company, it was found that a major portion of the labour employed was
child labour. On questioning the management, the auditor was told that it was outside his
scope of the financial audit to look into the compliance with other laws.
[RTP-May 18, MTP-May 20, April 21, March 23]
Ans: Auditor’s Responsibility for consideration of other Laws:
 As per SA 250 “Considerations of Laws and Regulations in an Audit of Financial
Statements”, auditor is not responsible for preventing non-compliance and cannot be
expected to detect non- compliance with all laws and regulations. For compliance with
provisions of those laws and regulations generally recognised to have a direct effect on
the determination of material amounts and disclosures in the F.S., auditor‟s responsibility
is to obtain SAAE about compliance with the provisions of those laws and regulations.
 For other laws and regulations, auditor‟s responsibility is limited to undertaking specified
audit procedures to help identify non-compliance with those laws and regulations that
may have a material effect on the financial statements.
 In the instant case, maximum of the labour employed was child labour. When auditor
questioned the management about the same, management replied that looking into the
compliance of such law is outside his scope of financial audit. Such reply by the
management is not acceptable as such situation may have a material effect on the
financial statements.
Conclusion: Auditor should ensure as to whether any penal provisions will be there for non-
compliance of such law and also whether the same has been duly disclosed by the company.
If he concludes that such non compliance has a material effect on the F.S. and the same
has not been adequately reflected in F.S., he shall express an adverse or a qualified opinion
on the F.S.

8
Q.11. As an Auditor of TRP Ltd., you are suspicious that there might be non-compliance with laws
and regulations to which the company is subject to. Indicate the possible areas or aspects
where you may have to look out for forming an opinion as to whether your suspicion has
some based to further inquire. [May 18 (4 Marks), MTP-Oct. 21]
Or
During the course of Audit of POP Ltd., you as an auditor while performing the audit
procedures become aware of the existence of certain instances which seem to be an indication
of non- compliance with Laws and Regulations. List out any five such instances identified by
you as an auditor, suggestive of non-compliance with Laws and Regulations.
[Jan. 21 (5 Marks)]
Ог
You are appointed as an auditor of BHK Ltd., a company engaged in export of
agricultural equipment. During the course of audit, your audit team informed you regarding
non-deduction of TDS on huge payments made to legal counsel of BHK Ltd. You want
to alert your team on the possibility of non-compliance with Laws and Regulations by BHK
Ltd. Help your audit team in identifying any other indications of non-compliance with
Laws and Regulations particularly related to payments made by the company.
[Dec. 21 (5 Marks)]
Ans: Indicators to be considered for verifying compliance with laws and regulations:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” deals
with the auditor‟s responsibilities to consider laws and regulations when performing an audit.
To verify compliance of laws and regulations, auditor is required to consider the following
indicators:
1. Investigation by regulatory organisations, Government departments or payment of fines,
additional taxes or penalties.
2. Payments for unspecified services or loans to consultants related parties or employees.
3. Sales commission or agent‟s fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
4. Purchases at prices significantly above or below market price.
5. Unusual payments in cash.
6. Unusual payments towards legal and retainership fees.
7. Unusual transactions with companies registered in tax havens.
8. Payments for goods or services made other than to the country from which the goods or
services originated.
9. Payments without proper exchange control documentation.
10. Existence of an information system which fails to provide an adequate audit trail.
11. Unauthorised transactions or improperly recorded transactions.
12. Adverse media comment.

Q.12. CA Abhinanadan is an auditor of KM Private Limited. During the course of audit, CA

Abhinanadan becomes aware of information concerning an instance of non-compliance or
suspected non- compliance with laws and regulations. Being a senior partner of CA.
Abhinanadan, guide him regarding audit procedures to be followed when non-compliance is
identified or suspected.
Ans: Audit Procedures When Non-Compliance is Identified or Suspected:
 As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial

9
 Statements”, if the auditor becomes aware of information concerning an instance of non-
compliance or suspected non-compliance with laws and regulations, the auditor shall
obtain:
(i) An understanding of the nature of the act and the circumstances in which it has
occurred; and
(ii) Further information to evaluate the possible effect on the financial statements.
 If the auditor suspects there may be non-compliance, the auditor shall discuss the matter
with management and, where appropriate, those charged with governance. If
management or, as appropriate, those charged with governance do not provide sufficient
information that supports that the entity is in compliance with laws and regulations and,
in the auditor‟s judgment, the effect of the suspected non-compliance may be material to
the financial statements, the auditor shall consider the need to obtain legal advice.
 If sufficient information about suspected non-compliance cannot be obtained, the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the
auditor‟s opinion.
 The auditor shall evaluate the implications of non-compliance in relation to other aspects
of the audit, including the auditor‟s risk assessment and the reliability of written
representations, and take appropriate action.

Q.13. PQ Limited, a listed entity, is in the business of manufacturing of specialty chemicals. The
company has appointed CA Jazz as CFO of the company. CA Jazz is concerned about
compliance with the provisions of laws and regulations that determine the reported amounts
and disclosure in financial statements of PQ Limited. Accordingly, CA Jazz wants to
implement such policies and procedures that can assist him in the prevention and detection of
non-compliance with laws and regulations. Help CA Jazz by citing examples of such policies
and procedures. [Nov. 20 (5 Marks)]
Ans: Management Responsibility for compliance with laws and regulation:
SA 250 “Consideration of Laws and Regulations in an audit of Financial Statements” states
that it is the responsibility of management, with the oversight of TCWG, to ensure that the
entity‟s operations are conducted in accordance with the provisions of laws and regulations.
For this purpose, management may apply the following procedures:
1. Monitoring legal requirements and ensuring that operating procedures are designed to
meet these requirements.
2. Instituting and operating appropriate systems of internal control.
3. Developing, publicising and following a code of conduct.
4. Ensuring employees are properly trained and understand the code of conduct.
5. Monitoring compliance with the code of conduct and acting appropriately to discipline
employees who fail to comply with it.
6. Engaging legal advisors to assist in monitoring legal requirements.
7. Maintaining a register of significant laws and regulations with which the entity has to
comply within its particular industry and a record of complaints.

Q.14. Discuss why the potential effects of inherent limitations of an auditor‟s ability to detect
material misstatements described in SA 200 are far greater in respect of non-compliance with
laws and regulations?

10
Ans: Potential effects of inherent limitations on the auditor’s ability to detect material
misstatements in respect of non-compliance with laws and regulations:
Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements in the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the SAs.
In the context of laws and regulations, the potential effects of inherent limitations on the
auditor‟s ability to detect material misstatements are greater for such reasons as the following:
 There are many laws and regulations, relating principally to the operating aspects of an
entity that typically do not affect the financial statements and are not captured by the
entity‟s information systems relevant to financial reporting.
 Non-compliance may involve conduct designed to conceal it, such as collusion, forgery,
deliberate failure to record transactions, management override of controls or intentional
misrepresentations being made to the auditor.
 Whether an act constitutes non-compliance is ultimately a matter for legal determination
by a court of law.

Q.15. FAS Insurance Brokers Limited is a leading online insurance intermediary. During the year,
Director General of GST Intelligence (DGGI) has issued notice to the company for allegedly
creating fictitious invoices for “marketing and sales services” amounting to ` 50 crores in
favour of non-life insurance companies. The premises of company were also searched during
the year by DGGI officials. The matter was also informed to IRDAI by DGGI for violation of
norms and regulations in this regard. Does above situation has any bearing on your
responsibilities as statutory auditor of the company? Outline briefly in context of possible
non-compliance with laws by the company.
Ans: Audit Procedures When Non-Compliance is Identified or Suspected:
 When the auditor becomes aware of the existence of or has information about
investigations by government departments and regulatory organizations, it may be an
indication of noncompliance with laws and regulations.
 In the instant case, notice has been served upon the company by DGGI for allegedly
creating fictitious invoices in guise of providing “marketing and sales services” for
` 50 crores. Issuing an invoice without supply of services is a serious offence under GST
laws and it could involve penalties and imprisonment. Such suspected non-compliance
may have a direct effect on financial statements. The matter has also been informed to
regulator i.e. IRDAI. Violation of IRDAI regulations may result in fines, litigation or
other consequences for the entity that may have a material effect on the financial
statements.
 If the auditor becomes aware of information concerning an instance of non-compliance
or suspected non-compliance with laws and regulations, the auditor shall obtain:
(a) An understanding of the nature of the act;
(b) Circumstances in which it has occurred; and
(c) Further information to evaluate the possible effect on the financial statements.
 If auditor suspects there may be non-compliance, he shall discuss the matter with
management and, where appropriate, TCWG. If management or TCWG do not provide
sufficient information that supports that the entity is in compliance with laws and
regulations and in the auditor‟s judgment, the effect of the suspected non-compliance
may be material to the financial statements, the auditor shall consider the need to obtain
legal advice.

11
  If sufficient information about suspected non-compliance cannot be obtained, the auditor
shall evaluate the effect of the lack of sufficient appropriate audit evidence on the
auditor‟s opinion.

2.3 - SA 260 “Communication with Those Charged with Governance”

Q.16. CA. Shivani Behl is offered appointment as auditor of RUTE Limited, a listed company. The
audit committee of the company wants her to justify independence in relation to company
through proper communication. Although she has ensured that there are no threats to her
independence, she feels requirement of audit committee to be beyond its purview. What is
your opinion in this regard?
Ans: Communicating Independence with TCWG:
 SA 260 “Communication with Those charged with Governance”, requires that in the case
of listed entities, auditor shall communicate with TCWG, a statement that the
engagement team and others in the firm as appropriate, the firm and, when applicable,
network firms have complied with relevant ethical requirements regarding independence
and
(i) All relationships and other matters between firm, network firms and the entity that,
in the auditor‟s professional judgment, may reasonably be thought to bear on
independence.
This shall include total fees charged during the period covered by the financial
statements for audit and non-audit services provided by the firm and network firms
to the entity and components controlled by the entity. These fees shall be allocated to
categories that are appropriate to assist TCWG in assessing the effect of services on
the independence of the auditor and;
(ii) Related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
 Further, as per the Companies Act, 2013 requires audit committee to review and monitor
auditor‟s independence.
Conclusion: Audit committee requiring auditor to justify her independence is well within its
purview.

Q.17. Whilst the Audit team has identified few matters, they need your advice to conclude on the
same. Engagement Partner have asked them to review the Board minutes and other
secretarial/ regulatory records based on which the following additional matters were brought
to the attention of the Partner:
(i) The long-term borrowings from the parent company has no written terms and neither the
interest nor the principal has been repaid so far.
(ii) Certain computers were received from the parent company free of cost, the value of
which is ` 0.23 lakhs & no accounting or disclosure of the same has been made in the
notes to accounts.
(iii) An amount of ` 3.25 Lakhs per month is paid to M/s WE CARE Associates, a
partnership firm, which is a „related party‟ in accordance with the provisions of
the Companies Act, 2013 for the marketing services rendered by them. Based on an
independent assessment, the consideration paid is higher than the arm‟s length
pricing by ` 0.25 lakh per month. Whilst the transaction was accounted in the financial
statements based on the amounts‟ paid, no separate disclosure of this related

12
 party transaction has been made in the notes to accounts forming part of the
financial statements highlighting the same as a „related party‟ transaction.
Audit Manager has reported that she had asked certain information relating to another „related
party‟ transaction (amounting to approx. ` 47 lakhs) but the CFO refused to provide the same
since the same is perceived to be confidential and cannot be shared with the Auditors.
You are required to advise about items to be reported to those charged with governance,
where applicable, based on your audit findings in the given situation. [MTP-Oct. 20]
Ans: Reporting to TCWG:
 SA 260 “Communication with Those charged with Governance” deals with auditor‟s
responsibilities to communicate with TCWG in an audit of financial statements. As per
SA 550, Related Parties, communicating significant matters arising during the audit in
connection with the entity‟s related parties helps the auditor to establish a common
understanding with those charged with governance of the nature and resolution of these
matters. The auditor is also required to ensure the compliance of Ind AS 24/AS 18
Related Party Disclosures.
 In view of above in the given scenario, the auditor is required to prepare a brief summary
of various items to be reported to TCWG in accordance with SA 260:
(i) Receipt of long-term borrowing (on no agreed terms and repayment of interest and
principal) and free of cost computers from the Parent Company need separate
disclosure in financial statements as per Ind AS 24/AS 18.
(ii) In respect of one of related party transaction amounting ` 3.25 lakhs per month, it is
noticed that ` 0.25 lakh per month exceeds the arm‟s length price, which has not
been disclosed highlighting the same as related party transactions as per Ind- AS 24/
AS 18.
(iii) Refusal by CFO of the company to provide the details of related party transaction
amounting to ` 47 lakhs on the ground that same is perceived to be confidential and
cannot be shared with auditors, is not in order, as denying for the related party
details of ` 47 lakhs is imposing limitation of scope of auditor in view of SA 705.
 The auditor would also need to assess his reporting requirements under clause (xiii) of
Paragraph 3 of CARO, 2020 with respect to related party transactions that whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the
Financial Statements etc, as required by the applicable Accounting Standards.

Q.18. UVW & Associates are the statutory auditors of Moon Ltd., a listed company, for the
financial year 2023-24. CA Udhav is the engagement partner for the audit assignment. He
was of the understanding that as per the requirement of one of the SAs he has a responsibility
to communicate following matters to those charged with governance:
(a) The auditor‟s responsibilities in relation to the financial statement audit.
(b) Planned scope and timing of the audit.
(c) Auditor independence Which of the matters is not included in the list prepared by
CA Udhav.
Discuss such matter in detail.
Ans: Matters to be communicated with TCWG:
SA 260 “Communication with Those Charged with Governance” deals with auditor‟s
responsibility to communicate with TCWG in relation to an audit of financial statements.

13
 Among various matters as included in the list, one of the matters that is not mentioned in the
list is Significant findings from the audit. With respect to such matter, the auditor shall
communicate with TCWG:
(a) Auditor‟s views about significant qualitative aspects of entity‟s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
When applicable, the auditor shall explain to TCWG why the auditor considers a
significant accounting practice, that is acceptable under the applicable FRF, not to be
most appropriate to the particular circumstances of the entity;
(b) Significant difficulties, if any, encountered during the audit;
(c) Unless all of TCWG are involved in managing the entity:
(i) Significant matters arising during the audit that were discussed, or subject to
correspondence, with management;
(ii) Written representations the auditor is requesting
(d) Circumstances that affect the form and content of the auditor‟s report, if any and
(e) Any other significant matters arising during the audit that, in the auditor‟s professional
judgment, are relevant to the oversight of the financial reporting process.
The communication of findings from the audit may include requesting further information
from TCGW in order to complete the audit evidence obtained. For example, the auditor may
confirm that TCWG have the same understanding of the facts and circumstances relevant to
specific transactions or events.

Q.19. M/s Manidhari & Associates have been appointed as an auditor of JIN Limited, a
multinational company dealing in spare parts. During the course of audit, CA Manidhari is
facing many problems including the problem of not getting the desired information from the
management. Accordingly, he decided to communicate with TCWG about significant
difficulties encountered during the audit. CA Manidhari seeks your guidance on matters
which can be considered as significant difficulties as per SA 260. [RTP-May 22]
Ans: Significant Difficulties encountered during audit:
As per SA 260, “Communication with Those Charged with Governance”, significant
difficulties encountered during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an
unwillingness by management to provide information necessary for the auditor to
perform the auditor‟s procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Management‟s unwillingness to make or extend its assessment of the entity‟s ability to
continue as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a
modification of the auditor‟s opinion as per SA 705 (Revised), Modifications to the Opinion
in the Independent Auditor‟s Report.

Q.20. CA. Vallabh Sundar is auditor of a leading private sector bank. “IT Systems and controls” is
under his consideration to be reported as “Key audit matter” in audit report of the bank due to
high level of automation and complexity of the IT architecture and its impact on the financial
reporting system.

14
 At what time he should communicate such identified “Key audit matter”? What are relevant
considerations in this regard and their usefulness?
Ans: Communication with TCWG and KEY Audit Matters (KAM):
 SA 260 requires the auditor to communicate with TCWG on a timely basis.
 SA 701 states that the appropriate timing for communications about KAM will vary with
the circumstances of the engagement. However, auditor may communicate preliminary
views about KAM when discussing the planned scope and timing of the audit, and may
further discuss such matters when communicating about audit findings. Doing so may
help to alleviate the practical challenges of attempting to have a robust two way dialogue
about key audit matters at the time the financial statements are being finalized
for issuance.
 Communication with TCWG enables them to be made aware of the KAM that the auditor
intends to communicate in the auditor‟s report, and provides them with an opportunity to
obtain further clarification where necessary. The auditor may consider it useful to
provide TCWG with a draft of the auditor‟s report to facilitate this discussion.
 Communication with TCWG recognizes their important role in overseeing the financial
reporting process, and provides the opportunity for TCWG to understand the basis for the
auditor‟s decisions in relation to KAM and how these matters will be described in the
auditor‟s report.
 It also enables TCWG to consider whether new or enhanced disclosures may be useful in
light of the fact that these matters will be communicated in the auditor‟s report.

2.4 - SA 299 “Joint Audit of Financial Statements”

Q.21. Four audit firms viz. GPR & Co., MKS & Co., CY & Associates and DES & Associates have
been appointed for conducting statutory audit of KNB Bank, a public sector bank in
accordance with regulatory guidelines. The professional work was divided by audit firms on
the basis of zones of bank. However, work relating to “IT Systems and controls” was not
allocated by them due to its very nature.
While planning for the above common work area, it was decided to test IT general controls,
application controls and IT dependent manual controls. Planned key audit procedures relating
to this common area also included testing design and operating effectiveness of controls over
“computer operations including back-up, batch-processing and data centre security”.
The actual audit procedures pertaining to “testing controls over batch processing” were
performed by team of DES & Associates. In case work in relation to above audit procedures
is not performed professionally by DES & Associates, discuss where responsibility for such
lapses would lie in line with SA 299?
Ans: Responsibilities of Joint Auditors w.r.t. Common Areas of working:
 As per SA 299 “Joint Audit of Financial Statements”, in respect of common areas, joint
auditors are only responsible for appropriateness of NTE of planned audit procedures
agreed among them. The responsibility of individual execution lies with concerned joint
auditor.
 In the instant case, audit procedures relating to testing design and operating effectiveness
of controls over computer operations including back-up, batch-processing and data center
security have been planned jointly as it is a common area. However, audit procedures
relating to testing controls over batch processing were actually performed by team of
DES & Associates although these were planned jointly.

15
 Conclusion: In case of any lapses in performing such procedures, DES & Associates would
be responsible.

Q.22. Magnet Interiors Ltd. is a listed company engaged in the manufacture of office furniture. The
company has its activities divided into four geographic regions. The company has appointed
two joint auditors, namely, AB & Co. and CD & Co. to conduct the joint audit of the financial
statements of the company for the year ending 31.03.2024. The engagement partners from
both the firms, CA Amar and CA Chetanya along with their audit teams had a meeting to
discuss the areas of the work to be divided and their respective responsibilities. Explain the
responsibilities of the joint auditors with respect to such joint audit.
Ans: Responsibilities of Joint Auditors:
 As per SA 299 “Joint Audit of Financial Statements”, in respect of audit work divided
among the joint auditors, each joint auditor shall be responsible only for the work
allocated to such joint auditor including proper execution of the audit procedures. In
cases where specific divisions, zones or units are allocated to different joint auditors, it is
the separate and specific responsibility of each joint auditor to obtain information and
explanations from the management in respect of such divisions/zones/units and to
evaluate the information and explanations so obtained by said Joint auditor.
 All the joint auditors shall be jointly and severally responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all
joint auditors.
(b) decisions taken by all the joint auditors under audit planning in respect of common
audit areas concerning the NTE of the audit procedures to be performed by each of
the joint auditors.
(c) matters which are brought to the notice of the joint auditors by any one of them and
on which there is an agreement among the joint auditors.
(d) examining that the F.S. of the entity comply with the requirements of the relevant
statutes.
(e) presentation & disclosure of the financial statements as required by the applicable
FRF.
(f) ensuring that the audit report complies with the requirements of the relevant statutes,
the applicable Standards on Auditing and the other relevant pronouncements issued
by ICAI.
 Where, in the course of the audit, a joint auditor comes across matters which are relevant
to the areas of responsibility of other joint auditors and which deserve their attention, or
which require disclosure or require discussion with, or application of judgment by other
joint auditors, the said joint auditor shall communicate the same to all the other joint
auditors in writing prior to the completion of the audit.
 It shall be the responsibility of each joint auditor to determine the NTE of audit
procedures to be applied in relation to the areas of work allocated to said joint auditor. It
is the individual responsibility of each joint auditor to study and evaluate the prevailing
system of internal control and assessment of risk relating to the areas of work allocated to
said joint auditor.
 As regards decisions taken by all the joint auditors under audit planning in respect of
common audit areas concerning the NTE of the audit procedures to be performed by each
of the joint auditors, all joint auditors are responsible only in respect of the

16
 appropriateness of the decisions concerning the NTE of the audit procedures agreed upon
among them, proper execution of these audit procedures is the individual responsibility
of the joint auditor concerned.

Q.23. KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors
to conduct auditing for the financial year 2023-24. For the valuation of gratuity scheme of the
company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to
difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently,
major difference was found in the actuary reports. However, Mr. X agreed to Mr. Y‟s actuary
report, though, Mr. Z did not. Mr. X contends that Mr. Y‟s actuary report shall be considered
in audit report due to majority of votes. Now, Mr. Z is in dilemma.
You are required to briefly explain the responsibilities of auditors when they are jointly and
severally responsible in respect of audit conducted by them and also guide Mr. Z in such
situation. [RTP- Nov. 18]
Ans: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct
of joint audit to achieve the overall objectives of the auditor as laid down in SA 200.
Accordingly, in respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including proper
execution of the audit procedures. All the joint auditors shall be jointly and severally
responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(b) decisions taken by all the joint auditors under audit planning in respect of common audit
areas concerning the NTE of the audit procedures to be performed by each of the joint
auditors;
(c) matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors;
(d) examining that the F.S. of the entity comply with the requirements of the relevant
statutes;
(e) presentation and disclosure of the F.S. as required by the applicable FRF;
(f) ensuring that the audit report complies with the requirements of the relevant statutes, the
applicable Standards on Auditing and the other relevant pronouncements issued by ICAI.
It shall be the responsibility of each joint auditor to determine the NTE of audit procedures to
be applied in relation to the areas of work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate the prevailing
system of internal control & assessment of risk relating to the areas of work allocated to said
joint auditor.
Reporting Responsibilities in case of differences of opinion:
 Joint auditors are required to issue common audit report.
 However, in case of any disagreement among joint auditors with regard to the opinion or
any matters to be covered by the audit report, they shall express their opinion in a
separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.

17
  In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, Mr. Z does not agree with the opinion of Mr. X and Mr. Y, therefore he
needs to issue a separate report.

Q.24. Your firm is one of the Joint Auditors of FMP Ltd. Under what circumstances joint auditors
are jointly liable for the work in relation to audit of financial statements? Is there any
restriction on a joint auditor to communicate a dissenting note differing from the majority
opinion of the other joint auditors in the audit report issued under section 143 of the
Companies Act, 2013? [Nov. 18 (5 Marks)]
Ans: Circumstance in which joint auditors are jointly liable: Refer Answer of Q. No. 23
Restrictions as to communication of dissenting note:
 SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.
 In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.

Q.25. Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for
conducting audit for the year ended on 31st March, 2024. In the course of audit, it has been
observed that there is a major understatement in the value of inventory. The inventory
valuation work was looked after by MN & Associates but there was no documentation for the
division of the work between the joint auditors. Comment on the above situation with regard
to responsibilities among joint auditors. [May 19 (5 Marks)]
Ans: Responsibilities of Joint Auditor:
 As per SA 299 “Joint Audit of Financial Statements” where joint auditors are appointed,
they should, by mutual discussion, divide the work among themselves.
 After identification & allocation of work among the joint auditors, the work allocation
document shall be signed by all the joint auditors and the same shall be communicated
to TCWG of the entity. Documentation of allocation of work helps in avoiding
any dispute or confusion which may arise among the joint auditors regarding the scope of
work to be carried out by them. Further, the communication of allocation of work to
the entity helps in avoiding any dispute or confusion which may arise between the entity
& the joint auditors.
 In respect of audit work divided among the joint auditors, each joint auditor is
responsible only for the work allocated to him, whether or not he has prepared a separate
report on the work performed by him.
 However, for the work not divided, all the joint auditors are jointly and severally
responsible.
 In the present case, though the revenue aspects (inventory valuation work) were looked
after by MN & Associates, but as there is no documentation for division of the work

18
 between them, both the joint auditors will be held responsible for it.
Conclusion: Both Joint auditors are jointly and severally responsible.
Note: Conclusion given in suggested answer of ICAI is different stating that MN &
Associates will be held responsible as inventory valuation work was looked after by them.
Further, there is a violation of SA 299 as the division of work has not been documented.
Author’s view: As the work is not documented, responsibility will be joint and several.

Q.26. Excellent Bank Ltd. is a Public Limited Company. The said Bank has various branches all
over India. The Bank appoints 3 Joint Auditors for the financial year ending on 31/03/2024.
All the 3 Joint Auditors divide the work with mutual consent. Verification of Consolidation,
however, remained undivided. All branches and zones were divided amongst the 3 Joint
Auditors. During audit of zones, CA Z, one of the joint auditors expressed a concern about
internal control in one of the large corporate branches situated in his zone. The irregularity
was not reported in the final accounts as the other 2 Joint Auditors were not in favour of
reporting and decision of not reporting the same was taken on the basis of majority.
Subsequently, fraud has been detected in the said branch which was audited by CA Z.
The Bank seeks your advice about the responsibility of the 3 Joint Auditors in the above
situation. [Nov. 19 (5 Marks)]
Ans: Responsibilities of Joint auditors:
SA 299 “Joint Audit of Financial Statements” lays down the principles for effective conduct
of joint audit to achieve the overall objectives of the auditor as laid down in SA 200. As per
SA 299, where joint auditors are appointed, they should, by mutual discussion, divide the
work among themselves.
Accordingly, in respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including proper
execution of the audit procedures. On the other hand, all the joint auditors shall be jointly and
severally responsible for:
(a) the audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(b) matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors.
In the present case, all the 3 Joint Auditors divide the work with mutual consent , except for
the verification of consolidation, which remained undivided. Hence, in accordance with SA
299, all the joint auditors are responsible for the same.
Reporting Responsibilities in case of differences of opinion:
 Joint auditors are required to issue common audit report.
 However, in case of any disagreement among joint auditors with regard to the opinion or
any matters to be covered by the audit report, they shall express their opinion in a
separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.
 In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
In the present case, CA Z, one of the joint auditors expressed a concern about internal control

19
 in one of the large corporate branches situated in his zone. The irregularity was not reported
in the final accounts as the other 2 Joint Auditors were not in favour of reporting and decision
of not reporting the same was taken on the basis of majority. Subsequently, fraud has been
detected in the said branch which was audited by CA Z.
Conclusion: Mr. Z was required to issue a separate report. He was not bound by the views of
other joint auditors. Mr. Z will be held responsible for non-reporting of the matter.
Note: Alternatively, it may be concluded that all the 3 joint auditors will be held
responsible for the fraud detected in the branch audited by CA Z, as decision for not
reporting the irregularity observed was taken on majority basis.

Q.27. A, B and C are joint auditors of a company. B is of the opinion that there are material
misstatements in financial statements of a company which, if accounted for, would turn profit
reflected in financial statements for ` 25 crore to a loss of ` 5 crore. He, therefore, wants an
adverse opinion to be expressed in audit report. However, A and B do not concur with his
views and are inclined to accept management‟s version. Is B required to go by majority
opinion of 2-1?
Ans: Disagreement among joint Auditors:
 As per SA 299 “Joint Audit of Financial Statements”, where the joint auditors are in
disagreement with regard to the opinion or any matters to be covered by the audit report,
they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement. Therefore, B is
not required to go by majority opinion of 2-1.
 In the given situation, audit report issued by the joint auditors shall make a reference to
the separate audit report issued by the other joint auditor. Further, separate audit report
shall also make reference to the audit report issued by other joint auditors. Such reference
shall be mad under the heading “Other Matter Paragraph” as per SA 706.

Q.28. NMN & Co., LLP and ABC & Associates, LLP are the joint statutory auditors of BHS Ltd.
BHS Ltd. is a listed company and has been in existence for the last 50 years. Since beginning
this company was audited by MQS & Associates but due to audit rotation, the company had
to bring in new auditors. Considering the size of the company, two auditors were appointed as
joint auditors. Since the company is new to these auditors and the concept of joint auditors to
whom audit work has been divided, management had a discussion and understood that each
joint auditor is responsible only for the work allocated to him, whether or not he has prepared
a separate report on the work performed by him. Advise. [MTP-April 19]
Ans: Reporting in case of Joint Auditors:
 SA 299 “Joint Audit of Financial Statements” lays down the principles for effective
conduct of joint audit to achieve the overall objectives of the auditor as laid down in
SA 200.
 SA 299 requires the Joint auditors to issue common audit report. However, in case of any
disagreement among joint auditors with regard to the opinion or any matters to be
covered by the audit report, they shall express their opinion in a separate audit report.
 A joint auditor is not bound by the views of the majority of the joint auditors regarding
the opinion or matters to be covered in the audit report and shall express opinion formed
by the said joint auditor in separate audit report in case of disagreement.

20
  In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Such
reference shall be made under the heading “Other Matter Paragraph” as per SA 706.
Review of work by other joint auditor:
 Each joint auditor is entitled to assume that the other joint auditors have carried out their
part of the audit work & the work has actually been performed in accordance with
the SAs.
 It is not necessary for a joint auditor to review the work performed by other joint auditors
or perform any tests in order to ascertain whether the work has actually been performed
in such a manner.
 Each joint auditor is entitled to assume that the other joint auditors have brought to said
joint auditor‟s notice any departure from applicable FRF or significant observations that
are relevant to their responsibilities noticed in the course of the audit.
 Before finalizing audit report, the joint auditors shall discuss and communicate with each
other their respective conclusions that would form the content of the audit report.

2.5 - SA 402 “Audit Considerations in an Entity using Service Organisation”

Q.29. Durafone Mobile Co. Ltd. have pan India presence and market leader in mobile operation. It
has outsourced all its revenue operation including accounting functions to Set Solutions (P.)
Ltd. As an Auditor of the mobile company, enumerate the factors to be taken into
consideration related to its financial reporting. [May 18 (5 Marks)]
Ans: Factors to be taken into consideration related to financial reporting in case of user
entities using services of Service Organisation:
 SA 402 “Audit Considerations relating to an Entity Using a Service Organisation” deals
with the user auditor‟s responsibility to obtain sufficient appropriate audit evidence when
a user entity uses the services of one or more service organisations.
 Services provided by a service organisation are relevant to the audit of a user entity‟s
financial statements when those services, and the controls over them, are part of the user
entity‟s Information system, including related business processes, relevant to financial
reporting.
 Although most controls at the service organisation are likely to relate to financial
reporting, there may be other controls that may also be relevant to the audit, such as
controls over the safeguarding of assets.
 A service organisation‟s services are part of a user entity‟s information system, including
related business processes, relevant to financial reporting if these services affect any of
the following:
(a) The classes of transactions in the user entity‟s operations that are significant to the
user entity‟s financial statements;
(b) The procedures, within both information technology (IT) and manual systems, by
which the user entity‟s transactions are initiated, recorded, processed, corrected as
necessary, transferred to the general ledger and reported in the financial statements;
(c) The related accounting records, either in electronic or manual form, supporting
information and specific accounts in the user entity‟s financial statements that are
used to initiate, record, process and report the user entity‟s transactions; this includes
the correction of incorrect Information and how information is transferred to the
general ledger,

21
 (d) How the user entity‟s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
(e) The financial reporting process used to prepare the user entity‟s financial statements,
including significant accounting estimates and disclosures; and
(f) Controls surrounding journal entries, including non-standard journal entries used to
record non-recurring, unusual transactions or adjustments.

Q.30. ENN Limited is availing the services of APP Private Limited for its payroll operations.
Payroll cost accounts for 65% of total cost for ENN Limited. APP Limited has provided the
type 2 report as specified under SA 402 for its description, design and operating effectiveness
of control.
APP Private Limited has also outsourced a material part of payroll operation M/s SMP &
Associates in such a way that M/s SMP & Associates is sub-service organisation to ENN
Limited. The Type 2 report which was provided by APP Private Limited was based on carve-
out method as specified under SA 402.
CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a
reference has been made to the work done by the service auditor. CA Raman hence asked his
assistant to remove such reference and modify report accordingly.
Comment whether CA Raman is correct in removing the reference of the work done by
service auditor? [RTP-Nov. 20; MTP-April 21, Sep. 22]
Ans: Reporting by the User Auditor:
 As per SA 402, “Audit Considerations Relating to an Entity Using a Service
Organisation”, the user auditor shall modify the opinion in the user auditor‟s report in
accordance with SA 705, “Modifications to the Opinion in the Independent Auditor‟s
Report”, if he is unable to obtain sufficient appropriate audit evidence regarding the
services provided by the service organisation relevant to the audit of the user entity‟s
financial statements.
 The User Auditor shall not refer to report of Service auditor unless required by Laws &
Regulations.
 If such reference is required by laws or regulations, the user auditor‟s report shall
indicate that the reference does not diminish the user auditor‟s responsibility for the audit
opinion.
 In the given case, CA Raman while reviewing the unmodified audit report drafted by his
assistant found that, a reference has been made to the work done by the service auditor.
CA Raman hence asked his assistant to remove such reference and modify report
accordingly.
Conclusion: Contention of CA Raman in removing reference of the work done by service
auditor is in order as in case of unmodified audit report, user auditor cannot refer to the work
done by service auditor.

Q.31. In the course of audit of Tech Limited you observed that processing of accounting data was
given to a third party on account of certain considerations like cost reduction, own computer
working to full capacity. Tech Limited used a service organisation to record transactions and
process related data. As an auditor, what would be your considerations regarding the nature
and extent of activities undertaken by service organisation so as to determine whether those
activities are relevant to the audit and, if so, to assess their effect on audit risk.

22
 Discuss with reference to relevant Standard on Auditing. [Dec. 21 (5 Marks); MTP-March 23]
Ans: Considerations regarding the nature and extent of activities undertaken by service
organisation:
As per SA 402 “Audit Considerations relating to an Entity using a Service Organisation”,
when obtaining an understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service
organisation in the user entity‟s operations, including:
(i) The nature of the services provided by the service organisation and the significance of
those services to the user entity, including the effect thereof on the user entity‟s internal
control;
(ii) The nature and materiality of the transactions processed or accounts or financial
reporting processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of
the user entity; and
(iv) The nature of the relationship between the user entity and the service organisation,
including the relevant contractual terms for the activities undertaken by the service
organisation.
Based on above, the auditor will assess the effect on the audit risk and take necessary steps
while conducting the audit.

Q.32. MNO Ltd. gets its accounting data processed by a service organisation. CA Riya is the
statutory auditor of MNO Ltd. CA Riya wants to obtain an understanding as to how MNO
Ltd. is using the services of the service organisation. What all understanding should she
obtain?
Or
G Ltd. is a mobile phone operating company. Barring the marketing function, it had
outsourced the entire operations like maintenance of mobile infrastructure, customer billing,
payroll, accounting functions, etc. Assist the auditor of G Ltd. as to how he can obtain an
understanding of how G Ltd. uses the services of the outsourced agency in its operations.
[MTP-Oct. 18, RTP-Nov. 18, MTP-Oct. 19]
Ans: Matters of which understanding is required by user auditor w.r.t. services of a services
organisation:
SA 402 on “Audit Considerations relating to an Entity Using a Service Organisation” deals
with the user auditor‟s responsibility to obtain SAAE when a user entity uses the services of
one or more service organisations. Accordingly, when obtaining an understanding of user
entity in accordance with SA 315, auditor shall obtain an understanding of how user entity
uses the services of a service organisation in its operations, including:
(a) Nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity‟s internal
control. Information on nature of services may be available from sources such as user
manuals, contract between the user entity and service organization, reports by service
auditors etc.
(b) Nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation.
(c) Degree of interaction between the activities of the service organisation and those of the
user entity. The degree of interaction refers to the extent to which a user entity is able to

23
 and elects to implement effective controls over the processing performed by the service
organisation.
(d) Nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organisation.

PART- II MULTIPLE CHOICE QUESTIONS

1. Ms. Kee, the engagement partner of Best Hospitality Limited‟s audit team did not perform the
necessary communication with those charged with governance over some critical issues
identified during the course of the audit. Moreover, when management identified that the
engagement partner has not communicated to those charged with governance of the Best
Hospitality Limited, they also chose not to communicate. Upon identification of this issue, the
personnel charged with governance Inquired with management and auditors as to why there
was no communication of the critical matters to them.
Upon such inquiry, Engagement Partner contended that it was the responsibility of
Management to communicate first, then only the audit team should communicate. However,
Management was of the view that they are not liable to communicate to those charged with
governance. As an Engagement Quality Control Reviewer, what will be your opinion?
(a) The auditor is responsible for communicating matters required by SA 260 to those
charged with governance. Also, management has a responsibility to communicate matters
of governance interest to those charged with governance. Communication by the auditor
does not relieve management of its responsibility.
(b) SAs are not applicable to the management and hence the management was not
responsible for communicating the same to those charged with governance. Also, as per
SA 260, Auditor can only communicate when management has already informed those
charged with governance about the matters. Auditors cannot communicate first without
management‟s communication.
(c) Communication by management with those charged with governance of matters that the
auditor is required to communicate does relieve the auditor of the responsibility to also
communicate them if the management has already communicated. Hence, in the current
case Management should have communicated as it was their responsibility.
(d) SA 260 requires the auditor to perform procedures specifically to identify any other
matters to communicate with those charged with governance which includes matters
already communicated by the management of non-material nature. Hence, It was the
responsibility of the Auditor to communicate.

2. A significant deficiency exists in the process of flow of approval of travel reimbursements of

the officials. This was communicated in the previous year to those charged with Governance
and no remedial action was taken on the same so far. The auditors are of the opinion that it
need not be communicated again. Is the opinion of the auditors on not to communicate the
deficiency in internal control reported in the previous year correct?
(a) Yes, the auditor is not required to communicate the same again as it is the duty of the
management and those charged with governance to maintain the internal control system.
(b) No, the current year‟s communication may repeat the description from previous
communication or simply reference the previous communication.
(c) Yes, the auditor is not required to communicate the same again as written representation

24
 is being obtained from management and those charged with governance that they are
responsible for maintaining internal control.
(d) No, it needs to be communicated again but an oral reminder to those charged with
governance on the matter may suffice. [MTP-May 20]

3. A small concern has approached CA. Ajeet Nath for audit of accounts for year 2022-23. It
later on transpired that preparation of accounts of the concern was outsourced to a third party
which was engaged in preparation of books of this concern on a cloud server and was also
preparing financial statements. The discussion amongst partners regarding agreeing to audit
engagement remained inconclusive. Which of the following statements is MOST
APPROPRIATE regarding agreeing to audit engagement of small concern?
(a) The management is responsible for preparation of books and financial statements. If
management is not willing to acknowledge it, audit engagement should not be accepted.
(b) The third party has prepared the books and financial statements. It should be
acknowledged by third party and then audit engagement should be accepted.
(c) It is implied that management is responsible for preparation of books and financial
statements. No express acknowledgment from management is necessary. Hence, audit
engagement should be accepted.
(d) The management as well as third party should acknowledge joint responsibility for
preparation of books and financial statements. Only then, audit engagement should be
accepted. [MTP-Oct. 22]

4. You are the audit senior in charge of the audit of Swadhyay Co. and have been informed by
your audit manager that during the current year a fraud occurred at the client. A payroll clerk
sets up fictitious employees and the wages were paid into the clerk‟s own bank account. This
clerk has subsequently left the company, but the audit manager is concerned that additional
frauds have taken place in the wages department. Which of the following audit procedures
would be undertaken during the audit of wages as a result of the manager‟s assessment of the
increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the
financial impact of amounts incorrectly paid into the payroll clerk‟s bank account.
(2) Review the supporting documentation to confirm the total of the fraudulent payments
made and assess the materiality of this misstatement.
(3) Review and test the internal controls surrounding setting up of and payments to new
joiners to assess whether further frauds may have occurred.
(4) Review the legal action taken by the management against the payroll clerk who was
involved in the fraud and see whether he is punished for his actions.
(a) Audit procedures 1,2,3.
(b) Audit procedures 2,3,4.
(c) Audit procedures 1,3,4.
(d) Audit procedures 1,2,4. [MTP-April 23]

5. Shripal Company got a show cause notice from State Pollution Control Board for the
contravention of the provisions of Hazardous and waste Management Rule. As per SA 250,
the auditor shall perform the audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial statements. As

25
 the audit team of the company became aware of information concerning an instance of non-
compliance with law, what would NOT be the audit procedure to be performed?
(a) Understand the nature of the act and circumstances in which it has occurred and obtain
further information to evaluate the possible effect on the financial statement.
(b) Discuss the matter with management and if they do not provide sufficient information;
and if the effect of non-compliance seems to be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that
operating procedures are designed to assist in the prevention of non-compliance with law
and regulation and report accordingly.
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including
risk assessment and reliability of written representation and take appropriate action.
[MTP-Apr. 22]

6. M/s ABC & Associates are the statutory auditors of PQR Ltd. for the FY 2022-23. While
conducting the audit, CA Aman, the engagement partner noticed the following:
 Payments of various fines and penalties
 Payments to various government employees not supported by any document
 Unusual cash payments
 Notices received from various regulatory authorities.
 Heavy payments to legal counsels.
CA Aman should consider the above as indicative of:
(a) Doubt on Internal Controls of PQR Ltd.
(b) Doubt of non-compliance to laws by PQR Ltd.
(c) Doubt on the accounting system of PQR Ltd.
(d) Doubt on the going concern assumption of PQR Ltd.

Answer Key

1. (a) The auditor is responsible for communicating matters required by SA 260 to those
charged with governance. Also, management has a responsibility to communicate matters
of governance interest to those charged with governance. Communication by the auditor
does not relieve management of its responsibility.

2. (b) No, the current year‟s communication may repeat the description from previous
communication or simply reference the previous communication.

3. (a) The management is responsible for preparation of books and financial statements. If
management is not willing to acknowledge it, audit engagement should not be accepted.

4. (a) Audit procedures 1,2,3.

5. (c) Monitoring legal requirement and compliance with code of conduct and ensuring that
operating procedures are designed to assist in the prevention of non-compliance with law
and regulation and report accordingly.

6. (b) Doubt of non-compliance to laws by PQR Ltd.

26
 PART- III INTEGRATED CASE SCENARIO

CA. Biswajit is conducting audit of “Have More Limited”. He is auditor of the company since last
three years and has found nothing unusual in operations and financial statements of the company. The
company has many locations where substantial inventories are stored and lying. During his fourth
year stint, he finds that inventory quantities have risen disproportionately as compared to past few
years trends. He has assessed existence of risk of material misstatement due to fraud. The company
has revenue of 750 crore during the year. He has deeply verified all aspects pertaining to revenue
recognition of the company and has concluded that there is no risk of material misstatement due to
fraud related to revenue recognition.
During the course of audit, it has come to his knowledge that company is also required to install
online air pollution control monitoring systems in its plant as mandated in state pollution control
legislation and regulations. Non-installation of such online air pollution control monitoring systems
may lead to fines and even sealing of plant.
While verifying pay roll data of the company, it has come to notice that provisions of law preventing
employment of child labour are not being adhered to and company is employing child labour in
flagrant violation of rules in this regard. The company also exports part of its turnover and matter has
gone unnoticed in compliance audits carried out by agencies of overseas buyers.
On the basis of above, answer the following questions:
Q.1. Considering description of disproportionate rise in inventory quantities, which of the
following is not likely to be an appropriate response to outlined assessed risk of material
misstatement due to fraud?
(a) Observing inventory counts at all locations at same date by employing necessary
resources.
(b) Observing inventory counts at certain locations after prior intimation.
(c) More rigorous examination of packed items during observing inventory count process.
(d) Observing inventory count at end of reporting period to minimize risk of manipulation.

Q.2. It has been concluded by auditor that there is no risk of material misstatement due to fraud
related to revenue recognition. Which of the following statements is most appropriate in this
respect?
(a) The auditor needs to document reasons for arriving at conclusion that there is no risk of
material misstatement due to fraud related to revenue recognition.
(b) Identified and assessed risks of material misstatement due to fraud need to be
documented. Since no risk of material misstatement due to fraud pertaining to revenue
recognition was identified, separate documentation in this respect is not needed.
(c) The auditor needs only to document that no risk of material misstatement due to fraud
relating to revenue recognition was identified.
(d) The auditor needs to give reference to discussion among engagement team members to
document that no risk of material misstatement due to fraud relating to revenue
recognition was identified.

Q.3. Which of the following statements most appropriately describes responsibilities of auditor in
relation to compliance with state pollution control legislation and regulations?

27
 (a) Sufficient appropriate evidence needs to be obtained by auditor to verify compliance.
(b) Physical verification of workability of such systems is required from an auditor.
(c) Only inquiry of company management personnel and review of correspondence with
regulatory authorities are suffice to verify compliance.
(d) Only physical verification of workability of such systems and review of correspondence
with regulatory authorities are suffice to verify compliance.

Q.4. The auditor has observed non-compliance of law prohibiting employment of child labour.
Which is the most appropriate course of action for him to proceed in this matter?
(a) He should obtain further information to evaluate the possible effect on financial
statements.
(b) He must report the matter to concerned government department.
(c) He should obtain further information to evaluate the possible effect on financial
statements. Besides, he should evaluate implications of non-compliance for audit risk
assessment.
(d) He should express a modified opinion in audit report.

Q.5. Which of the following statements is most appropriate about documentation of

noncompliance with laws and regulations by an auditor in context of SA 250?
(a) Instances of identified non-compliance with laws and regulations need to be documented.
(b) Instances of suspected non-compliance with laws and regulations need to be documented.
(c) Instances of non–compliance with laws and regulations finally determined by Courts of
law need to be documented.
(d) Instances of identified as well as suspected non-compliance with laws and regulations
need to be documented.

Answer Key
1. (b) Observing inventory counts at certain locations after prior intimation.

2. (a) The auditor needs to document reasons for arriving at conclusion that there is no risk of
material misstatement due to fraud related to revenue recognition.

3. (c) Only inquiry of company management personnel and review of correspondence with
regulatory authorities are suffice to verify compliance.

4. (c) He should obtain further information to evaluate the possible effect on financial
statements. Besides, he should evaluate implications of non-compliance for audit risk
assessment.

5. (d) Instances of identified as well as suspected non-compliance with laws and regulations
need to be documented.

28
 SA 402 "AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING SO"

Scope of SA 402
(i) Many entities outsource aspects of their business to organizations that provide services ranging
from performing a specific task under the direction of an entity to replacing an entity’s entire
business units or functions, such as the tax compliance function. however, not all those services
are relevant to the audit.
(ii) Relevant to financial reporting = Relevant to the audit
(iii) A SO’s services are part of a user entity’s information system, including related business
processes, relevant to financial reporting if these services affect any of the following:-
 The classes of transactions that are significant to FS.
 The procedures by which the user entity’s transactions are initiated, recorded, processed
(bookkeeping)
 The related accounting records that are used to report the transactions
 How the user entity’s information system captures events and conditions, that are significant
to the financial statements (estimates)
 The financial reporting process used to prepare the user entity’s financial statements
 Controls surrounding journal entries, including non-standard journal entries used to record
non-recurring, unusual transactions or adjustments.

Auditor's Objective
 To obtain an understanding of nature and significance of service provided by the SO and their
effect on the user’s entity internal control relevant to the audit, sufficient to identify and assess the
risk of material misstatement (ROMM)
 To design and perform audit procedures responsive to those risks (Response)

Meaning of terms used in SAs

(a) User Entity
An entity that uses a SO and whose financial statements are being audited.
(b) User Auditor
An Auditor who audits and reports on the financial statements of a user entity.
(c) SO
A third-party organisation that provides services to user entities that are part of those entities
information systems relevant to financial reporting.
(d) Service Auditor
An Auditor who provides an assurance report on the controls of a SO. (SAE-3402 me padhenge)

(Step-1) Obtaining understanding of services provided by SO

The user auditor shall obtain an understanding of how user entity uses the services of a SO in the user
entity operation, including:
 Nature and significance of service provided by the SO
1
  Nature and materiality of the transactions processed or financial reporting processes affected by
SOs.
 Nature of relationship between user entity and the SO including the relevant contractual terms
for the activities undertaken by the SO.
 The degree of interaction between activities of SOs and those of the user entity.

(Step-2) Obtaining an understanding of Internal control at User entity (related to SO)

The user auditor shall evaluate the DIM of relevant controls of user entity that relate to the services
provided by SO.

(Step-3) Determine whether step1 & step2 provided sufficient understanding for assessment of
ROMM
The user auditor shall determine whether a sufficient understanding of nature and significance of
services provided by SO and their effect on the user entity internal control relevant to the audit has been
obtained, to provide basis for identification and assessment of risk of Material Misstatement. (Objective)

(Step-4) Specific audit procedure to obtain sufficient understanding

If user auditor is unable to obtain a sufficient understanding from the user entity, the auditor shall obtain
that understanding from one or more of the following procedures:
 Obtaining a Type 1 or Type 2 Report, if available.
 Contacting the SO, through the user entity, to obtain the sufficient information.
 Using another auditor to perform procedures at the SO.
 Visiting the SO.

Type 1 & Type 2 Reports

(a) Type I Report
Report on the description and design of internal controls at a SO. This report comprises of:
(1) A description prepared by management of the SO, of
 The SO’s system,
 Control objectives
 Related controls
that have been designed and implemented as at a specified date
(2) A report by the service auditor with the objective of conveying reasonable assurance that
includes
 The service auditor’s opinion on the description of the SO’s system, control
objectives and related controls.

(b) Type II Report

Report on the description, design and operating effectiveness of controls at a SO. This report
comprises of:
(3) A description prepared by management of the SO, of
 The SO’s system,
2
  Control objectives
 Related controls and
 Operating effectiveness of the control
that have been designed and implemented as at a specified date or throughout a
specified period
(4) A report by the service auditor with the objective of conveying reasonable assurance that
includes:
 The service auditor’s opinion on the description of the SO’s system, control
objectives and related controls and the operating effectiveness of the control
 A description of the service auditor’s tests of the controls and the results thereof.

Using Type 1 or Type 2 Report

(i) In determining the sufficiency and appropriateness of the audit evidence provided by a Type 1 or
Type 2 report, the user auditor shall be satisfied as to:
 The service auditor’s professional competence (except where the service auditor is a
member of the ICAI) and independence from the SO; and
 The adequacy of the standards under which the Type 1 or Type 2 report was issued.
(ii) If the user auditor plans to use a Type 1 or Type 2 report as audit evidence to support the user
auditor’s understanding about the design and implementation of controls at the SO, the user
auditor shall:
 Evaluate whether the description and design of controls at the SO is at a date or for a period
that is appropriate for the user auditor’s purposes;
 Evaluate the sufficiency and appropriateness of the evidence provided by the report for the
understanding of the user entity’s internal control relevant to the audit; and
 Determine whether complementary user entity controls identified by SO are relevant to the
user entity and, if so, obtain an understanding of whether the user entity has designed and
implemented such controls.
(iii) Complementary user entity controls refer to controls that the SO assumes, in the design of its
service, will be implemented by user entities, and which, if necessary to achieve control objectives,
are identified in the description of its system.

Responding to Assessed Risk of Material Misstatement

Determine whether Sufficient Appropriate Audit Evidence w.r.t. F.S. assertions are available from
records held at User Entity. If Not:
 Perform further audit procedures to obtain SAAE; (overall level, assertion level)
 Use another auditor to perform those procedures at SO.

Tests of Controls
When the user auditor’s risk assessment includes an expectation that controls at the SO are operating
effectively, the user auditor shall obtain audit evidence about the operating effectiveness of those
controls from one or more of the following procedures:
 Obtaining a Type 2 report, if available; (savdhannn)
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  Performing appropriate tests of controls at the SO; or
 Using another auditor to perform tests of controls at the SO on behalf of the user auditor.

Using a Type 2 report as audit evidence that controls at the SO are operating effectively
If, the user auditor plans to use a Type 2 report as audit evidence that controls at the SO are operating
effectively, he shall determine whether the service auditor’s report provides SAAE about the
effectiveness of the controls to support the user auditor’s risk assessment by:
 Evaluating whether the description, design and operating effectiveness of controls at the SO is at
a date or for a period that is appropriate for the user auditor’s purposes;
 Determining whether complementary user entity controls identified by the SO are relevant to the
user entity and, if so, obtaining an understanding of whether the user entity has designed and
implemented such controls and, if so, testing their operating effectiveness;
 Evaluating the adequacy of the time period covered by the tests of controls and the time elapsed
since the performance of the tests of controls; and
 Evaluating whether the tests of controls performed by the service auditor and the results thereof,
as described in the service auditor’s report, are relevant to the assertions in the user entity’s F.S.
and provide SAAE to support the user auditor’s risk assessment.

Audit Procedures in case of Fraud or Non-Compliance

 Inquire of User Entity Management whether the SO has reported instances of any Fraud, Non-
compliance with Law and Regulations or Uncorrected Misstatement affecting F.S. of User Entity.
 Evaluate impact on Nature, timing and extent of further audit procedures, Including Auditor’s
Conclusions and Audit report.

Reporting by User Auditor

 The User Auditor shall modify opinion if he is unable to obtain SAAE, regarding the services
provided by SO, relevant to audit of User Entity F.S.

Reference to Service auditor in user entity’s audit report (Rachit’s Special)

 The User Auditor shall not refer to report of Service auditor unless required by Law and
Regulation.
 If such reference is required by law or regulation, the user auditor’s report shall indicate that the
reference does not diminish the user auditor’s responsibility for the audit opinion.
 If reference to the work of a service auditor is relevant to an understanding of a modification to
the user auditor's opinion, the user auditor's report shall indicate that such reference does not
diminish the user auditor's responsibility for that opinion.

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 SAE 3402 "ASSURANCE REPORTS ON CONTROLS AT A SO"

Scope of SAE 3402

 SAE 3402 deals with assurance engagements undertaken by a professional accountant
(CA/Auditor use nahi karne ka) in public practice to provide a report on the controls at a SO for
use by user entities and their auditors.
 Reports prepared in accordance with this SAE are capable of providing appropriate evidence under
SA 402.

Meaning of Terms used in SAE

(a) Service Auditor
(b) SO (SO)
(c) User Auditor REFER SA
(d) User Entity 420
(e) Type I Report
(f) Type II Report
(g) Controls at SO
 Controls over the achievement of a control objective that is covered by the service auditor’s
assurance report.
 Such controls may include aspects of a SO’s – control environment, monitoring and control
activities related to the services provided.
Importance of controls of a SO (SO) to user entity’s internal controls relating to financial
reporting
 Controls related to a SO operations and compliance objectives may be relevant to a user
entity’s internal control as it relates to financial reporting. Such controls may pertain to
assertions about presentation and disclosure relating to account balances, classes of
transactions, or disclosures, or may pertain to evidence that the user auditor evaluates or
uses in applying auditing procedures.
 Example: A company has outsourced its payroll processing functions to a SO. SO is
responsible for the accurate preparation of payrolls and timely remittance of statutory dues
to government authorities on behalf of the company. Payroll processing SO controls related
to the timely remittance of payroll deductions to government authorities may be relevant to
the company (user entity) as late remittances could result in interest & penalties resulting
in liabilities for the user entity.

Objective
 To obtain reasonable assurance about whether, in all material respects, based on suitable
criteria: (COBIT)
(1) SO description of its system fairly presents the system as designed and implemented
throughout the specified period (or as at a specified date, in case of Type 1 report);
(2) Control Objectives stated in the SO description of its system were achieved throughout the
specified period.
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 (3) Controls related to the control objectives stated in SO description of its system were suitably
designed throughout the specified period (or as at a specified date, in case of Type 1 report);
 To report on the matters stated above in accordance with the findings.

Compliance of Ethical Requirements

Service auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to assurance engagements.

Determination Of Management and TCWG

Service auditor shall determine the appropriate person(s) within the SO’s management or governance
structure with whom to interact.

Agreeing the terms of Engagement

(a) Acceptance and Continuance
Before agreeing to accept or continue, an engagement service auditor shall determine whether:
 He has the capabilities and competence to perform the engagement;
 Criteria to be applied by SO to prepare the description of its system will be suitable and
available to user entities and their auditors; and
 Scope of the engagement and the SO description of its system will not be so limited that
they are unlikely to be useful to user entities and their auditors.
(b) Changes in terms of engagement
If the So requests a change in the scope of the engagement before the completion of the
engagement, service auditor shall be satisfied that there is a reasonable justification for the
change.

Assessing the suitability of Criteria

Service auditor shall assess whether the SO has used suitable criteria in preparing the description of its
system, in evaluating whether controls are suitably designed, and, in the case of a type 2 reports, in
evaluating whether controls are operating effectively
Definition of Criteria : Benchmarks used to evaluate or measure a subject matter including, where
relevant, benchmarks for presentation and disclosure.

Consideration of Materiality
When planning and performing the engagement, the service auditor shall consider materiality with
respect to the fair presentation of the description, the suitability of the design of controls and, in the case
of a type 2 report, the operating effectiveness of controls.

Obtaining an Understanding
Service auditor shall obtain an understanding of the SO System, including controls that are included in
the scope of the engagement.

Collection of Evidences
(a) Regarding Description
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 Service auditor shall obtain and read the SO’s description of its system, and shall evaluate
whether those aspects of the description included in the scope of the engagement are fairly
presented.
(b) Regarding Design of Controls
Service auditor shall determine which of the controls at the SO are necessary to achieve the
control objectives stated in the SO’s description of its system, and shall assess whether those
controls were suitably designed.
(c) Regarding operating Effectiveness of Controls
When providing a type 2 report, the service auditor shall test those controls that he has determined
are necessary to achieve the control objectives stated in the SO’s description of its system and
assess the operating effectiveness throughout the period.
(d) Evaluation of Internal Audit Function
If SO has an internal audit function, the service auditor shall obtain an understanding of the nature
of the responsibilities of the internal audit function and of the activities performed in order to
determine whether the internal audit function is likely to be relevant to the engagement in order
for the service auditor to use specific work of the internal auditors.
(e) Obtaining Written Representation
Service auditor shall request SO to provide written representations:
 That reaffirm the assertion accompanying the description of the system;
 That it has provided the service auditor with all relevant information and access agreed to;
and
 That it has disclosed to the service auditor any of the following of which it is aware:
(1) Non-compliance with laws and regulations, fraud, or uncorrected deviations
attributable to the SO that may affect one or more user entities;
(2) Design deficiencies in controls;
(3) Instances where controls have not operated as described; and
(4) Any events subsequent to the period covered by organization’s description of its
system up to the date of the service auditor’s assurance report that could have a
significant effect on the service auditor’s assurance report.
(f) Subsequent Events
Service auditor shall inquire whether SO is aware of any events subsequent to the period covered
by the SO description of its system up to the date of the service auditor’s assurance report that
could have a significant effect on the service auditor’s assurance report.

Documentation
The service auditor shall prepare documentation that is sufficient to enable an experienced service
auditor, having no previous connection with the engagement to understand:
 The NTE of the procedures performed to comply with this SAE and applicable legal and
regulatory requirements;
 The results of the procedures performed, and the evidence obtained; and
 Significant matters arising during the engagement, and the conclusions reached thereon and
significant professional judgments made in reaching those conclusions.

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Elements of Assurance Report
 A title that clearly indicates the report is an independent service auditor’s assurance report.
 An addressee.
 Identification of:
(1) SO description of its system, and the SO’s assertion.
(2) Those parts of the SO description of its system, if any, that are not covered by the service
auditor’s opinion.
(3) If the description refers to the need for complementary user entity controls, a statement that
the service auditor has not evaluated the suitability of design or operating effectiveness of
complementary user entity controls.
(4) If services are performed by a subSO, the nature of activities performed by the subSO as
described in the SO description of its system.
 Identification of the criteria, and the party specifying the control objectives.
 A statement that the report is intended only for user entities and their auditors.
 A statement that the SO is responsible for:
(1) Preparing the description of its system, including the completeness, accuracy and method of
presentation of that description;
(2) Providing the services covered by the SO description of its system;
(3) Stating the control objectives; and
(4) Designing and implementing controls to achieve the control objectives stated in the SO
description of its system.
 A statement that the service auditor’s responsibility is to express an opinion on the SO description,
on the design of controls related to the control objectives stated in that description and, in the case
of a type 2 report, on the operating effectiveness of those controls, based on the service auditor’s
procedures.
 A statement that the engagement was performed in accordance with SAE 3402.
 A summary of the service auditor’s procedures to obtain reasonable assurance and a statement of
the service auditor’s belief that the evidence obtained is sufficient and appropriate to provide a
basis for the service auditor’s opinion, and, in the case of a type 1 report, a statement that the
service auditor has not performed any procedures regarding the operating effectiveness of controls
and therefore no opinion is expressed thereon.
 A Statement of the limitations of controls.
 The service auditor’s opinion, expressed in the positive form, on whether, in all material respects,
based on suitable criteria:
(1) In the case of a type 2 report:
(i) The description fairly presents the SO system that had been designed and
implemented throughout the specified period;
(ii) The controls related to the control objectives stated in the SO description of its system
were suitably designed throughout the specified period; and
(iii) The controls tested, which were those necessary to provide reasonable assurance that
the control objectives stated in the description were achieved, operated effectively
throughout the specified period.
(2) In the case of a type 1 report:
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 (i) The description fairly presents the SO system that had been designed and
implemented as at the specified date; and
(ii) The controls related to the control objectives stated in the SO description of its system
were suitably designed as at the specified date.
 The date of the service auditor’s assurance report, which shall be no earlier than the date on which
the service auditor has obtained sufficient appropriate evidence on which to base the opinion.
 Practitioner’s Signature: Report should be signed by the practitioner.
 Place of signature: Report should name specific location, which is ordinarily the city where the
report is signed.
Additional matters requiring reporting in type 2 report
 In the case of a type 2 report, service auditor’s assurance report shall include a separate section
after the opinion, or an attachment, that describes the tests of controls that were performed and the
results of those tests.
 In describing the tests of controls, the service auditor shall clearly state which controls were tested,
identify whether the items tested represent all or a selection of the items in the population, and
indicate the nature of the tests in sufficient detail to enable user auditors to determine the effect of
such tests on their risk assessments.
 If deviations have been identified, the service auditor shall include the extent of testing performed
that led to identification of the deviations (including the sample size where sampling has been
used), and the number and nature of the deviations noted.
 The service auditor shall report deviations even if, on the basis of tests performed, the service
auditor has concluded that the related control objective was achieved.

Modified Opinion
A modified opinion is required to be expressed if auditor concludes that:
 The SO description does not fairly present, in all material respects, the system as Designed and
implemented;
 The controls related to the control objectives stated in the description were not suitably designed,
in all material respects;
 In the case of a type 2 report, the controls tested, which were those necessary to reasonable
assurance that the control objectives stated in the SO description of its system were achieved, did
not operate effectively, in all material respects; or
 The service auditor is unable to obtain sufficient appropriate evidence, the service auditor’s
opinion shall be modified, and the service auditor’s assurance report shall contain a clear
description of all the reasons for the modification.

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 SA 500 "AUDIT EVIDENCE"
Meaning of Audit Evidence
 Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is
based.

Meaning of Sufficient Appropriate Audit Evidence

(a) Sufficiency
 Refers to the quantity of audit evidence.
 Affected by the Materiality, Risks of material misstatement and Size of population.
(b) Appropriate
 Refers to the measure of the quality of audit evidence
 That is its relevance (Logical connection B/w Procedure & Assertion) and its reliability
(Trustworthy Source) in providing support for the conclusions on which the auditor’s
opinion is based.
Q.1 Auditor's Duties when an Information to be Used as Audit Evidence
(a) Information prepared using the work of Management Expert (ref Q2 for detail
answer)
 Evaluate the competence, capabilities and objectivity of that expert;
 Obtain an understanding of the work of that expert; and
 Evaluate the appropriateness of expert’s work as audit evidence for the relevant
assertion.
(b) Information produced by the Entity
 Obtaining audit evidence about the accuracy and completeness of the information; &
 Evaluating whether the information is sufficiently precise and detailed for the
auditor’s purposes.
Q.2 Evaluation of work of Management Expert
(a) Evaluate the competency, capability and objectivity of Expert
 Competence: Relates to nature and level of expertise.
 Capability: Ability to exercise that competence.
 Objectivity: Relates to possible effects that bias, conflict of interest of influence of
others may have on the professional/business objectivity of management expert.
(b) Understanding the Expert Work
It may include:
 Areas of specialty within field of expertise.
 Applicable professional, legalor regulatory requirements.
 Assumptions and methods used, their general acceptability within that expert’s field
and appropriateness for financial reporting purposes.
 Nature of internal and external data or information the auditor’s expert uses.
(c) Evaluating Appropriateness of Expert Work
 Relevance of expert’s findings or conclusions;
 Relevance of assumptions and methods; and
 Relevance, completeness, and accuracy of the source data.

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Q.3 Auditor Duties in case of Inconsistency, or Doubts over Reliability of Audit Evidence
The auditor shall determine modifications or additions required in audit procedures so as to
resolve the matter that arise due to following reasons:
 Audit evidence obtained from one source is inconsistent with that obtained from another;
or
 The auditor has doubts over the reliability of information to be used as audit evidence.
 Under the circumstances auditor shall also consider the effect of the matter, if any, on
other aspects of the audit.
Q.4 Audit Procedures for obtaining Audit Evidence
(a) RAP
(b) FAP
(1) TOC
(2) Substantive Procedures
 TOD
 Substantive Analytical Procedures

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SA 501 AUDIT EVIDENCE — SPECIFIC CONSIDERATIONS FOR SELECTED
ITEMS
Scope of SA 501
This SA deals with specific considerations by the auditor in obtaining sufficient and appropriate
audit evidence, with respect to certain aspects of inventory, litigation and claims, and segment
information in an audit of financial statements.

Auditor’s Objective
The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
▪ Existence and condition of inventory;
▪ Completeness of litigation and claims involving the entity; and
▪ Presentation and disclosure of segment information in accordance with the applicable FRF.

Audit Procedures w.r.t Inventory

When inventory is material to the F.S., the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable, to:
▪ Evaluate management instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
▪ Observe the performance of management’s count procedures;
▪ Inspect the inventory;
▪ Perform test counts;
(b) Performing audit procedures over the entity’s final inventory records to determine whether
they accurately reflect actual inventory count results.

Procedures in Special Circumstances

(a) Inventory counting conducted at date other than B/S Date
▪ Perform audit procedures to obtain audit evidence about whether changes in inventory
between the count date and the date of the FS are properly recorded.
(b) Auditor Unable to attend Inventory Count due to unforeseen circumstance
▪ Auditor should take or observe some physical counts on an alternative date and perform
audit procedures on intervening transactions to assess whether the changes in inventory
between the date of physical count and the period end date are correctly recorded.
▪ The auditor would also verify the procedure adopted; treatment given for the
discrepancies noticed during the physical count.
▪ The auditor would also ensure that appropriate cut off procedures were followed by the
management.
(c) Attendance at Inventory count is impracticable
▪ Perform alternative audit procedures to obtain sufficient appropriate audit evidence
regarding existence and condition of inventory.

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 ▪ Alternative Audit Procedure: Inspection of documentation of the subsequent sale of
specific inventory items acquired/purchased prior to physical inventory counting.
(d) Inventory under custody and control of Third Party
Obtain sufficient appropriate audit evidence by performing the following:
▪ Attending/arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.
▪ Obtaining service auditor’s report, on the adequacy of the third party’s I.C. w.r.t. proper
count and safeguard of inventory.
▪ Inspecting documentation, for example, warehouse receipts.
▪ Requesting confirmation from other parties when inventory pledged as collateral.

Audit Procedures w.r.t. Litigation and Claims

Auditor is required to identify litigation and claims by following procedures:
▪ Inquiry — of management and others within entity, including in house legal counsel.
▪ Review — minutes of meetings of TCWG, communication between entity and external legal
counsel.
▪ Review — legal expenses account.

Procedures in Special Circumstances

(a) Auditor's Assessment of Risk of Material misstatement w.r.t. existence of Litigation or
Claim
▪ Seek Communication directly with Entity’s External legal Counsel.
▪ If law/regulation or respective legal professional body prohibits entity’s external legal
counsel from communicating directly with the auditor, the auditor shall perform
alternative audit procedures
(b) Management refuses to permit auditor to communicate
Modify opinion in
(c) External Legal Counsel Refuses
accordance with SA 705
(d) Auditor unable to collect SAAE from alternate procedures

Written Representation: from Management and TCWG that all known actual/possible Litigation
and Claim affecting FS
▪ Have been disclosed to the auditor; and
▪ Appropriately accounted for and disclosed in accordance with the applicable FRF.

Audit Procedures w.r.t. Segment Information

The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and
disclosure of segment information in accordance with the applicable financial reporting framework
by:
(a) Obtaining an understanding of the methods used by management in determining segment
information, and
(b) Performing analytical procedures or other audit procedures appropriate in the circumstances.

2
Examples of Matters relevant in obtaining an understanding of the methods used by the
management for determining segment information
Example of matters that may be relevant when obtaining an understanding of the methods used by
management in determining segment information and whether such methods are likely to result in
disclosure in accordance with the applicable financial reporting framework include:
▪ Sales, transfers and charges between segments, and elimination of intersegment amounts.
▪ Comparisons with budgets and other expected results, for example, operating profits as a
percentage of sales.
▪ The allocation of assets and costs among segments.
▪ Consistency with prior periods, and the adequacy of the disclosures with respect to
inconsistencies.

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 SA 505 "EXTERNAL CONFIRMATIONS"
Scope of SA 505
SA 505 deals with the auditor's use of external confirmation procedures to obtain audit evidence in
accordance with requirements of SA 330 and SA 500.

Objective of the Auditor

To design & perform external confirmation procedures to obtain relevant & reliable audit evidence.

Meaning and Type of External Confirmation

Audit evidence obtained as a direct written response to the auditor from a third party (the confirming
party), in paper form, or by electronic or other medium. 2 types:
(a) Positive Confirmation Request
A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request, or providing the
requested information.
(b) Negative Confirmation Request
A request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request.

Areas where External Confirmation may be obtained

 Bank balance and Other confirmation from bankers
 Account Receivable/Account Payable Balances
 Stock Lying with Third Parties
 Property Title Deed held by third parties
 Investments Purchased but delivery not taken
 Loan from Lenders
 Terms of agreement or Transaction with Third Parties

External Confirmation Procedures

(a) Determining Information to be confirmed or requested
Regarding:
 Account balances and their elements.
 Terms of agreements/contracts/transactions.
(b) Selecting the appropriate confirming party
Responses to confirmation requests provide more relevant and reliable audit evidence when
confirmation requests are sent to a confirming party the auditor believes is knowledgeable
about the information to be confirmed.
(c) Designing the confirmation requests
It also includes:
 Determining that requests are properly addressed, and
 Contain return information for responses to be sent directly to the auditor.
Factors to be considered while designing Confirmation requests
 Assertion being addressed.
 Specific identified RMM.

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  Layout and presentation of request.
 Prior experience on the audit of similar engagements.
 Method of communication.
 Management authorisation/encouragement to Confirming Party to respond to auditor.
 Ability of Confirming Party to provide/confirm requested info.
(d) Sending the requests
Including follow-up requests when applicable, to the confirming party.

Audit Procedures in Special Circumstances

(a) Management refuses to allow the auditor to send a confirmation request
 Inquire as to reasons and seek evidence as to their validity and reasonableness;
 Evaluate the implications of refusal on the assessment of risks of material misstatement,
including the risk of fraud and on the NTE of other audit procedures; and
 Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
Management refusal appears to be (a) Communicate to TCWG in accordance
unreasonable with SA 260.
Or (b) Implications for the audit;
Auditor unable to obtain evidence from (c) Effect on Auditor’s opinion in accordance
alternative audit procedure. with SA 705
(b) Results of External Confirmation Procedure
Factors raising doubt over reliability of response Obtain further evidence to resolve

doubts.
Response to request is not reliable Consider its effect on NTE of

other procedures.
Confirming party do not respond 
No confirmation obtained when auditor determines Determine its effect on Auditor's
that response is necessary and alternative procedure  opinion in accordance with SA
will not provide the evidence auditor requires. 705.
(c) Exception Occurs
 Exception is a response that indicates a difference between:
(1) Information requested to be confirmed, or contained in the entity’s records, and
(2) Information provided by confirming party.
 Auditor should investigate to determine whether or not they are indicative of misstatements.

Limited use of Negative Confirmations

Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, the auditor shall use negative confirmation requests as the sole substantive audit
procedure only when all of the following conditions are present:
 Low Risk of material misstatement and auditor has obtained sufficient appropriate audit evidence
regarding the operating effectiveness of controls.
 The population comprises a large number of small, homogeneous, account balances or
transactions.
 A very low exception rate is expected.
 The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.

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 SA 510 "INITIAL AUDIT ENGAGEMENTS — OPENING BALANCES"
Scope of SA 510
This SA deals with the auditor’s responsibilities relating to opening balances when conducting an
initial audit engagement.

Objective of the Auditor

To obtain sufficient appropriate audit evidence about whether:
 Opening balances contain misstatements that materially affect the current period’s F.S.; and
 Appropriate accounting policies reflected in the opening balances have been consistently applied
in the current period’s F.S.
OR
Changes in the accounting policies are properly accounted for and adequately presented and
disclosed in accordance with the applicable FRF.

Meaning of terms used in SA

(a) Initial Audit
An engagement in which F.S. for the prior period are either:
 not audited; or
 were audited by a predecessor auditor.
(b) Opening Balances
 Those account balances that exist at the beginning of the period.
 These are based upon the closing balances of the prior period and reflect the effects of
transactions and events of prior periods and accounting policies applied in the prior period.
They also include matters requiring disclosure that existed at the beginning of the period,
such as contingencies and commitments.
(c) Predecessor Auditor
The auditor from a different audit firm, who audited the F.S. of an entity in the prior period and
who has been replaced by the current auditor.
Requirements of SA
Audit Procedures in respect of Opening Balances
 The auditor shall read the most recent financial statements, if any, and the predecessor
auditor’s report thereon, if any, for information relevant to opening balances, including
disclosures.
 The auditor shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s F.S. by:
(1) Determining whether the prior period’s closing balances have been correctly brought forward
to the current period or, when appropriate, any adjustments have been disclosed as prior
period items in the current year’s Statement of Profit and Loss;
(2) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
(3) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the copies of the audited F.S. including
the other relevant documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening balances.

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 For current assets and liabilities some audit evidence can ordinarily be obtained as part
of audit procedures during the current period. For example, the collection/payment of
opening balances of receivables and payables will provide audit evidence as to their
existence, rights & obligations, completeness & valuation at the beginning of the period.
In respect of other assets and liabilities such as fixed assets, investments long term debt,
the auditor will examine the records relating to opening balances. The auditor may also
be able to get confirmation from third parties (e.g., balances of long term loan obtained
from banks).
 If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period’s F.S., the auditor shall perform such additional audit
procedures as are appropriate in the circumstances to determine the effect on the current period’s
F.S.
 If the auditor concludes that such misstatements exist in the current period’s F.S., the auditor
shall communicate the misstatements with the appropriate level of management and TCWG in
accordance with SA 450.

Audit Procedures in respect of evaluation of Consistency of Accounting Policies

 The auditor shall obtain sufficient appropriate audit evidence about whether the accounting
policies reflected in the opening balances have been consistently applied in the current period’s
F.S., and
 Whether changes in the accounting policies have been properly accounted for and adequately
presented and disclosed in accordance with the applicable FRF.

Relevant Information in Predecessor Auditor's Report

If the prior period’s F.S. were audited by a predecessor auditor and there was a modification to in
the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in
assessing the RMM in the current period’s F.S. in accordance with SA 315.

Audit Conclusions and Reporting

(a) Opening Balances
 If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate.
 If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s F.S., and the effect of the misstatement is not properly accounted
for or not adequately presented or disclosed, the auditor shall express a qualified opinion or
an adverse opinion, as appropriate.
(b) Consistency of Accounting Policies
The auditor shall express a qualified opinion or an adverse opinion as appropriate, if he
concludes that:
 The current period’s accounting policies are not consistently applied in relation to opening
balances in accordance with the applicable FRF; or
 A change in accounting policies is not properly accounted for or not adequately presented or
disclosed in accordance with the applicable FRF.
(c) Modification to the Opinion in the Predecessor Auditor's Report
If the predecessor auditor’s opinion regarding the prior period’s F.S. included a modification to
the auditor’s opinion that remains relevant and material to the current period’s F.S., the auditor
shall modify the auditor’s opinion on the current period’s F.S. accordingly.

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 SA 530 "AUDIT SAMPLING"
Scope of SA 530
This SA applies when the auditor has decided to use audit sampling in performing audit procedures.
It deals with the auditor’s use of statistical and non-statistical sampling when designing and selecting
the audit sample, performing tests of controls and tests of details and evaluating the results from the
sample.

Objective of the Auditor

The objective of the auditor when using audit sampling is to provide a reasonable basis for the auditor
to draw conclusions about the population from which the sample is selected.

Meaning of Audit Sampling

The application of audit procedures to less than 100% of items within a population of audit relevance
such that all sampling units have a chance of selection in order to provide the auditor with a reasonable
basis on which to draw conclusions about the entire population.
(a) Population : The entire set of data from which a sample is selected and about which the auditor
wishes to draw conclusions.
(b) Sampling Unit : The individual items constituting a population.

Meaning of Statistical and Non-Statistical Sampling

(a) Statistical Sampling
An approach to sampling that has the following characteristics:
 Random selection of the sample items; and
 The use of probability theory to evaluate sample results, including measurement of sampling
risk.
This method is more scientific as it involves use of laws of probability. This method has
reasonably wide application where a population consists of a large number of similar items.
(b) Non-statistical Sampling
 A sampling approach that does not have characteristics of random selection and use of
probability theory is considered as non-statistical sampling.
 In this method, the sample size and its composition are determined on the basis of personal
experience and knowledge of the auditor.
 This method because of its simplicity in operation was in common application for many years.

Meaning of Sampling Risk

The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the
entire population were subjected to the same audit procedure. Sampling risk can lead to two types of
erroneous conclusions:
 In the case of a test of controls, that controls are more effective than they actually are, or in the
case of a test of details, that a material misstatement does not exist when in fact it does. The auditor
is primarily concerned with this type of erroneous conclusion because it affects audit effectiveness
and is more likely to lead to an inappropriate audit opinion.

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 In the case of a test of controls, that controls are less effective than they actually are, or in the case
of a test of details, that a material misstatement exists when in fact it does not. This type of
erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.

Non-sampling Risk
The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk.

 Meaning of Stratification
Stratification may be defined as the process of dividing a population into sub-populations, each of
which is a group of sampling units which have similar characteristics (often monetary value).
Every such group so divided is called a strata. Each stratum is treated as if it were a separate
population and proportionate items are selected from each of the stratum. The groups into which
the whole population is divided is determined by the auditor on the basis of his judgment. E.g.
entire expense vouchers may be divided into:
(1) Vouchers above ₹1,00,000
(2) Vouchers between ₹25,000 and ₹1,00,000
(3) Vouchers below ₹25,000
The auditor can then decide to check all vouchers above ₹1,00,000, 50% between ₹25,000 and
₹1,00,000 and 25% of those below ₹25,000.

 Uses of Stratification
 Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete
sub-populations which have an identifying characteristic. The objective stratification is to
reduce the variability of items within each stratum and therefore allow sample size to be reduced
without increasing sampling risk.
 When performing tests of details, the population is often stratified by monetary value This
allows greater audit effort to be directed to the larger value items, as these items may contain
the greatest potential misstatement in terms of overstatement.
 The results of audit procedures applied to a sample only be projected to the items that make up
that stratum. To draw a conclusion on the entire population, the auditor will need to consider the
risk of material misstatement in relation to whatever other strata make up the entire population.
 If a class of transactions or account balance has been divided into strata, the misstatement is
projected for each stratum separately. Projected misstatements for each stratum are then
combined when considering the possible effect of misstatements on the total class of transactions
or account balance.

Requirements of SA
(a) Sample, Design, Size and Selection of Items for Testing
 When designing an audit sample, the auditor shall consider the purpose of the audit procedure
and the characteristics of the population from which the sample will be drawn.
 The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably
low level.
 The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection.

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(b) Performing Audit Procedures
 The auditor shall perform audit procedures, appropriate to the purpose, on each item selected.
 If the audit procedure is not applicable to the selected item, the auditor shall perform the
procedure on a replacement item.
 If the auditor is unable to apply the designed audit procedures, or suitable alternative
procedures, to a selected item, the auditor shall treat that item as a deviation from the
prescribed control, in the case of tests of controls, or a misstatement, in the case of tests of
details.
 The auditor shall investigate the nature and cause of any deviation or misstatements identified
and evaluate their possible effects.
Projecting Misstatements
 For tests of details, auditor shall project misstatements found in the sample to the
population.
 Auditor is required to project misstatements for the population to obtain a broad view of
the scale of misstatement.
 When a misstatement has been established as an anomaly, it may be excluded when
projecting misstatements to the population.
 For tests of controls, no explicit projection of deviations is necessary.
(c) Evaluating Results of Audit Sampling
 The auditor shall evaluate the results of the sample and determine whether the use of audit
sampling has provided a reasonable basis for conclusions about the population that has been
tested.
 If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions
about the population that has been tested, the auditor may:
(1) Request management to investigate misstatements that have been identified and the
potential for further misstatements and to make any necessary adjustments; or
(2) Tailor the nature, timing and extent of those further audit procedures to best achieve the
required assurance. For example, in the case of tests of controls, the auditor might extend
the sample size, test an alternative control or modify related substantive procedures.

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 SA 550 "RELATED PARTIES"

Risk Assessment Procedures and Related Activities

(a) Understanding the Entity's RPRT
(1) Engagement Team discussion.
(2) Auditor to inquire management regarding:
▪ Identification process of entity’s RP
▪ Nature of relationships between entity and RP.
▪ Type and purpose of transactions with RP during the period.
(3) Perform appropriate RAPs to obtain understanding whether management have established
controls regarding RPRT
(4) Authorise and approve significant transactions/arrangements outside normal course of
business.

Matters to be addressed in the Engagement Team Discussion

(1) General Matters that may be addressed in the discussion among the engagement team
include:
▪ Nature and extent of the entity’s RPRT.
▪ Emphasis on the importance of maintaining professional skepticism throughout the
audit regarding the potential for material misstatement associated with RPRT.
▪ Circumstances or conditions that management has failed to identified or disclosed
RPRT to auditor.
▪ Records or documents that may indicate the existence of RPRT.
▪ Importance that management and TCWG attach to the identification, appropriate
accounting for, and disclosure of RPRT and the related risk.
(2) In addition, the discussion in the context fraud may include specific consideration of how
related parties may be involved in fraud. For example:
▪ How special-purpose entities controlled by management might be used to facilitate
earnings management.
▪ How transactions between the entity and a known business partner of a key member
of management could be arranged to facilitate misappropriation of the entity’s
assets.

Possible sources for identification of related party information

Auditor shall inspect the following for indications of the existence of RPRT that management
has not previously identified or disclosed to the auditor:
▪ Bank, legal and third-party confirmations obtained as part of the auditor’s procedures;
▪ Minutes of meetings of shareholders and of those charged with governance; and
▪ Such other records or documents as the auditor considers necessary in the circumstances
of the entity.
In addition, below mentioned records or documents may also be inspected:
▪ Entity income tax returns.
▪ Information supplied by the entity to regulatory authorities.
▪ Shareholder registers to identify the entity’s principal shareholders.
 ▪ Statements of conflicts of interest from management and TCWG.
▪ Records of the entity’s investments and those of its pension plans.
▪ Contracts and agreements with key management or TCWG.
▪ Significant contracts and agreements not in the entity’s ordinary course of business.
▪ Specific invoices and correspondence from the entity’s professional advisors.
▪ Life insurance policies acquired by the entity.
▪ Significant contracts renegotiated by the entity during the period.
▪ Internal auditors’ reports.

Examples of transactions outside the entity’s normal course of business

▪ Complex equity transactions, such as corporate restructurings or acquisitions.
▪ Transactions with offshore entities in jurisdictions with weak corporate laws.
▪ The leasing of premises or the rendering of management services by the entity to another
party if no consideration is exchanged.
▪ Sales transactions with unusually large discounts or returns.
▪ Transactions with circular arrangements, for example, sales with a commitment to
repurchase.
▪ Transactions under contracts whose terms are changed before expiry.

Responses to Assessed Risks

(a) In case of Identification or unidentified/ undisclosed RP or RP transaction
(1) Promptly communicate relevant info to other members of engagement team.
(2) Inquire from management reason for failure of entity’s controls to identify/ disclose RP
relationships and transactions AND Request management to identify all transactions with
newly identified RP for further evaluation
(3) Perform appropriate substantive audit procedures relating to newly identified RPRT.
(4) Reconsider risk that other RPRT may exist that management has not previously
identified/disclosed.
(5) If non-disclosure by management appears intentional, evaluate its implications for audit.

(b) In case of identification significant Related Party transaction outside the entity normal
course of business
(1) Obtain evidence that transactions appropriately authorized and approved.
(2) Inspect underlying contracts/agreements and evaluate whether:
▪ Business rationale suggests that transactions entered to engage in fraudulent
financial reporting or to conceal misappropriation of assets.
▪ Terms of transactions consistent with management’s explanations.
▪ Transactions appropriately accounted for/disclosed in accordance with FRF.
(c) Ascertain the RPT conducted as per Arm's length Transaction
(1) When management has made an assertion in FS that RP transaction was conducted on
terms equivalent to those prevailing in arm’s length transaction - auditor to obtain SAAE
(2) Management support for assertion may include:
▪ Comparing terms to those of identical/similar transaction or to known market terms.
▪ Engaging an external expert to determine market value and to confirm market terms
and condition.
 SA 520 "ANALYTICAL PROCEDURES"
Meaning of Analytical Procedures
“Analytical Procedures” means
 Evaluation of financial information
 Through analysis of relationships
 Among both financial and non-financial data.
It also encompasses such investigation as is necessary of identified fluctuations or relationships that
are inconsistent with other relevant information or that differ from expected values by a significant
amount.

Auditor's Procedures
 Determine the suitability of particular substantive analytical procedures for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any, for these
assertions;
 Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or
ratios is developed, taking account of source, comparability, and nature and relevance of
information available, and controls over preparation;
 Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
sufficiently precise to identify a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated; and
 Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation as required.

Factors affecting reliability of Source Data

 Source of the information available: For example, information may be more reliable when it is
obtained from independent sources outside the entity;
 Comparability of the information available: For example, broad industry data may need to be
supplemented to be comparable to that of an entity that produces and sells specialised products;
 Nature and relevance of the information available: For example, whether budgets have been
established as results to be expected rather than as goals to be achieved; and
 Controls over the preparation of the information: That are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation, review and
maintenance of budgets.

Analytical Procedures that Assist when Forming an Overall Conclusion

 The auditor shall design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor's understanding of the entity.
 Conclusions drawn from the results of analytical procedures are intended to verify conclusions
formed during the audit of individual components or elements of the F.S. This assists the auditor
to draw reasonable conclusions on which to base the auditor’s opinion.
 Results of analytical procedures may identify a previously unrecognised RMM. In such
circumstances, SA 315 requires auditor to revise the auditor’s assessment of the RMM and
modify the further planned audit procedures accordingly.

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  Analytical procedures performed in accordance with above may be similar to those that would
be used as risk assessment procedures.

Investigating Results of Analytical Procedures

If APs performed in accordance with this SA identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant
amount, the auditor shall investigate such differences by:
(a) Inquiring of management and obtaining appropriate audit evidence relevant to management’s
responses; and
(b) Performing other audit procedures as necessary in the circumstances.
Audit evidence relevant to management’s responses may be obtained by evaluating those responses
taking into account the auditor’s understanding of the entity and its environment, and with other
audit evidence obtained during the course of the audit.
The need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.

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SA 540 "AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE
ACCOUNTING ESTIMATES and RELATED DISCLOSURES"
Meaning and Nature of Accounting Estimates
 An Accounting estimate may be defined as “An approximation of a monetary amount in the
absence of a precise means of measurement”. This term is used for an amount measured at fair
value where there is estimation uncertainty.
 The degree of estimation uncertainty affects the risks of material misstatement of accounting
estimates. [Estimation Uncertainty: The susceptibility of an accounting estimate and related
disclosures to an inherent risk of precision in its measurement]
 Degree of estimation uncertainty varies based on:
(1) The nature of the accounting estimates
(2) The extent to which there is a generally accepted method used to make the accounting
estimate.
(3) The subjectivity of the assumptions used to make the accounting estimates

Examples of Accounting Estimates

 Allowance for doubtful accounts
 Inventory obsolescence.
 Warranty obligations.
 Depreciation method or asset useful life.
 Provision against the carrying amount of an investment.
 Outcome of long-term contracts.
 Financial Obligations/Costs arising from litigation settlements and judgments

Examples of Fair Value Accounting

 Complex financial instruments.
 Share-based payments.
 Property or equipment held for disposal.
 Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
 Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration.
(a) Estimates with low estimation uncertainty
 Accounting estimates arising in entities that engage in business activities that are not
complex.
 Accounting estimates that are frequently made and updated because they relate to routine
transactions.
 Accounting estimates derived from data that is readily available, such as published
interest rate data or exchange-traded prices of securities. Such data may be referred to as
“observable” in the context of a fair value accounting estimate.
 Fair value accounting estimates where the method of measurement prescribed by the
applicable financial reporting framework is simple and applied easily to the asset or
liability requiring measurement at fair value.

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  Fair value accounting estimates where the model used to measure the accounting
estimate is well-known or generally accepted, provided that the assumptions or inputs to
the model are observable.
(b) Estimates with high estimation uncertainty
 Accounting estimates relating to the outcome of litigation.
 Fair value accounting estimates for derivative financial instruments not publicly traded.
 Fair value accounting estimates for which a highly specialised entity developed model is
used or for which there are assumptions or inputs that cannot be observed in the market
place.

Scope of SA 540
 SA 540 deals with the auditor’s responsibilities regarding accounting estimates, including fair
value accounting estimates, and related disclosures in an audit of F.S.
 Specifically, it expands on how SA 315 and SA 330 and other relevant SAs are to be applied in
relation to accounting estimates.

Objective of Auditor
To obtain sufficient appropriate audit evidence whether:
 Accounting estimates, including fair value accounting estimates are reasonable; and
 Related disclosures in the financial statements are adequate.

Management Bias
 FRF often call for neutrality, that is, freedom from bias. Accounting estimates are imprecise,
however, and can be influenced by management judgment. Such judgment may involve
unintentional or intentional management bias.
 Susceptibility of an accounting estimate to management bias increases with the subjectivity
involved in making it.
 For continuing audits, indicators of possible management bias identified during the audit of the
preceding periods influence the planning and risk identification and assessment activities of the
auditor in the current period.
 Management bias can be difficult to detect at an account level. It may only be identified when
considered in the aggregate of groups of accounting estimates or all accounting estimates, or
when observed over a number of accounting periods.
 Although some form of management bias is inherent in subjective decisions, in making such
judgments, there may be no intension by management to mislead the users of F.S. Where,
however, there is intension to mislead, management bias is fraudulent in nature.

Risk Assessment Procedures and Related Activities

Auditor shall obtain an understanding of the following in order to identify and assess the risks of
material misstatement for accounting estimates:
(a) The requirements of the applicable financial reporting framework.
(b) How management identifies those transactions, events and conditions that may give rise to
the need for accounting estimates.

2
 In obtaining this understanding, the auditor shall make inquiries of management about
changes in circumstances that may give rise to new, or the need to revise existing, accounting
estimates.
(c) The estimation making process adopted by the management including:
 The method, including where applicable the model used in making the accounting
estimates;
 Relevant controls;
 Where management has used an expert;
 The assumptions underlying the accounting estimates;
 Where there has been or ought to have been a change from the prior period in the
methods for making the accounting estimates, and if so why; and
 Whether and if so, how the management has assessed the effect of estimation
uncertainty.
(d) The auditor shall review the outcome of accounting estimates included in the prior period
financial statements, or, where applicable, their subsequent re-estimation for the purpose of
the current period.

Inquiries of management about changes in circumstances

Inquiries of management about changes in circumstances may include, for example, inquiries about
whether:
 The entity has engaged in new types of transactions that may give rise to accounting estimates.
 Terms of transactions that gave rise to accounting estimates have changed.
 Accounting policies relating to accounting estimates have changed, as a result of changes to the
requirements of the applicable financial reporting framework or otherwise.
 Regulatory or other changes outside the control of management have occurred that may require
management to revise, or make new, accounting estimates.
 New conditions or events have occurred that may give rise to the need for new or revised
accounting estimates.

Matters that the auditor may consider in obtaining an understanding of the assumptions
Assumptions are integral components of accounting estimates. Matters that the auditor may consider
in obtaining an understanding of the assumptions underlying the accounting estimates include, for
example:
 The nature of the assumptions, including which of the assumptions are likely to be significant
assumptions.
 How management assesses whether the assumptions are relevant and complete (that is, that all
relevant variables have been taken into account).
 Where applicable, how management determines that the assumptions used are internally
consistent.
 Whether the assumptions relate to matters within the control of management (for example,
assumptions about the maintenance programs that may affect the estimation of an asset’s useful
life), and how they conform to the entity’s business plans and the external environment, or to
matters that are outside its control (for example, assumptions about interest rates, mortality
rates, potential judicial or regulatory actions, or the variability and the timing of future cash
flows).
 The nature and extent of documentation, if any, supporting the assumptions.

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Assumptions may be made or identified by an expert to assist management in making the accounting
estimates. Such assumptions, when used by management, become management’s assumptions.

Review of Outcome of Accounting Estimates

 The auditor shall review the outcome of accounting estimates included in the prior period
financial statements, or, where applicable, their subsequent re-estimation for the purpose of the
current period.
 The nature and extent of the auditor’s review takes account of the nature of the accounting
estimates, and whether the information obtained from the review would be relevant to identifying
and assessing risks of material misstatement of accounting estimates made in the current period
financial statements.
 However, the review Is not intended to call into question the judgments made in the prior periods
that were based on information available at that time.
 The outcome of an accounting estimate will often differ from the accounting estimate recognised
in the prior period financial statements. By performing risk assessment procedures to identify and
understand the reasons for such differences, the auditor may obtain:
(1) Information regarding the effectiveness of management’s prior period estimation process,
from which the auditor can judge the likely effectiveness of management’s current process.
(2) Audit evidence that is pertinent to the re-estimation, in the current period, of prior period
accounting estimates.
(3) Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
 The review of prior period accounting estimates may also assist the auditor, in the current period,
in identifying circumstances or conditions that increase the susceptibility of accounting estimates
to, or indicate the presence of, possible management bias. The auditor’s professional skepticism
assists in identifying such circumstances or conditions and in determining the nature, timing and
extent of further audit procedures.

Estimation Uncertainty
 For accounting estimates that give rise to significant risks, the auditor shall evaluate the following:
(1) How management has considered alternative assumptions or outcomes, and why it has
rejected them.
(2) Whether the significant assumptions used by management are reasonable.
(3) Where relevant to the reasonableness of the significant assumptions used by management or
the appropriate application of the applicable financial reporting framework, management’s
intent to carry out specific courses of action and its ability to do so.
 If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
uncertainty, the auditor shall, develop a range with which to evaluate the reasonableness of the
accounting estimate.

Recognition and Measurement Criteria

For accounting estimates that give rise to significant risks, the auditor shall obtain SAAE whether
the following are in accordance with the requirements of the applicable FRF:
 Management’s decision to recognise, or to not recognise, the accounting estimates in the F.S.;
&
 The selected measurement basis for the accounting estimates.

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Identifying and Assessing the Risks of Material Misstatement
 In identifying and assessing the RMM, as required by SA 315, the auditor shall evaluate the
degree of estimation uncertainty associated with an accounting estimate.
 The auditor shall determine whether, in the auditor’s judgment, any of those accounting estimates
that have been identified as having high estimation uncertainty give rise to significant risks.

Factors Influencing Degree of Estimation Uncertainty

The degree of estimation uncertainty associated with an accounting estimate may be influenced by
factors such as:
(1) The extent to which the accounting estimate depends on judgment.
(2) The sensitivity of the accounting estimate to changes in assumptions.
(3) The existence of recognised measurement techniques that may mitigate the estimation
uncertainty (though the subjectivity of the assumptions used as inputs may nevertheless give
rise to estimation uncertainty).
(4) The length of the forecast period, and the relevance of data drawn from past events to forecast
future events.
(5) The availability of reliable data from external sources.
(6) The extent to which the accounting estimate is based on observable or unobservable inputs.

Responses to Assessed Risks

Based on the assessed risks of material misstatement, the auditor shall determine:
 Whether management has appropriately applied the applicable FRF.
 Whether the methods are appropriate and have been applied consistently.
 Whether changes, if any, in accounting estimates or in the method for making them from the
prior period are appropriate in the circumstances.

Responses to Significant Risks Estimation Uncertainty

 For accounting estimates that give rise to significant risks, the auditor shall evaluate the
following:
(1) How management has considered alternative assumptions or outcomes, and why it has
rejected them.
(2) Whether the significant assumptions used by management are reasonable.
(3) Where relevant to the reasonableness of the significant assumptions used by management or
the appropriate application of the applicable financial reporting framework, management’s
intent to carry out specific courses of action and its ability to do so.
 If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
uncertainty, the auditor shall, develop a range with which to evaluate the reasonableness of the
accounting estimate.

Measurement and Disclosures Related to Accounting Estimates

 The auditor shall obtain sufficient appropriate audit evidence about whether the accounting
estimate and their disclosure in the financial statements is appropriate.
 For accounting estimates that give rise to significant risks, the auditor shall check adequacy of the
disclosure of their estimation uncertainty in the financial statements.

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Indicators of Possible Management Bias
 The term management bias may be defined as a lack of neutrality by management in the
preparation and presentation of information.
 The auditor shall review the judgments and decisions made by management in the making of
accounting estimates to identify whether there are indicators of possible management bias.
Indicators of possible management bias do not themselves constitute misstatements for the
purposes of drawing conclusions on the reasonableness of individual accounting estimates.

Indicators of possible management bias

Changes in an accounting estimate, or the method for making it, where management has made a
subjective assessment that there has been a change in circumstances.
 Use of an entity’s own assumptions for fair value accounting estimates when they are
inconsistent with observable marketplace assumptions.
 Selection or construction of significant assumptions that yield a point estimate favourable for
management objectives.
 Selection of a point estimate that may indicate a pattern of optimism or pessimism.

Written Representations
The auditor shall obtain written representations from management whether management believes
significant assumptions used by it in making accounting estimates are reasonable.
SA 580 “Written Representations” discusses the use of written representations. Depending on the
nature, materiality and extent of estimation uncertainty, written representations about accounting
estimates recognised or disclosed in the financial statements may include representations:
 About the appropriateness of the measurement processes, including related assumptions and
models, used by management in determining accounting estimates in the context of the
applicable FRF, and the consistency in application of the processes.
 That the assumptions appropriately reflect management’s intent and ability to carry out specific
courses of action on behalf of the entity, where relevant to the accounting estimates and
disclosures.
 That disclosure related to accounting estimates are complete and appropriate under the
applicable FRF.
 That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statement

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 SA 560 "SUBSEQUENT EVENTS"
Scope of SA 560
SA 560 deals with the auditor’s responsibilities relating to subsequent events in an audit of F.S

Meaning of Subsequent Event

Subsequent Event may be defined as:
 Events Occurring Between the Date of the Financial Statements and the Date of the Auditor’s Report.
 Facts that become known to the auditor after the date of the auditor’s report.

Subsequent Events
A. Events Occurring between the Date of the Financial Statements and the Date of the Auditor's
Report
(1) The auditor shall perform audit procedures to obtain sufficient and appropriate audit evidence to
ensure that events which require adjustments or disclosure in the financial statements have been
identified.
(2) In determining nature and extent of audit procedures, auditor shall:
 Obtain an understanding of the procedures through which management has identified subsequent
events.
 Inquiring of management as to occurrence of Subsequent events which affect the financial
statements.
 Read minutes of management meetings that have been held after the date of the financial
statements.
 Read entity’s latest subsequent interim financial statements, if any.
If auditor identifies events that require adjustment or disclosure in the financial statements, the
auditor should determine whether each such event is appropriately reflected in the financial
statements.
Written Representations: The auditor shall request the management to provide a “Written
Representation” that all events occurring subsequent to the date of the F.S. and requires adjustment
or disclosure have been adjusted or disclosed.
B. Facts which become known to the Auditor after the Date of the Auditor's Report but before the
Date of F.S. are issued
(1) The auditor has no obligation to perform any audit procedures regarding the financial statements
after the date of the auditor’s report.
(2) However, if a fact becomes known to the auditor that, had it been known to the auditor at the date of
the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
 Discuss the matter with Management.
 Determine whether the F.S. need amendment and, if so,
 Inquire how management intends to address the matter in the financial statements.
(3) If management amends the financial statements, the auditor shall:
 Extend the audit procedures to the date of the new auditor’s report; and
(4) Provide a new auditor’s report on the amended F.S.
(5) When law, regulation or FRF does not prohibit management from restricting the amendment of F.S.
to the effect of subsequent events, auditor is permitted to restrict the audit procedures subsequent
events to that amendment. In such case, the auditor shall:

1
  Amend the Audit report to include an additional date restricted to that amendment.
 Provide a new or amended Audit Report that includes EOM/OMP that conveys that auditor’s
procedures on subsequent event are restricted solely to amendments of financial statements.

(6) However, if the management does not amend the F.S., then:
 Auditor shall modify the opinion, if the report has not yet been provided to the entity.
 Otherwise, auditor shall notify the management and TCWG not to issue the F.S. to the third
parties. If management still issue the F.S., auditor shall take appropriate action so as to prevent
reliance on Auditor’s report.

C. Facts which become known to the Auditor after the Financial Statements have been Issued
(1) The auditor has no obligation to perform any audit procedures regarding such financial statements.
(2) However, if a fact becomes known to the auditor that, had it been known to the auditor at the date of
the auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
 Discuss the matter with management.
 Determine whether the F.S. need amendment and, if so,
 Inquire how management intends to address the matter in the financial statements.
(3) If the management amends the financial statements, the auditor shall:
 Carry out the audit procedures necessary in the circumstances on the amendment.
 Review the steps taken by management to ensure that anyone in receipt of the previously issued
F.S. together with the auditor’s report thereon is Informed of the situation.
 Extend audit procedures to the date of the new auditor’s report; and
 Provide a new auditor’s report on the amended financial statements.
(4) In the amended auditor’s report, an EOM paragraph referring to a note to the F.S. that discussed the
reason of amendment in F.S., should be included.

Specific Inquiries to be made from Management

 Whether new commitments, borrowings or guarantees have been entered into.
 Whether sales or acquisitions of assets have occurred or are planned.
 Whether there have been increases in capital or issuance of debt instruments, such as the issue of new
shares or debentures, or an agreement to merge or liquidate has been made or is planned.
 Whether any assets have been appropriated by government or destroyed, for example fire or flood.
 Whether there have been any developments regarding contingencies.
 Whether any unusual accounting adjustments have been made or are contemplated.
 Whether any events have occurred or are likely to occur that will bring into question the appropriateness of
accounting policies used in the F.S., as would be the case, for example, if such events call into question the
validity of the going concern assumption.
 Whether any events have occurred that are relevant to the measurement of estimates or provisions made in
the financial statements.
 Whether any events have occurred that are relevant to the recoverability of assets.

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 SA 570 "GOING CONCERN"
Scope of SA 570
This SA deals with the auditor’s responsibilities in the audit of F.S. relating to going concern and
the implications for the auditor’s report.

Objectives of the Auditor

To obtain SAAE regarding use of the going concern basis of accounting in the preparation of the
financial statements by the management. On the basis of evidence obtained, it is concluded
whether a material uncertainty exists relating to events or conditions that may cast a significant
doubt on the entity’s ability to continue as a going concern.

Going Concern Basis of Accounting

▪ Under the going concern basis of accounting, the F.S. are prepared on the assumption that
the entity is a going concern and will continue its operations for the foreseeable future.
▪ General purpose F.S. are prepared using the going concern basis of accounting, unless
management either intends to liquidate the entity or to cease operations or has no realistic
alternative but to do so.
▪ Special purpose F.S. may or may not be prepared in accordance with a FRF for which the
going concern basis of accounting is relevant.
▪ When the use of the going concern basis of accounting is appropriate, assets and liabilities
are recorded on the basis that the entity will be able to realize its assets and discharge its
liabilities in the normal course of business.

Responsibility for Assessment of the Entity's Ability to Continue as a Going Concern

▪ It is management responsibility to assess the entity’s ability to continue as a going concern
even if the FRF does not include an explicit requirement to do so.
▪ Management’s assessment of the entity’s ability to continue as a going concern involves
making a judgment, at a particular point in time, about inherently uncertain future outcomes
of events or conditions.
▪ The following factors are relevant to that judgment:
(1) Degree of uncertainty associated with the outcome of an event or condition.
(2) Size and complexity of the entity, the nature and condition of its business and the
degree to which it is affected by external factors.
(3) Information available at the time at which the judgment is made. Subsequent events
may result in outcomes that are inconsistent with judgments that were reasonable at
the time they were made.

Responsibilities of the Auditor

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 ▪ To obtain SAAE regarding, and conclude on, the appropriateness of management’s use of
the going concern basis of accounting in the preparation of the F.S.
▪ To conclude, based on the audit evidence obtained, whether a material uncertainty exists
about the entity’s ability to continue as a going concern.
▪ These responsibilities exist even if the FRF used in the preparation of the F.S. does not
include an explicit requirement for management to make a specific assessment of the
entity’s ability to continue as a going concern.
▪ Absence of any reference to a material uncertainty about the entity’s ability to continue as
a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s
ability to continue as a going concern.

Requirements of SA 570
(a) Risk Assessment Procedures and Related Activities
(1) When performing RAP as required by SA 315, the auditor shall consider whether
events or conditions exist that may cast significant doubt on the entity’s ability to
continue as a going concern.
(2) In so doing, the auditor shall determine whether management has already performed
a preliminary assessment of the entity’s ability to continue as a going concern, and
▪ If such an assessment has been performed, the auditor shall discuss the
assessment with management and determine whether management has
identified events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern and, if
so, management’s plans to address them; or
▪ If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of
accounting and inquire of management whether events or conditions exist that,
individually or collectively, may cast significant doubt on the entity’s ability to
continue as a going concern.
(3) The auditor shall remain alert throughout the audit for audit evidence of events or
conditions that may cast significant doubt on the entity’s ability to continue as a going
concern.
(b) Evaluating Management's Assessment
▪ The auditor shall evaluate management’s assessment of the entity’s ability to
continue as a going concern.
▪ In evaluating management’s assessment of the entity’s ability to continue as a going
concern, the auditor shall cover the same period as that used by management to make
its assessment as required by the applicable FRF, or by law or regulation if it specifies
a longer period.

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 ▪ If management’s assessment of the entity’s ability to continue as a going concern
covers less than 12 months from the date of the F.S., the auditor shall request
management to extend its assessment period to at least 12 months from that date.
▪ In evaluating management’s assessment, the auditor shall consider whether
management’s assessment includes all relevant information of which the auditor is
aware as a result of the audit.
(c) Period beyond Management's Assessment
The auditor shall inquire of management as to its knowledge of events or conditions beyond
the period of management’s assessment that may cast significant doubt on the entity’s
ability to continue as a going concern.
(d) Additional Audit Procedures when Events or Conditions are Identified
If events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern, the auditor shall obtain SAAE to determine whether
or not a material uncertainty exists related to events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern through performing additional
audit procedures, including consideration of mitigating factors. These procedures shall
include:
Where management has not yet performed an assessment of the entity’s ability to continue
as a going concern, requesting management to make its assessment.
▪ Evaluating management’s plans for future actions, whether the outcome of these
plans is likely to improve the situation and whether management’s plans are feasible
in the circumstances.
▪ Where the entity has prepared a cash flow forecast, evaluate the reliability of the
underlying data used to prepare the forecast and determine whether there is adequate
support for the assumptions underlying the forecast.
▪ Considering whether any additional facts or information have become available since
the date on which management made its assessment.
▪ Requesting WR from management and, where appropriate, TCWG, regarding their
plans for future actions and the feasibility of these plans.
Additional audit procedures when events or conditions are identified
▪ Analyzing and discussing cash flow, profit and other relevant forecasts with
management.
▪ Analyzing and discussing the entity’s latest available interim financial statements.
▪ Reading the terms of debentures and loan agreements and determining whether any
have been breached.
▪ Reading minutes of the meetings of shareholders, TCWG and relevant committees
for reference to financing difficulties.
▪ Inquiring of the entity’s legal counsel regarding the existence of litigation and claims
and the reasonableness of management’s assessments of their outcome and the
estimate of their financial implications.

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 ▪ Confirming the existence, legality and enforceability of arrangements to provide or
maintain financial support with related and third parties and assessing the financial
ability of such parties to provide additional funds.
▪ Evaluating the entity’s plans to deal with unfilled customer orders.
▪ Performing audit procedures regarding subsequent events to identify those that either
mitigate or otherwise affect the entity’s ability to continue as a going concern.
▪ Confirming the existence, terms and adequacy of borrowing facilities.
▪ Obtaining and reviewing reports of regulatory actions.
▪ Determining the adequacy of support for any planned disposals of assets.

Auditor Conclusions
▪ Auditor shall evaluate whether SAAE has been obtained regarding, and shall conclude on,
the appropriateness of management’s use of the going concern basis of accounting in the
preparation of the F.S.
▪ Based on the audit evidence obtained, the auditor shall conclude whether, in his judgment,
a material uncertainty exists related to events or conditions that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern.
▪ A material uncertainty exists when the magnitude of its potential impact and likelihood of
occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary for:
(1) In the case of a fair presentation financial reporting framework, the fair presentation
of the financial statements, or
(2) In the case of a compliance framework, the financial statements not to be misleading.
(a) Adequacy of Disclosures when Events or Conditions have been Identified and a
Material Uncertainty exists
If the auditor concludes that management’s use of the going concern basis of accounting is
appropriate in the circumstances but a material uncertainty exists, the auditor shall
determine whether the F.S.:
▪ Adequately disclose the principal events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern and management’s plans to deal
with these events or conditions; and
▪ Disclose clearly that there is a material uncertainty related to events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern
and, therefore, that it may be unable to realize its assets and discharge its liabilities
in the normal course of business.
(b) Adequacy of Disclosures when Events or Conditions have been Identified but no
Material Uncertainty exists
If events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall evaluate whether, in view

4
 of the requirements of the applicable FRF, the F.S. provide adequate disclosures about
these events or conditions.

Implications for the Auditor's Report

(a) Use of Going Concern Basis of Accounting is Inappropriate
If the F.S. have been prepared using the going concern basis of accounting but, in the
auditor’s judgment, management’s use of the going concern basis of accounting in the
preparation of the F.S. is inappropriate, the auditor shall express an adverse opinion.
(b) Use of Going Concern Basis of Accounting is Appropriate but a Material Uncertainty
exists
(1) Adequate disclosure of a Material Uncertainty is made in the F.S.
If adequate disclosure about the material uncertainty is made in the F.S. the
auditor shall express an unmodified opinion and the auditor’s report shall include
a separate section under the heading “Material Uncertainty Related to Going
Concern” to:
▪ Draw attention to the note in the financial statements that discloses the
matters; and
▪ State that these events or conditions indicate that a material uncertainty exists
that may cast significant doubt on the entity’s ability to continue as a going
concern and that the auditor’s opinion is not modified in respect of the matter.
(2) Adequate disclosure of a material uncertainty is not made in the F.S.
If adequate disclosure about the material uncertainty is not made in the F.S., the
auditor shall:
▪ Express a qualified opinion or adverse opinion, as appropriate, in accordance
with SA 705; and
▪ In the Basis for Qualified (Adverse) Opinion section of the auditor’s report,
state that a material uncertainty exists that may cast significant doubt on the
entity’s ability to continue as a going concern and that the F.S. do not
adequately disclose this matter.
(c) Management Unwilling to Make or Extend its Assessment
If management is unwilling to make or extend its assessment when requested to do so by
the auditor, the auditor shall consider the implications for the auditor’s report.

Communication with TCWG

Unless all TCWG are involved in managing the entity, the auditor shall communicate with TCWG
events or conditions identified that may cast significant doubt on the entity’s ability to continue
as a going concern. Such communication with TCWG shall include the following:
▪ Whether the events or conditions constitute a material uncertainty;
▪ Whether management’s use of the going concern basis of accounting is appropriate in the
preparation of the financial statements;

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 ▪ The adequacy of related disclosures in the financial statements; and
▪ Where applicable, the implications for the auditor’s report.

Significant Delay in the Approval of F.S.

▪ If there is significant delay in the approval of the F.S. by management or TCWG after the
date of the F.S., the auditor shall inquire as to the reasons for the delay.
▪ If the auditor believes that the delay could be related to events or conditions relating to the
going concern assessment, the auditor shall perform additional audit procedures necessary,
as well as consider the effect on the auditor’s conclusion regarding the existence of a
material uncertainty.

Events or Conditions that May Cast Doubts about Going Concern Assumptions
(a) Financial
▪ Net liability or net current liability position.
▪ Fixed-term borrowings approaching maturity without realistic prospects of renewal
or repayment; or excessive reliance on short-term borrowings to finance long-term
assets.
▪ Indications of withdrawal of financial support by creditors.
▪ Negative operating cash flows indicated by historical or prospective financial
statements.
▪ Adverse key financial ratios.
▪ Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
▪ Arrears or discontinuance of dividends.
▪ Inability to pay creditors on due dates.
▪ Inability to comply with the terms of loan agreements.
▪ Change from credit to cash-on-delivery transactions with suppliers.
▪ Inability to obtain financing for essential new product development or other essential
investments.
(b) Operating
▪ Management intentions to liquidate the entity or to cease operations.
▪ Loss of key management without replacement.
▪ Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
▪ Labour difficulties.
▪ Shortages of important supplies.
▪ Emergence of a highly successful competitor.
(c) Other
▪ Non-compliance with capital or other statutory requirements. Pending legal or
regulatory proceedings against the entity that may, if successful, result in claims that
the entity is unlikely to be able to satisfy.

6
▪ Changes in law or regulation or government policy expected to adversely affect the
entity.
▪ Uninsured or underinsured catastrophes when they occur.

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 SA 580 "WRITTEN REPRESENTATIONS"
Scope of SA 580
SA 580 deals with the auditor’s responsibility to obtain written representations from management and, where
appropriate, TCWG.

Meaning of Written Representation

 A written statement by management provided to the auditor to confirm certain matters or to support other
audit evidence. Written representations in this context do not include financial statements, the assertions
therein or supporting books and records.
 Written representations are necessary information that the auditor requires in connection with the audit,
hence they are recognised as audit evidence as a response to inquiries.
 Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.

Objectives of Auditor
 To obtain written representations from management that management believes that it has fulfilled the
fundamental responsibilities.
 To support other audit evidence relevant to the F.S. or specific assertions in the F.S. by means of written
representations, if determined necessary by the auditor or required by other SAs; and
 To respond appropriately to written representations provided by management or if management does not
provide the written representations requested by the auditor.

Requirements of SA 580
The auditor shall request written representations from management with appropriate responsibilities for the
financial statements and knowledge of the matters concerned.

Written Representations Required

(1) Management Responsibilities:
(i) Written representation specifying that the management has fulfilled its responsibility for the
preparation and presentation of the financial statements in accordance with applicable financial
reporting framework.
(ii) Written representation specifying that management has provided the auditor with all relevant
information agreed in the terms of audit engagement and that all transactions have been recorded and
are reflected in the F.S.
(iii) Written representation must describe the management responsibilities in the manner in which these
responsibilities are described in the terms of audit engagement.
(2) Others:
Other SAs require the auditor to request written representations. If, in addition to such required
representations, the auditor determines that it is necessary to obtain one or more written representations,
the auditor shall request such other written representations.

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Date of and Period(s) Covered by Written Representation
The date of the written representations shall be as near as practicable to the date of the auditor’s report.
However, it should not be after the date of auditor’s report. The written representations shall be for all
financial statements and period(s) referred to in the auditor’s report.
 In some circumstances it may be appropriate for the auditor to obtain a written representation about a
specific assertion in the financial statements during the course of the audit. Where this is the case, it may
be necessary to request an updated written representation.
 The written representations are for all periods referred to in the auditor’s report because management
needs to reaffirm that the written representations it previously made with respect to the prior periods
remain appropriate. The auditor and management may agree to a form of written representation that
updates written representations relating to the prior periods by addressing whether there are any changes
to such written representations and, if so, what they are.
 Situations may arise where current management were not present during all periods referred to in the
auditor’s report. Such persons may assert that they are not in a position to provide some or all of the
written representations because they were not in place during the period. This fact, however, does not
diminish such persons’ responsibilities for the financial statements as a whole. Accordingly, the
requirement for the auditor to request from them written representations that cover the whole of the
relevant period(s) still applies.

Form of Written Representations

 The written representations shall be in the form of a representation letter addressed to the auditor.
 If law or regulation requires management to make written public statements about its responsibilities, the
relevant matters covered by such statements need not be included in the representation letter.

Auditor's duties when Reliability of Written Representations is Doubtful

 If the auditor has concerns about the competence, integrity, ethical values or diligence of management, the
auditor shall determine their effect on the reliability of representations (oral or written) and audit evidence
in general.
 In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform
audit procedures to attempt to resolve the matter.
 If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate
actions, including determining the possible effect on the opinion.
 If he claims that there is sufficient doubt about integrity of management, he shall issue a disclaimer of
opinion.

Auditor's duties when Requested WR Not Provided

 The Auditor’s shall discuss the matter with management and
 Re-evaluate the reliability and integrity of management.
 Take appropriate action including the determining the possible effect on the opinion.
 Under these circumstances the auditor shall issue a disclaimer of opinion.

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 SA 600 - "USING THE WORK OF OTHER AUDITOR"
 SA 600 applies in situation where an auditor (principal auditor), reporting on the financial
information of an entity, uses the work of another auditor (other auditor) with respect to the financial
information of one or more components included in the financial information of the entity.
 This Standard does not deal with those instances where two or more auditors are appointed as joint
auditors nor does it deal with the auditor’s relationship with a predecessor auditor.

Acceptance as Principal Auditor

The auditor should consider whether the auditor’s own participation is sufficient to be able to act as
the principal auditor. For this purpose, the auditor would consider:
 The materiality of the portion of the financial information which the principal auditor audits;
 The principal auditor’s degree of knowledge regarding the business of the components;
 The risk of material misstatements in the financial information of the components audited by the
other auditor; and
 The performance of additional procedures as set out in this SA regarding the components audited
by other auditor resulting in the principal auditor having significant participation in such audit.

The Principal Auditor's Procedures

(a). Visit Component and examine books of account, if essential
 Where another auditor has been appointed for the component, the principal auditor would
normally be entitled to rely upon the work of such auditor unless there are special
circumstances to make it essential for him to visit the component and / or to examine the books
of account and other records of the said component, if he thinks it necessary to do so.
 In certain situations, the statute governing the entity may confer a right on the principal auditor
to visit a component and examine
(b). Consider the professional competence of Other Auditor, if Other Auditor is not a Member
of ICAI
When planning to use the work of another auditor, the principal auditor should consider the
professional competence of the other auditor in the context of specific assignment if the other
auditor is not a member of the ICAI.
(c). Perform Procedures to obtain SAAE, that the work of the OA is Adequate for the PA
purposes
When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:
(1) Principal auditor would inform the other auditor of matters such as
(i) areas requiring special consideration,
(ii) procedures for the identification of inter component transactions that may require
disclosure and
(iii) The time-table for completion of audit.
(2) Advise the other auditor of the significant accounting, auditing and reporting requirements
and obtain representation as to compliance with them.

1
(d). Review a Written Summary of OA procedures
The principal auditor might discuss with the other auditor the audit procedures applied or review
a written summary of the other auditor’s procedures and findings which may be in the form of a
completed questionnaire or check list.
(e). Consider Significant Findings of OA
 The PA may consider it appropriate to discuss with the OA and the management of the
component, the audit findings or other matters affecting the financial information of the
components.
 He may also decide that supplemental tests of the records or the financial statements of the
component are necessary. Such tests may, depending upon the circumstances, be performed by
the principal auditor or the other auditor.

Coordination between Auditors

 There should be sufficient liaison between the principal auditor and the other auditor.
 For this purpose, the principal auditor may find it necessary to issue written communication(s) to
the other auditor.
 The other auditor, knowing the context in which his work is to be used by the principal auditor,
should co-ordinate with the principal auditor.
(1) Adhering to time-table.
(2) Bringing to the attention of PA any significant finding.
(3) Compliance with relevant statutory requirements.
(4) Respond to detailed questionnaire.

Reporting Considerations
 When the principal auditor concludes, based on his procedures, that the work of the other auditor
cannot be used and the principal auditor has not been able to perform sufficient additional
procedures regarding the financial information of the component audited by the other auditor, the
principal auditor should express a qualified opinion or disclaimer of opinion because there is a
limitation on the scope of audit.
 In all circumstances, if the other auditor issues, or intends to issue, a modified auditor’s report, the
PA should consider whether the subject of the modification is of such nature and significance, in
relation to the financial information of the entity on which the principal auditor is reporting, that it
requires a modification of the principal auditor’s report.

Division of Responsibility
 The principal auditor would not be responsible in respect of the work entrusted to the other auditors,
except in circumstances which should have aroused his suspicion about the reliability of the work
performed by the other auditors.
 When the principal auditor has to base his opinion on the financial information of the entity as a
whole relying upon the statements and reports of the other auditors, his report should state clearly
the division of responsibility for the financial information of the entity by indicating the extent to
which the financial information of components audited by the other auditors have been included in
the financial information of the entity, e.g., the number of divisions/branches/subsidiaries or other
components audited by other auditors.

2
 SA 610 - "USING THE WORK OF INTERNAL AUDITOR"
Scope of SA 610
 This SA deals with the external auditor’s responsibilities if using the work of internal auditors. This
includes:
(1) Using the work of the internal audit function in obtaining audit evidence and
(2) Using internal auditors to provide direct assistance under the direction, supervision and review
of the external auditor.
 This SA does not apply if the entity does not have an internal Audit function.

Objectives of Auditor
 To determine whether the work of the internal audit function or direct assistance from internal
auditors can be used, and if so, in which areas and to what extent;
 If using the work of the internal audit function, to determine whether that work is adequate for
purposes of the audit; and
 If using internal auditors to provide direct assistance, to appropriately direct, supervise and review
their work.

Definitions
(a) Internal Audit Function
A function of an entity that performs assurance and consulting activities designed to evaluate
and improve the effectiveness of the entity’s governance, risk management and internal control
processes.
(b) Direct Assistance
The use of internal auditors to perform audit procedures under the direction, supervision and
review of external auditor.

Requirements of SA 610
Determining whether, in which areas, and to what extent the work of the Internal Audit Function can
be used
(a) Evaluating the Internal Audit Function
The external auditor shall determine whether the work of the internal audit function can be used
for purposes of the audit by evaluating the following:
 Objectivity of the internal auditors;
 Level of competence; and
 Application of Systematic and disciplined approach.
The external auditor shall not use the work of the internal audit function if the external auditor
determines that:
 The function’s organizational status and relevant policies and procedures do not adequately
support the objectivity of internal auditors;
 The function lacks sufficient competence; or
 The function does not apply a systematic and disciplined approach.

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(b) Determining the nature and Extent of Work of the Internal Audit that can be used
 The external auditor shall consider the nature and scope of the work that has been performed,
or is planned to be performed, by the internal audit function and its relevance to the external
auditor’s overall audit strategy and audit plan.
 The external auditor shall make all significant judgments in the audit engagement and, to
prevent undue use of the work of the internal audit function, shall plan to use less of the work
of the function and perform more of the work directly.
 The external auditor shall also evaluate whether, in aggregate, using the work of the internal
audit function to the extent planned would still result in the external auditor being sufficiently
involved in the audit, given the external auditor’s sole responsibility for the audit opinion
expressed.
 The external auditor shall, in communicating with TCWG an overview of the planned scope
and timing of the audit in accordance with SA 260, communicate how the external auditor has
planned to use the work of the internal audit function.
Examples of work of the Internal audit function that can be used by the external auditor
 Testing of the operating effectiveness of controls.
 Substantive procedures involving limited judgment.
 Observations of inventory counts.
 Tracing transactions through the information system relevant to financial reporting.
 Testing of compliance with regulatory requirements.
 Audits or reviews of the financial information of subsidiaries that are not significant
components to the group (where this does not conflict with the requirements of SA 600).

Using the Work of the Internal Audit Function

 If the external auditor plans to use the work of the internal audit function, the external auditor
shall discuss the planned use of its work.
 The external auditor shall read the reports of the internal audit function relating to the work of
the function that the external auditor plans to use to obtain an understanding of the nature and
extent of audit procedures it performed and the related findings.
 The external auditor shall perform sufficient audit procedures on the work of the internal
audit function as a whole that the external auditor plans to use to determine its adequacy for
purposes of the audit, including evaluating whether:
(1) The work of the function had been properly planned.
(2) Sufficient appropriate evidence had been obtained to enable the function to draw reasonable
conclusions; and
(3) Conclusions reached are appropriate in the circumstances and the reports prepared by the
function are consistent with the results of the work performed.
 The nature and extent of the external auditor’s audit procedures shall be responsive to the
external auditor’s evaluation of:
(1) The amount of judgment involved;
(2) The assessed risk of material misstatement;
(3) The extent to which the internal audit function’s organisational status and relevant policies
and procedures support the objectivity of the internal auditors; and
(4) The level of competence of the function; and
(5) Shall include reperformance of some of the work.

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  The external auditor shall also evaluate whether the external auditor’s conclusions regarding
the internal audit function and the determination of the nature and extent of use of the work of the
function for purposes of the audit remain appropriate.

Determining whether, in which areas, and to what extent Internal Auditors can be
used to provide Direct Assistance
(a) Determining whether Internal Auditors can be used to provide direct assistance for purposes
of audit
 The external auditor may be prohibited by law or regulation from obtaining direct assistance
from internal auditors.
 If using internal auditors to provide direct assistance is not prohibited by law or regulation,
and the external auditor plans to use internal auditors to provide direct assistance on the audit,
the external auditor shall evaluate the existence and significance of threats to objectivity and
the level of competence of the internal auditors who will be providing such assistance.
 The external auditor shall not use an internal auditor to provide direct assistance if:
(1) There are significant threats to the objectivity of the internal auditor; or
(2) The internal auditor lacks sufficient competence to perform the proposed work.
(b) Determining the nature and Extent of Work that can be assigned by Internal Auditors
providing direct assistance
 In determining the nature and extent of work that may be assigned to internal auditors and the
NTE of direction, supervision and review that is appropriate in the circumstances, the
external auditor shall consider:
(1) The amount of judgment involved in Planning and performing relevant audit procedures;
and evaluating the audit evidence gathered;
(2) The assessed risk of material misstatement; and
(3) The external auditor’s evaluation of the existence and significance of threats to the
objectivity and level of competence of the internal auditors who will be providing such
assistance.
 The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
(1) Involve making significant judgments in the audit; Significant judgments include the
following:
 Assessing the risks of material misstatement;
 Evaluating the sufficiency of tests performed;
 Evaluating the appropriateness of management’s use of the going concern assumption;
 Evaluating significant accounting estimates; and
 Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report
(2) Relate to higher assessed risks of material misstatement;
(3) Relate to work with which the internal auditors have been involved; or
(4) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.

5
 Using Internal Auditors to Provide Direct Assistance
 Prior to using internal auditors to provide direct assistance for purposes of the audit, the
external auditor shall:
(1) Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditor’s instructions, and that the entity will
not intervene in the work the internal auditor performs for the external auditor; and
(2) Obtain written agreement from the internal auditors that they will keep confidential specific
matters as instructed by the external auditor and inform the external auditor of any threat to
their objectivity.
 The external auditor shall direct, supervise and review the work performed by internal
auditors on the engagement in accordance with SA 220.

Review of the work performed by internal auditors

External auditor shall direct, supervise and review the work performed by internal auditors on the
engagement in accordance with SA 220.

6
 SA 610 - Using the work of Internal Auditor
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IAF (Internal audit function) does not Exist

Not applicable The external auditor does not expect to use the work of the IAF in obtaining AE

Understanding of IAF will help in understanding the E/E/IC and IA ROMM

Relationship with
315

Activities - Assurance and Consulting

IAF
Definition Evaluate and improve effectivness and Entity's governance / Risk Management / IC

organizational
status

conflicting
responsibilities

employment
decisions
Objectivity (ability to perform those
Factors
tasks without allowing bias)
constraints or
restrictions

members of relevant
professional bodies
- memberships
obligate compliance
with objectivity

resourced relative
to the size

established policies
for hiring, training
and assigning

adequate technical
training and
proficiency
Competence (attainment and
Evaluating the IAF
maintenance of knowledge and skills,
required knowledge
enable assigned tasks to be performed Factors
and skillrelating to
diligently and in accordance with
the entity
applicable professional standards.)
members of relevant
professional bodies
that oblige them to
comply with
standards and
continued
professional
development
Using the work of
requirements
IAF - (Whether, in
Which Areas, and to
documented
What Extent the
internal audit
Work of the Internal
procedure
Audit Function Can
commensurate with
Be Used)
the size and
circumstances of an
entity
Approach (Systematic & Disciplined) Factors
appropriate quality
control policies and
procedures For
example QC
requirements set by
professional bodies

Nature and scope of work

Relevance (Strategy and Plan)

Significant judgement - EA
Determining the
nature and extent of Prevent undue use
the work of the IAF
that can be used Use less perform more directly

External Auditor should be sufficiently involved (Sole responsibility of opinion)

SA 260, communicate to TCWG, how the external auditor has planned to use the
work of the internal audit function

Discuss the planned use

Understand NET of
Read Reports IAF
AP and Finding of IAF

Using the Work of

Work Properly PPSRD (planned, performed,
the IAF
supervised, reviewed and documented)

Determine Adequacy SAE for Reasonable Conclusion

Conclusions - Appropriate.
Reports - consistent with work

Direct Assistance -
The use of IAs to perform audit procedures under the direction, supervision and review of the external
auditor.

Determining must not be prohibited by law or regulation

Whether Internal
Auditors Can Be
Used to Provide threats to objectivity
Direct Assistance
for Purposes of the
Audit competence

ROMM

sufficiency of tests

appropriateness of
Significant management’s use
judgement involved ( of the going concern
(EA has sole assumption
responsibility for
the audit opinion significant
expressed, the EA accounting
needs to make the estimates
significant
Determining the
Areas where direct assistance shall judgments in the adequacy of
Nature and Extent
not be taken. audit engagement. disclosures in the
of Work that Can Be
) financial statements
Using IA to provide Assigned to Internal
Direct Assistance Auditors Providing
other matters
under Direction, Direct Assistance
affecting the
Supervision and
auditor’s report.
Review of EA
(Whether, in Which
Areas, and to What High ROMM
Extent Internal
Auditors Can Be Threats to objectivity
Used to Provide
Direct Assistance Decision of EA regarding use of / Direct
) assistance of IAF/ IA

SA 260, communicate the nature and extent of the planned use of internal auditors
to provide direct assistance so as to reach a mutual understanding that such use is
not excessive in the circumstances of the engagement.

lA is allowed to
followed the EA's
Instruction
Written Agreement With AR of Entity
Entity will not
Intervene

Specific Matters as
instructed by EA
Using Internal will be Kept
Auditors to Provide Confidential
Written Agreement With IA
Direct Assistance
lA will inform EA of
any threats to their
objectivity

Work performed by IA (As per SA 220)

DSR DSR should be sufficient for EA to be

satisfied IA have obtained SAAE to support
the conclusion based on the work

Objectivity of IA

Competence

Using the work of IAF Approach

Nature and Extent of Work used and basis for that decision

AP performed by Evaluate the Adequacy of IA

Evaluation of threats to objectivity

Competence

Documentation Nature and extent of work to be performed by IA

Who
Using lAs to Provide
Review Date
DA
Extent

AR
Written Agreements with
IA

Working papers prepared by IA

 SA 620 "USING THE WORK OF AN AUDITOR'S EXPERT"
➢ Auditor Expert = Use of an individual or organisation’s work to assist the auditor in obtaining
sufficient appropriate audit evidence in any field of expertise other than accounting or auditing (ET
ka hissa manne jaate hai yeah log)
➢ Management Expert = Use of an individual or organisation’s work to assist the entity in preparation
& presentation of Financial Statement in any field of expertise other than accounting or auditing (ET
ka hissa nahi manne jaate hai yeah log, even if their work is used by auditor)
NOTE
✓ Auditor’s responsibility is not reduced by the auditor’s use of the work of an auditor’s expert. He
remains sole responsible for the opinion expressed. (GAJAB)
✓ An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including
temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert.
(GAJAB)
✓ Auditor can use the work of an Expert if after following this SA he conclude that the work of
expert is ADEQUATE.

Objectives
The objectives of the auditor is to determine:
▪ Whether to use the work of an auditor’s expert; and (chaiye ya nahi)
▪ Whether that work is adequate for the auditor’s purposes. (Adequacy of expert’s work)

Matters where Auditor can use Expert Work

Expertise in a field other than Accounting & auditing may include expertise in relation to such
matters/field as:-
▪ The valuation of complex financial instruments, land and buildings, plant and machinery, jewellery,
works of art, antiques, intangible assets, assets acquired and liabilities assumed in business
combinations and assets that may have been impaired.
▪ The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans.
▪ The environmental liabilities, and site clean-up costs calculation.
▪ The interpretation of contracts, laws and regulations.
▪ The oil and gas reserves estimation.
▪ The analysis of unusual tax compliance.

Procedures to be Followed while Using the work of AE

(a) Determining the Need for an AE
If expertise a field other than accounting or auditing is necessary to obtain sufficient appropriate
audit evidence, the auditor shall determine whether to use the work of an auditor’s expert.
Matters on which assistance of auditor’s expert may be required (auditing matters)
▪ Obtaining an understanding of the entity and its environment, including its internal control.
▪ Identifying and assessing the risks of material misstatement.
1
 ▪ Determining and implementing overall responses to assessed risks at the financial statement
level.
▪ Designing and performing further audit procedures to respond to assessed risks at the
assertion level, comprising tests controls or substantive procedures.
▪ Evaluating the sufficiency and appropriateness of audit evidence obtained in forming an
opinion on the financial statements.
Considerations when deciding whether to use an auditor’s expert (use karu ya nahi)
▪ The significance & nature of the matter, including its complexity.
▪ The availability of alternative sources of audit evidence.
▪ The risks of material misstatement in the matter.
▪ Whether management has used a management’s expert in preparing the financial statements.
Factors influencing the auditor’s decision w.r.t. use of AE when management had used a
management expert (Expert toh expert hota hai)
▪ Whether the management’s expert is employed by the entity, or is a party engaged by it to
provide relevant services. (atiii sundarrrr)
▪ The extent to which management can exercise control or influence over the work of the
management’s expert. (mgt control)
▪ Any controls within the entity over the management’s expert’s work. (entity control)
▪ The nature, scope and objectives of the management’s expert’s work.
▪ The management’s expert’s competence and capabilities.
▪ Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.
(b) Evaluation, Competence, Capabilities and Objectivity of the Auditor's Expert
The auditor shall evaluate whether the auditor’s expert has the necessary competence, capabilities
and objectivity for the auditor’s purposes.
Matters that may be relevant for evaluation of Competency
▪ Any areas of specialty within that expert’s field.
For Ex.: A particular actuary may specialise in property and casualty insurance, but has
limited expertise regarding pension calculations.
▪ The auditor’s expert’s competence with respect to relevant accounting and auditing
requirements.
For Ex.: Knowledge of assumptions and methods, including models where applicable, that
are consistent with the applicable FRF.
▪ Whether unexpected events, changes in conditions, or audit evidence obtained from results
of audit procedures indicate that it may be necessary to reconsider initial evaluation of
competence, capabilities and objectivity of the auditor's expert as the audit progresses.
Evaluating the objectivity of the expert
When evaluating the objectivity of an auditor’s external expert, it may be relevant to:
▪ Inquire of the entity about any known interests or relationships that the entity has with the
auditor’s external expert that may affect that expert’s objectivity.

2
 ▪ Inquire with that expert any applicable safeguards, including any professional requirements
that apply to that expert; and evaluate whether the safeguards are adequate to reduce threats
to an acceptable level. Interests and relationships that may be relevant to discuss with the
auditor’s expert include:
(1) Financial interests.
(2) Business and personal relationships.
(3) Provision of other services by the expert, including by the organisation in the case
of an external expert that is an organisation.
(4) In some cases, it may also be appropriate for the auditor to obtain a written
representation from the auditor’s external expert about any interests or relationships
with the entity of which that expert is aware.
(c) Agreement with Auditor's Expert
In writing, on the following matters:
▪ Nature, scope and objectives of Auditor’s Expert work (may include relevant technical
standards or other professional and industry requirements).
▪ Respective roles and responsibilities of auditors and Auditor Expert.
▪ Nature, timing and extent of communication, including form of report.
▪ Need for Auditor Expert to observe confidentiality requirements under ethical requirements
or Law and Regulation.
NOTE
Agreement is often in the form of an engagement letter.
Factors suggesting need for detailed and written agreement with auditor’s expert
▪ The auditor’s expert will have access to sensitive or confidential entity information.
▪ The respective roles or responsibilities of the auditor and the auditor’s expert are different
from those normally expected.
▪ Multi-jurisdictional legal or regulatory requirements apply.
▪ The matter to which the auditor’s expert’s work relates is highly complex.
▪ The auditor has not previously used work performed by that expert.
▪ The greater the extent of the auditor’s expert’s work, and its significance in the context of
the audit.
(d) Evaluating the Adequacy of Auditor's Expert Work
▪ Findings and Conclusion: Relevance, reasonableness (consistency with other audit
evidence) (mera conclusion= uska conclusion)
▪ Assumptions and Methods used: Relevance and Reasonableness in the circumstance.
(Accurate vs Reasonable)
▪ Source data used: Relevance, completeness, and accuracy.
Specific procedures to evaluate the adequacy of auditor expert’s work for the auditor’s
purposes
▪ Inquiries of the auditor’s expert.
▪ Reviewing the auditor’s expert’s working papers and reports. (Gandi baat)
▪ Corroborative procedures, such as:
(1) Observing the auditor’s expert’s work;
3
 (2) Examining published data, such as statistical reports from reputable, authoritative
sources;
(3) Confirming relevant matters with third parties;
(4) Performing detailed analytical procedures; and
(5) Re-performing calculations.
▪ Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.
▪ Discussing the auditor’s expert’s report with management.
Evaluation of relevance and reasonableness of assumptions and methods
▪ When auditor’s expert’s work is to evaluate underlying assumptions and methods, including
models where applicable, used by management in developing an accounting estimate, the
auditor’s procedures are likely to be primarily directed to evaluating whether the auditor’s
expert has adequately reviewed those assumptions and methods.
▪ SA 540 discusses the assumptions and methods used by management in making accounting
estimates, including the use in some cases of highly specialised, entity-developed models.
Although that discussion is written in the context of the auditor obtaining SAAE regarding
management’s assumptions and methods, it may also assist the auditor when evaluating an
auditor’s expert’s assumptions and methods.
▪ When an auditor’s expert’s work involves the use of significant assumptions and methods,
factors relevant to the auditor’s evaluation of those assumptions and methods include
whether they are:
(1) Generally accepted within the auditor’s expert’s field;
(2) Consistent with the requirements of the applicable financial reporting framework;
(3) Dependent on the use of specialised models; and
(4) Consistent with those of management, and if not, the reason for, and effects of, the
differences.
Procedures used to test Source Data
▪ Verifying the origin of the data, including obtaining an understanding of, and where
applicable testing, the internal controls over the data and, where relevant, its transmission to
the expert.
▪ Reviewing the data for completeness and internal consistency
(e) Auditor's Expert Work not adequate for audit Purposes
▪ If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s
purposes, the auditor shall:
(1) Agree with that expert on the nature and extent of further work to be performed by that
expert; or
(2) Perform further audit procedures appropriate to circumstances.
▪ If the auditor concludes that the work of the auditor’s expert is not adequate for the auditor’s
purposes and the auditor cannot resolve the matter through the additional audit procedures,
which may involve further work being performed by both the expert and the auditor, or
include employing or engaging another expert, it may be necessary to express a modified

4
 opinion in the auditor’s report in accordance with SA 705 because the auditor has not
obtained SAAE.

NTE of Audit Procedures

While determining the nature, timing and extent of the procedures to be performed w.r.t. the requirements
of this SA, the auditor shall consider matters including:
▪ The nature of the matter to which that expert’s work relates;
▪ The risks of material misstatement in the matter to which that expert’s work relates;
▪ The significance of that expert’s work in the context of the audit;
▪ The auditor’s knowledge of and experience with previous work performed by that expert; and
▪ Whether that expert is subject to the auditor’s firm’s quality control policies and procedures.

Factors suggesting need for different or extensive procedures

▪ The work of the auditor’s expert relates to a significant matter that involves subjective and complex
judgments.
▪ The auditor has not previously used the work of the auditor’s expert, and has no prior knowledge
of that expert’s competence, capabilities and objectivity.
▪ The auditor’s expert is performing procedures that are integral to the audit, rather than being
consulted to provide advice on an individual matter.
▪ The expert is an auditor’s external expert and is not subject to the firm’s quality control policies
and procedures.

Reference to Auditor's Expert in Auditor's Report

▪ Auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an
unmodified opinion unless required by law or regulation to do so.
▪ If such reference is required by law or regulation, the auditor shall indicate in the auditor’s report
that the reference does not reduce the auditor’s responsibility for the audit opinion.
▪ If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such
reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall
indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for
that opinion.

Rachit’s Special (Auditor’s Expert ko refer karna hai ki nahi)

Unmodified opinion Not to refer (L&R= Refer) auditor’s responsibility will
Modified opinion Refer = relevant to NOT be reduced.
understanding of user

5
SA 620 "USING THE WORK OF AN AUDITOR'S EXPERT"
Auditor Expert = Management Expert = Matters on which assistance of
Expertise in relation to such
➢ Use of an individual or ➢ Use of an individual or auditor’s expert may be
matters/field as:- required (auditing matters)
organisations work organisations work
(MT= Vowels-AEIOU) (MT= Audit procedure)
➢ to assist the auditor in ➢ to assist the entity in PPFS
✓ The valuation (109, 103, 16) ✓ Identifying and assessing the
obtaining SAAE ➢ in any field of expertise other ✓ The actuarial calculation of
➢ in any field of expertise other than accounting or auditing. ROMM
liabilities associated with ✓ Obtaining an understanding of
than accounting or auditing (ET ka hissa nahi manne jaate hai
employee benefit plans. the entity
➢ (ET ka hissa manne jaate hai yeah log, even if their work is used
✓ The environmental liabilities, &
yeah log) by auditor) ✓ Overall responses at FS level.
site clean-up costs calculation. ✓ FAP to respond at the
➢ May be ✓ The interpretation of contracts,
✓ Internal (network firm also) assertion level
laws and regulations. ✓ Evaluating the SAAE obtained
✓ External (ET ka hissa hai) ✓ The oil and gas reserves
Special Note- in forming an opinion on the
estimation financial statements.
➢ Responsibility is not reduced ✓ The analysis of unusual tax
(220,500,580,610,620) compliance.
➢ Responsibility Reduce (299,600)
➢ Can use only if work is adequate
whether to use an AE (use karu ya nahi) use of AE when management had used a Agreement with Auditor's Expert
(MT= aapko SARM aati ho voh AE se karvao) management expert (Expert toh expert hota hai) In writing, on the following matters:
✓ Significance & nature of the matter, including its (MT= 3 by 3) ▪ Nature, scope and objectives of Auditor’s
complexity. ✓ Employed by the entity, or is engaged by it. Expert work
✓ Availability of alternative sources of audit ✓ Management can exercise control (mgt control)
evidence. ✓ Any controls within the entity (entity control)
▪ Respective roles and responsibilities of
✓ The ROMM in the matter. auditors and Auditor Expert.
✓ Whether management has used a management’s ✓ Nature, scope and objectives of ME ▪ NTE of communication
expert in preparing the financial statements. ✓ Competence and capabilities. ▪ Need for Auditor Expert to observe
✓ Technical performance standards or other confidentiality requirements.
professional or industry requirements. NOTE
Agreement is often in the form of an engagement
letter.
1. Competence: Relates to nature and level of Evaluating the objectivity Detailed and written agreement
expertise. ✓ Inquire of the entity about any known interests or ✓ highly complex.
2. Capability: Ability to exercise that competence. relationships ✓ different from those normally expected.
✓ Inquire with that expert any applicable safeguards
Evaluation of Competency ✓ Multi-jurisdictional legal req apply.
✓ Any areas of specialty within that expert’s field. Interests and relationships that may be relevant to ✓ not previously used work.
✓ The auditor’s expert’s competence with respect to discuss/Inquire with the AE:- (general ans) ✓ significance in the context of the audit
relevant accounting and auditing requirements. (1) Financial interests. ✓ sensitive or confidential information.
✓ Whether unexpected events, changes in conditions, (2) Business and personal relationships.
indicate to reconsider initial evaluation of (3) Provision of other services by the expert
competence, capabilities and objectivity (4) To obtain a written representation from the
auditor’s external expert about any relationships with
the entity of which that expert is aware.
 Evaluating the Adequacy of Auditor's Expert Specific procedures to evaluate the adequacy of AE Work not adequate for audit Purpose
Work auditor expert’s work for the auditor’s 1. Agree with that expert on further work to be
✓ Findings and Conclusion: Relevance, purposes performed by that expert; or
▪ Inquiries of the auditor’s expert.
reasonableness (consistency) 2. Perform further audit procedures
▪ Reviewing the auditor’s expert’s working
✓ Assumptions and Methods used: Relevance
papers and reports. (Gandi baat) Note- Not adequate, not perform FAP= QO/DO
and Reasonableness (Accurate vs Reasonable)
▪ Corroborative procedures, such as:
✓ Source data used: Relevance, completeness,
(Supportive) (vella panti)
and accuracy.
(1) Observing the auditor’s expert’s work; Different or extensive procedures
(2) Examining published data, such as ▪ The work of the auditor’s expert relates to a
Auditor’s evaluation of those assumptions and statistical reports from reputable, significant matter that involves subjective
methods include whether they are: authoritative sources; and complex judgments.
(1) Generally accepted (3) Confirming relevant matters with third ▪ The auditor has not previously used the work
(2) Consistent with FRF parties; of the auditor’s expert, and has no prior
(3) Dependent on specialised models; and (4) Performing detailed analytical knowledge of that expert’s competence,
(4) Consistent with those of management procedures; and capabilities and objectivity.
(5) Re-performing calculations. ▪ The auditor’s expert is performing
Procedures used to test Source Data ▪ Discussion with another expert with relevant procedures that are integral to the audit,
▪ Verifying the internal control, its expertise when, for example, the findings or rather than being consulted to provide advice
transmission to the expert. conclusions of the auditor’s expert are not on an individual matter.
▪ Reviewing the data for completeness and consistent with other audit evidence. ▪ The expert is an auditor’s external expert and
internal consistency ▪ Discussing the auditor’s expert’s report with is not subject to the firm’s quality control
management. policies and procedures.

Rachit’s Special (Auditor’s Expert ko refer karna hai ki nahi)

Unmodified opinion Not to refer (L&R= Refer) auditor’s responsibility will
Modified opinion Refer = relevant to NOT be reduced.
understanding of user
 SA 700 "FORMING AN OPINION and REPORTING ON F.S."
(W.E.F. 01.04.2018)
Scope of this SA
This SA deals with the following:
 Auditor’s responsibility to form an opinion on the F.S.
 Form and content of auditor’s report issued as a result of an audit of F.S.

Auditor's Objective
 Form an opinion on F.S. based on evaluation of conclusions drawn from audit evidence, and
 Express clearly that opinion through a written report that also describes the basis for opinion.

Meaning of General-Purpose
Purpose Framework
A FRF designed to meet common financial information needs of a wide range of users.
(a) Fair Presentation Framework
 Refers to FRF that requires compliance with requirements of the framework.
 Acknowledges that the following may be necessary for fair presentation of FS:
(1) Management may need to provide disclosures beyond those specifically required by FRF.
(2) Management to depart
epart (in extremely rare situations) from a requirement of framework.
Ex.: FS of a company Prepared under Companies Act, 2013.
(b) Compliance Framework
 Refers to FRF that requires compliance with requirements of the framework;
 But does not contain the acknowledgement as in Fair Presentation Framework.

Forming an Opinion on the F.S.

SA 700 requires that auditor shall form an opinion on whether the F.S. are prepared in all material
respects in accordance with the applicable FRF.
To form this opinion, auditor needs to conclude as to whether he has obtained reasonable assurance
that F.S. as a whole are free of material misstatements, whether due to fraud or error. The conclusion
shall take into account:
 The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit
evidence has been obtained;
 The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are
material, individually or in aggregate; and
 The evaluations mentioned below:
(1) Whether the financial statements are prepared, in all material respects, in accordance with the
requirements of the applicable FRF. This evaluation shall include consideration of the
qualitative aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgments.
(2) Whether, in view of the requirements of the applicable FRF:
 The F.S. adequately disclose the significant accounting policies selected and applied;
 The accounting policies selected and applied are con
consistent
sistent with the applicable FRF and
are appropriate;
 The accounting estimates made by management are reasonable;

1
  The information presented in the F.S. is relevant, reliable, comparable and understandable;
 The F.S. provide adequate disclosures to enable the intended users to understand the effect
of material transactions and events on the information conveyed in the F.S., and
 The terminology used in the F.S., including the title of each F.S., is appropriate.
(3) When the F.S. are prepared in accordance with a ffair air presentation framework, auditor is
required to evaluate whether the F.S. achieve fair presentation by considering the following:
 The overall presentation, structure and content of the F.S.; and
 Whether the F.S., including the related notes, represent tthe he underlying transactions and
events in a manner that achieves fair presentation.
(4) Whether the F.S. adequately refer to or describe the applicable FRF.

Form of Opinion
 The auditor shall express an unmodified opinion when the auditor concludes that the F.S. are
prepared, in all material respects, in accordance with the applicable FRF.
 The auditor shall modify the opinion in the auditor’s report in accordance with SA 705 if the
auditor:
(a) Concludes that, based on the audit evidence obtained, the financial statements as a whole are
not free from material misstatement; or
(b) Is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

Auditor's Report
It shall be in writing (Hard Copy Format using Electronic Medium). This standard covers three
cases:
 Auditor’s Report for audits conducted in accordance with SAS.
 Auditor’s Report Prescribed by Law or Regulation.
 AR for Audits Conducted as per SAs and ISAs.

Auditor's Report
port for audits conducted in Accordance with SAs
It covers the following elements:
(a) Title (Independent Auditor's Report)
AR to have a title clearly stating that it is a report of an independent auditor.
(b) Addressee (To the Shareholders of the Company)
Auditor’s Report shall be addressed, as appropriate, as required by circumstances of the
engagement:
 Applicable Law and Regulation may specify “addressee”.
 AR normally addressed to those for whom AR is prepared shareholders/ TCWG.
(c) Auditor's Opinion
Heading : "Opinion"
Opinion Section of the Auditor’s Report shall also cover the following:
 Identify the entity whose FS have been audited.
 State that Financial Statements have been audited.
 Identify title of each statement that comprises F.S.
 Refer to the notes,s, including the summary of significant accounting policies; and
 Specify date of period covered by each Financial Statement.

2
 Unmodified opinion shall be expressed as:
 In case of Fair presentation framework:
 In our opinion, the accompanying FS present fairly, in all material respects, in accordance
with {Applicable FRF}.
OR
 In our opinion, the accompanying FS give a true and fair view of {{---
---} in accordance with
{Applicable FRF}.
 In case of Compliance Framework:
 In our opinion, the accompanying FS are prepared in all material respects in accordance
with {applicable FRF}.
(d) Basis for Opinion
Heading : "Basis for Opinion"
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
 Statess that the audit was conducted in accordance with SA;
 Refers to the section of the auditor’s report that describes the auditor’s responsibilities under
the SAs;
 Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements. The statement shall refer to the Code
of Ethics issued by ICAI;
 States whether the auditor believes tthathat the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
(e) Going Concern
Where applicable, the auditor shall report in accordance with SA 570.
(f) Key Audit Matters
 For audits of complete sets of general purpose F.S. of listed entities, the auditor shall
communicate key audit matters in the auditor’s report in accordance with SA 701.
 When the auditor is otherwise required by law or regulation or decides to communicate key
audit matters in the auditor’s
ditor’s report, the auditor shall do so in accordance with SA 701.
(g) Other Information
Where applicable, auditor shall report in accordance with SA 720.
(h) Management Responsibility for the Financial Statements
Heading : "Responsibilities of Management for F. F.S."
 The auditor’s report shall use the term that is appropriate in the context of the legal
framework applicable to the entity and need not refer specifically to “management”. In some
entities, the appropriate reference may be to TCWG.
 This section of the auditor’s report shall describe management’s responsibility for:
(1) Preparing the F.S. in accordance with the applicable FRF, and for such internal control
as management determines is necessary to enable the preparation of F.S. that are free
from material misstatement,
sstatement, whether due to fraud or error; and

3
 (2) Assessing the entity’s ability to continue as a going concern and whether the use of the
going concern basis of accounting is appropriate as well as disclosing, if applicable,
matters relating to going concer
concern.
 This section of the auditor’s report shall also identify those responsible for the
oversight of the financial reporting process, when those responsible for such oversight
are different from those who fulfill the above mentioned responsibilities.

(i) Auditor's
r's Responsibility Para
Heading : "Auditor's Responsibility"
 The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for
the Audit of the F.S”.
 This section of the auditor’s report shall:
(1) State that the objectives of the auditor are to:
 Obtain reasonable assurance about whether the F.S. as a whole are free from material
misstatement, whether due to fraud or error; and
 Issue an auditor’s report that includes the auditor’s opinion.
(2) State that reasonable assurance is a h
high
igh level of assurance, but is not a guarantee that an
audit conducted in accordance with SAs will always detect a material misstatement when
it exists; and
(3) State that misstatements can arise from fraud or error, and either:
 Describe that they are conside
considered
red material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on
the basis of these F.S., or
 Provide a definition or description of materiality in accordance with the applicable
FRF.
 The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report shall further:
(1) State that auditor exercises professional judgment and maintains professional skepticism
throughout the audit; and
(2) Describe an audit by stating that the auditor’s responsibilities are:
 To identify and assess the RMM of the F.S., whether due to fraud or error;
 To obtain an understanding of internal control relevant to the audit in order to design
audit procedures.
 To evaluate the appr
appropriateness
opriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
 To conclude on the appropriateness of management’s use of the going concern basis
of accounting.
 To evaluate the overall pres
presentation,
entation, structure and content of the financial statements.
 The Auditor’s Responsibilities for the Audit of the F.S. section of the auditor’s report also
shall:
(1) State that the auditor communicates with TCWG regarding, among other matters, the
planned scopepe and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that the auditor identifies during the audit;

4
 (2) State that the auditor provides TCWG with a statement that the auditor has complied with
relevant
evant ethical requirements regarding independence.
Location of the description of the auditor’s responsibilities for the audit of the financial
statements :
The description of the auditor’s responsibilities for the audit of the financial statements shall
be included:
(1) Within the body of the auditor’s report;
(2) Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix; or
(3) By a specific reference within the auditor’s report to the location of such a
description on a website of an appropriate authority, where law, regulation or the
auditing standards expressly permit the auditor to do so.
(j) Other Reporting Responsibilities
Sub-Heading:
Heading: "Report on Other Legal and Regulatory Requirements "
If the auditor addresses other reporting responsibilities in the auditor’s report on the F.S. that are
in addition to the auditor’s responsibilities under the SAs, these other reporting responsibilities
shall be addressed in a separate secti
section
on in the auditor’s report with a heading titled “Report on
Other Legal and Regulatory Requirements”.
(k) Signature of the Auditor
 Audit report to be signed in auditor’s personal name.
 Where firm appointed as auditor, report signed in personal name and in namname of audit firm.
 Also mention membership number of ICAI.
 Include, wherever applicable, the registration number of the firm, allotted by ICAI.
(l) Place of Signature
Ordinarily the city where audit report is signed.
(m) Date of the Auditor's Report
Not earlier than
an date on which auditor has obtained Sufficient Appropriate Audit Evidence on
which to base auditor’s opinion.
Auditor's Report prescribed by Law or Regulation
Auditor’s Report refers to Standard on Auditing only if Auditor’s Report at minimum includes
each of the following elements:
 A title.
 An addressee, as required by the circumstances of the engagement.
 An Opinion section containing an expression of opinion on the F.S. and a reference to the
applicable FRF used to prepare the financial statements.
 An identification of the entity’s financial statements that have been audited.
 A statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements. The statement shall refer to the Code
of Ethics issued by ICAI.
 Where applicable, a section that addresses, and is not inconsistent with, the reporting
requirements of SA 570.
 Where applicable, a Basiss for Qualified (or Adverse) Opinion section that addresses, and is
not inconsistent with, the reporting requirements of SA 570.

5
  Where applicable, a section that includes the information required by SA 701, or additional
information about the audit that is prescribed by law or regulation and that addresses, and is
not inconsistent with, the reporting requirements in that SA.
 Where applicable, a section that addresses the reporting requirements of SA 720.
 A description of management’s responsibilities for th thee preparation of the F.S. and an
identification of those responsible for the oversight of the financial reporting process that
addresses, and is not inconsistent with, the requirements of this SA.
 A reference to Standards on Auditing and the law or regulatregulation,
ion, and a description of the
auditor’s responsibilities for an audit of the financial statements that addresses, and is not
inconsistent with, the requirements of this SA.
 The auditor’s signature.
 The Place of signature
 The date of the auditor’s report.

AR for Audits conducted as per SAs and ISAs

An auditor may be required to conduct an audit in accordance with the International Standards on
Auditing, in addition to the Standards on Auditing issued by ICAI. If this is the case, the auditor’s
report may refer to Standards on Auditing in addition to the International Standards on Auditing, but
the auditor shall do so only if:
 There is no conflict between the requirements in the International Auditing Standards and those in
SAs that would lead the auditor
auditor:
(a) To form a different opinion, or
(b) Not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the
particular circumstances, is required by SAS; and
 The auditor’s report includes, at a minimum, each of the elements set out in Auditor’
Auditor’s Report
Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording
specified by the Standards on Auditing.
When the auditor’s report refers to both the ISAs and the Standards on Auditing issued by ICAI, the
auditor’s report
rt shall clearly identify the same including the jurisdiction of origin of the other
auditing standards.

Supplementary Information presented with F.S.

 If supplementary information that is not required by the applicable FRF is presented with the
audited F.S., the auditor shall evaluate whether, in the auditor’s professional judgment,
supplementary information is nevertheless an integral part of the F.S. due to its nature or how it is
presented.
 When it is an integral part of the F.S., the supplementary in information
formation shall be covered by the
auditor’s opinion.
 If supplementary information that is not required by the applicable FRF is not considered an
integral part of the audited F.S., the auditor shall evaluate whether such supplementary
information is presented
ted in a way that sufficiently and clearly differentiates it from the audited
financial statements. If this is not the case, then the auditor shall ask management to change how
the unaudited supplementary information is presented. If management refuses to do so, the auditor
shall identify the unaudited supplementary information and explain in the auditor’s report that
such supplementary information has not been audited.

6
 SA 701 "COMMUNICATING KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITOR'S REPORT"(W.E.F. 01.04.2018)
Scope of SA 701
 This SA deals with the auditor’s responsibility to communicate key audit matters in the auditor’s
report.
 Communicating key audit matters in the auditor’s report is not:
(1) A substitute for disclosures in the F.S. that the applicable FRF requires management to make,
or that are otherwise necessary to achieve fair presentation;
(2) A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705;
(3) A substitute for reporting in accordance with SA 570 when a material uncertainty exists
relating to events or conditions that may cas castt significant doubt on an entity’s ability to
continue as a going concern; or
A separate opinion on individual matters.
 SA 701 applies to audits of complete sets of general purpose F.S. of listed entities and
circumstances when the auditor otherwise decidedecidess to communicate key audit matters in the
auditor’s report.
 SA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is required by law or regulation.

Purpose
e of Communicating Key Audit Matters
 To enhance the communicative value of the auditor’s report by providing greater transparency
about the audit that was performed.
 To provide additional information to intended users of the financial statements to assist them in
understanding those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the F.S. of the current period.
 To assist intended users in understanding the entity and areas of significant management judg
judgment
in the audited F.S.
 To provide a basis to further engage with management and TCWG about certain matters relating
to the entity, the audited F.S. or the audit that was performed.

Purpose of Communicating Key Audit Matters

Meaning of Key Audit Matters
Those matters that, in the auditor’s professional judgments were of most significance in the audit of
the F.S. of the current period.
Key audit matters are selected from matters communicated with TCWG.
Examples of Key Audit Matters:
 Assessment of Impairment
 Provision for losses and contingencies
 Valuation of financial instruments
 Matters relating to Revenue recognition
 Taxation matters(multiple tax jurisdictions, uncertain tax position, deferred tax assets)

Requirements of SA 701

7
(a) Determining Key Audit Matters
 The auditor shall determine, from the matters communicated with TCWG, those matters that
required significant auditor attention in performing the audit. In making this determination,
the auditor shall consider the following:
(1) Areas of higher assess
assessed
ed RMM, or significant risks identified in accordance with
SA 315;
(2) Significant auditor judgments relating to areas in the F.S. that involved significant
management judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
(3) The effect on the audit of significant events or transactions that occurred during the
period.
 The auditor shall determine which of the matters so determined above were of most
significance in the audit of the F.S. of the current period and therefore are the key audit
matters.
 In addition to matters that relate to the specific required considerations, there may be other
matters communicated with TCWG that required significant auditor attention and that
therefore may be determined to be key audit matters. Such matters may include, for example,
matters relevant to the audit that was performed that may not be required to be disclosed in
the F.S. For example, the implementation of a new IT system (or significant changes to an
existing IT system) during the period may be an area of significant auditor attention, in
particular if such a change had a significant effect on the auditor’s overall audit strategy or
related to a significant risk (e.g., changes to a system affecting revenue reco
recognition).
(b) Communicating Key Audit Matters
The auditor shall describe each key audit matter, using an appropriate sub sub-heading, in a separate
section of the auditor’s report under the heading “Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state that:
Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period; and
These matters were addressed in the contcontext
ext of the audit of the F.S. as a whole, and in forming
the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these
matters.
(1) Key Audit Matters not a Substitute for Expressing a Modified Opinion
The auditor shall not communi
communicate
cate a matter in the Key Audit Matters section of the
auditor’s report when the auditor would be required to modify the opinion in accordance
with SA 705 as a result of the matter.
(2) Descriptions of Individual Key Audit Matters
The description of each key audit matter in the Key Audit Matters section of the auditor’s
report shall include a reference to the related disclosure(s), if any, in the F.S. and shall
address:
 Why the matter was considered to be one of most significance in the audit and therefore
determined
termined to be a key audit matter; and
 How the matter was addressed in the audit.
(3) Circumstances in which a matter determined to be a Key Audit Matter is not
communicated in the Auditor's Report

8
 The auditor shall describe each key audit matter in the audit
auditor’s
or’s report unless:
 Law or regulation precludes public disclosure about the matter; or
 In extremely rare circumstances, the auditor determines that the matter should not be
communicated in the auditor’s report because the adverse consequences of doing so
would
ould reasonably be expected to outweigh the public interest benefits of such
communication. This shall not apply if the entity has publicly disclosed information about
the matter.
(4) Interaction between descriptions of Key Audit Matters and Other Elements re required
to be included in the Auditor's Report
A matter giving rise to a modified opinion in accordance with SA 705 or a material
uncertainty related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570, are by their nature key
audit matters.
However, in such circumstances, these matters shall not be described in the Key Audit
Matters section of the auditor’s report. Rather, the auditor shall:
 Report on these matter(s) in accordance with the applicable SA(s); and
 Include a reference to the Basis for Qualified (Adverse) Opinion or the Material
Uncertainty Related to Going Concern section(s) in the Key Audit Matters section.
(5) No Key Audit Matter
In case there are no KAM to ccommunicate,
ommunicate, auditors’ report must specifically mention that
by carrying a KAM Paragraph and under which they shall mention that there are no KAM to
communicate.

Relationship between KAM, Auditor’s Opinion and Other Elements

 SA 700 establishes requirements and provides guidance on forming an opinion on F.S.
Communicating KAM is not a substitute for disclosures in F.S. that the applicable FRF requires
management to make, or that are otherwise necessary to achieve fair presentation.
 SA 705, addresses circumstances in which auditor concludes that there is a material misstatement
relating to the appropriateness or adequacy of disclosures in the F.S.
 When auditor expresses a qualified or adverse opinion in accordance with SA 705, presenting
description
ription of a matter giving rise to modified opinion in Basis for Qualified (Adverse) Opinion
section helps to promote intended users’ understanding and to identify such circumstances when
they occur. Separating the communication of this matter from other K KAM
AM described in KAM
section, gives it appropriate prominence in auditor’s report.
 Further, when auditor expresses a qualified or adverse opinion, communicating other KAM would
still be relevant to enhancing intended users’ understanding of the audit, and ttherefore the
requirements to determine KAM apply. However, if an adverse opinion is expressed in
circumstances, auditor may determine that no other matters are KAMs.

9
 SA 705 "MODIFICATION TO THE OPINION IN THE INDEPENDENT
AUDITOR'S REPORT" (W.E.F. 01.04.2
01.04.2018)
018)
Scope of SA 705
This standard deals with the auditor’s responsibilities to issue an appropriate report in circumstances
when in forming the opinion in accordance with SA 700 , the auditor concludes that modification to
the auditor’s opinion is necessary.

Types of Modified Opinion

Auditor’s Judgment about the Pervasiveness of the Effects

Nature of Matter Giving Rise OR
to the Modification Possible Effects on the Financial Statements
Material but Not Pervasive Material and Pervasive

F.S. are materially misstated Qualified opinion Adverse opinion

Inability to obtain SAAE Qualified opinion Disclaimer of opinion

Circumstances when a Modification to the Auditor's Opinion is required

(1) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free
from material misstatement, may be due to following reasons:
 Inappropriate Accounting Policies;
 Inappropriate application of selected Accounting Policies;
 Inappropriate or inadequate disclosures in financial state
statements.
(2) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement, may be due to following
reasons:
 Limitations imposed by management;
 Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire);
 Circumstances related to Nature and Timing of auditor’s work.

Examples of situations in which auditor is unable to obtain sufficient and appropriate

evidences:
(a) Limitations
ions imposed by Management
Management:
 Management prevents the auditor from observing the counting of the physical
inventory.
 Management prevents the auditor from requesting external confirmation of specific
account balances.
(b) Circumstances beyond entity control
control:
 The entity’s accounting records have been destroyed.
 The accounting records of a significant component have been seized indefinitely by
governmental authorities.
(c) Circumstances related to Nature and Timings of Auditor's work
 The entity is required to use the equity method of accounting for an associated entity,

10
 and the auditor is unable to obtain sufficient appropriate audit evidence about the
latter’s financial information to evaluate whether the equity method has been
appropriately
riately applied.
 The timing of the auditor’s appointment is such that the auditor is unable to observe
the counting of the physical inventories.
 The auditor determines that performing substantive procedures alone is not sufficient,
but the entity’s contro
controls are not effective.

Determining the Type of Modification to the Auditor's Opinion

(a) Qualified Opinion
The auditor shall express a qualified opinion when:
 The auditor, having obtained SAAE, concludes that misstatements, individually or in the
aggregate, are material, but not pervasive, to the F.S.; or
 The auditor is unable to obtain SAAE on which to base the opinion, but the auditor
concludes that the possible effects on the F.S. of undetected misstatements, if any, could be
material but not pervasive.
(b) Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained SAAE,
concludes that misstatements, individually or in the aggregate, are both material and pervasive to
the financial statements.
(c) Disclaimer of Opinion
 The auditor shall disclaim an opinion when the auditor is unable to obtain SAAE on which
to base the opinion, and the auditor concludes that the possible effects on the F.S. of
undetected misstatements, if any, could be both material and pervasive.
 The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained SAAE
regarding each of the individual uncertainties, it is not possible to form an opi
opinion on the
F.S. due to the potential interaction of the uncertainties and their possible cumulative effect
on the F.S.

Other Considerations relating to an Adverse Opinion or Disclaimer of Opinion

When the auditor considers it necessary to express an ad adverse
verse opinion or disclaim an opinion on the
F.S. as a whole, the auditor’s report shall not also include an unmodified opinion with respect to the
same FRF on a single F.S. or one or more specific elements, accounts or items of a F.S., as it would
contradict
ct the auditor’s adverse opinion or disclaimer of opinion on the F.S. as a whole.
Examples of reporting circumstances that would not contradict the auditor’s adverse opinion
or disclaimer of opinion:
 The expression of an unmodified opinion on F.S. prepared under a given FRF and, within the
same report, the expression of an adverse opinion on the same financial statements under a
different FRF.
 The expression of a disclaimer of opinion regarding the results of operations, and cash flows,
where relevant,
nt, and an unmodified opinion regarding the financial position. In this case, the
auditor has not expressed a disclaimer of opinion on the financial statements as a whole.

11
Limitation after the Auditor has Accepted the Engagement
 If, after accepting the engagement, auditor becomes aware that management has limitation on
scope of audit that he considers likely to result in need to express a qualified opinion or to
disclaim an opinion, he shall request management to remove limitation.
 If management refuses to remove limitation, auditor shall communicate the TCWG and determine
whether it is possible to perform alternative procedures to obtain SAAE.
 If auditor is unable to obtain SAAE, he shall determine the implications as follows:
(1) If auditor concludes that possible effects on the F.S. of undetected misstatements, if any,
could be material but not pervasive, the auditor shall qualify the opinion; or
(2) If auditor concludes that possible effects on the F.S. of undetected misstatements, if any,
could be both material and pervasive so that a qualification of the opinion would be
inadequate to communicate the gravity of the situation, the auditor shall:
 Withdraw from the audit, where practicable and possible; or
 If withdrawal from the audit before issuing the au auditor’s
ditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.
 If auditor withdraws, before withdrawing, auditor shall communicate to TCWG any matters
regarding misstatements identified during audit that would have given ri rise
se to a modification of the
opinion.

Circumstances where Auditors’ withdrawal is not permitted

As per the directives contained in SEBI Circular, if the auditor proposes to resign:
 Within 45 days from end of any quarter of a period covered under the appo appointment, then auditor
shall, before such resignation, issue audit/limited review report for such quarter.
 After 45 days from the end of any quarter of a period covered under the appointment, then auditor
shall, before such resignation, issue audit/Limited review report for such quarter as well as the
next quarter.

Form and Content of the Auditor's Report when the Opinion is Modified
When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion”,
“Adverse Opinion”, or “Disclaimer of Opinion” as appropriate, for the Opinion section.
(a) Qualified Opinion:
 When the auditor expresses a qualified opinion due to a material misstatement in the F.S.,
auditor shall state that, in the auditor’s opinion, except for the effects of tthe matter(s)
described in the Basis for Qualified Opinion section:
(1) When reporting in accordance with a fair presentation framework – the accompanying
F.S. present fairly, in all material respects (or give a true and fair view of) […] in
accordance with [the applicable FRF],
OR
(2) When reporting in accordance with a compliance framework – the accompanying F.S.
have been prepared, in all material respects, in accordance with [the applicable
FRF].
 When the modification arises from an inability to obtain SAAE, the auditor shall use the
corresponding phrase “except for the possible effects of the matter(s)…” for the modified
opinion.

12
(b) Adverse Opinion
When the auditor expresses an adverse opinion, the aauditor
uditor shall state that, in the auditor’s
opinion, because of the significance of the matter(s) described in the Basis for Adverse
Opinion section:
(1) When reporting in accordance with a fair presentation framework – the accompanying F.S.
do not present fairly
ly (or give a true and fair view of) […] in accordance with [the
applicable FRF];
OR
(2) When reporting in accordance with a compliance framework, the accompanying F.S. have
not been prepared, in all material respects, in accordance with [the applicable FRF]
FRF].

(c) Disclaimer of Opinion

When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit
evidence, the auditor shall:
 State that the auditor does not express an opinion on the accompanying F.S.;
 State that, because of the sigsignificance
nificance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain SAAE to
provide a basis for an audit opinion on the financial statements
statements;; and
 Amend the statement in the Opinion Section, which ind indicates
icates that the financial statements
have been audited, to state that the auditor was engaged to audit the financial
statements.

(d) Basis for Opinion

When the auditor modifies the opinion on the F.S., the auditor shall, in addition to the specific
elements required
equired by SA 700:
 Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion”, “Basis for Adverse
Opinion” or “Basis for Disclaimer of Opinion” as appropriate; and
 Within this section, include a description of the matter giving rise to the modification.

Cause of Modification Description in Basis of Opinion Para

Material Misstatement of F.S. Auditor shall include in the Basis for Opinion section:
relating to Specific amounts in  Description and quantification of the financial effects of
FS. the misstatement, unless impracticable.
 If it is impracticable to quantify the financial effects,
state so.
Material misstatement of F.S. The auditor shall include in the Basis for Opinion section
relating Narrative Disclosures an explanation of how the disclosures are misstated.
Material Misstatement of F.S. The auditor shall:
disclosure of  Discuss the non-disclosure
relating to Non-disclosure disclosure with TCWG;
information required to  Describe in the Basis for Opinion section the nature of
disclosed the omitted information; and
 Unless prohibited by law or regulation, include the
omitted disclosures, provided it is practicable to do so
and the auditor has obtained SAAE about the omitted
information.

13
 Inability to obtain SAAE The auditor shall include in the Basis for Opinion section
the reasons for that inability.
 When the auditor expresses a qualified or adverse opinion, the auditor shall amend the
statement about whether the audit evidence obtained is sufficient and appropriate to provide a
basis for the auditor’s opinion to include the word “qualified” or “adverse”, as appropriate.
 When the auditor disclaims an opinion on the F.S., the auditor’s report shall not include the
following elements in the report:
(1) Reference to the section of the auditor’s report where th
thee auditor’s responsibilities are
described; and
(2) A statement about whether the audit evidence obtained is sufficient and appropriate to
provide a basis for the auditor’s opinion.
 If the auditor has expressed an adverse opinion or disclaimed an opinion on tthe F.S., the
auditor shall describe in the Basis for Opinion section the reasons for any other matters of
which the auditor is aware that would have required a modification to the opinion, and the
effects thereof.

(e) Description of Auditor's Responsibility in case of Disclaimer

When the auditor disclaims an opinion on the F.S. due to an inability to obtain SAAE, the
auditor shall amend the description of the auditor’s responsibilities to include only the
following:
 A statement that the auditor’s responsibili
responsibility
ty is to conduct an audit of the entity’s F.S. in
accordance with SAs and to issue an auditor’s report;
 A statement that however, because of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor was not able to obtain SAAE to provide a basis for an audit
opinion on the F.S.; and
 The statement about auditor independence and other ethical responsibilities as required under
SA 700.

(f) Considerations when the Auditor Disclaims an Opinion on the F.S.

Unless required by law or regulati
regulation,
on, when the auditor disclaims an the opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance with
SA 701 or an Other Information section in accordance with SA 720.
Communication with TCWG TCWG:
When the auditor expects to modify the opinion in the auditor’s report, the auditor shall
communicate with TCWG the circumstances that led to the expected modification and the
wording of the modification.

14
 SA 706 "EMPHASIS OF MATTER PARAGRAPHS and OTHER
MATTERS PARAGRAPHS IN THE INDEPENDENT AUDITOR'S
REPORT"(W.E.F. 01.04.2018)
Scope of this SA
This Standard deal with additional communication in the Auditor’s Report when auditor considers
necessary to draw users’ attention to:
 Matter/s presented or disclosed in FS are of such importance that they are fundamental to users’
understanding of FS.
OR
 Matter/s other than those presented/ disclosed in FS that are relevant to users’ understanding of
audit/ auditor’s responsibilities/ AR.

Meaning of EOM and Other Paragraph

(a) Emphasis of Matter Paragraph(EMP)
A Para included in Auditor’s Report that
 Refers to a matter appropriately presented/disclosed in F.S. that,
 In the auditor’s judgment, is of such importance that it is fundamental to users’ understanding
of F.S.
(b) Other Matter Paragraph(OMP)
A Para included in Auditor’s Report that
 Refers to matter other than those presented/dis
presented/disclosed in F.S. that
 In auditor’s judgment, is relevant to users’ understanding of audit, auditor’s responsibilities
or auditor’s report.

Requirements w.r.t. EOM Paragraph

(1) Auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided:
 The auditor would not be required to modify the opinion in accordance with SA 705 as a result
of the matter; and
 When SA 701 applies, the matter has not been determine
determinedd to be a key audit matter to be
communicated in the auditor’s report.
(2) When the auditor includes an EOM paragraph in the auditor’s report, the auditor shall:
 Include the paragraph within a separate section of the auditor’s report with an appropriate
heading
ing that includes the term “Emphasis of Matter”;
 Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements. The
paragraph shall refer only to information presented or disclosed in the financial statements;
and
 Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
(a) Requirements in other SAs requiring EOM Para
 When a FRF prescribed by law or regulation wo would
uld be unacceptable but for the fact that
it is prescribed by law or regulation. (SA 210)

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  To alert users that the financial statements are prepared in accordance with a special
purpose framework. (SA 800)
When facts become known to the auditor after the da date
te of the auditor’s report and the
auditor provides a new or amended auditor’s report (i.e., subsequent events). (SA 560)
(b) Circumstances when EOM Para can be included in Auditor's Report
 An uncertainty relating to the future outcome of an exceptional litigation or regulatory
action.
 A significant subsequent event that occurs between the date of the financial statements
and the date of the auditor’s report.
 Early application (where permitted) of a new accounting standard that has a pervasive
effect on the
he financial statements in advance of its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.

Requirements w.r.t. other Matter Paragraphs in Auditor's Report

 If the auditor considers it necessary to communicate a matter other than those that are presented
or disclosed in the F.S. that, in the auditor’s judgment, is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s re
report,
port, the auditor shall include an Other
Matter paragraph in the auditor’s report, provided:
(1) This is not prohibited by law or regulation; and
(2) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the audito
auditor’s report.
 When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall
include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.

Communication to TCWG:
If the auditor expects to include an EOM or an Other Matter paragraph in the auditor’s report, the
auditor shall communicate with TCWG regarding this expectation and the proposed wording of
this paragraph.

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 SA 710 "COMPARATIVE INFORMATION - CORRESPONDING
FIGURES and COMPARATIVE FINANCIAL STATEMENTS"
Scope of SA 710
 Auditor’s responsibilities relating to comparative information in audit of F.S.
 When prior period FS are audited by another auditor/ unaudited: Also apply Revised SA 510 to
audit of opening balances.
 Nature of Comparative Info: Depends upon applicable FRF.
 Two approaches:
(1) Corresponding figures.
(2) Comparative FS.

Definition of Important Terms

(a) Comparative Information
The amounts and disclosures included in the F.S.
 In respect of one or more prior periods
 In accordance with the applicable FRF.
(b) Corresponding Figures
Comparative information where amounts and other disclosures for the prior period,
 Are included as an integral part of current period F.S.
F.S., and
 Are intended to be read only in relation to the amounts and other disclosures relating to the
current period.
(c) Comparative F.S.
Comparative information where amounts and other disclosures for the prior period,
 Are included for comparison with the F.S. of the current period
 but, if audited,
d, are referred to in the auditor’s opinion.

Audit Reporting Differences between two Approaches

 Corresponding Figures: Auditor’s Opinion on F.S. refers to current period only.
 Comparative F.S.: Auditor’s Opinion refers to each period for which F.S. are presented.

Objectives of Auditor
 To obtain SAAE about whether the comparative information included in the F.S. has been
presented, in all material respects, in accordance with the requirements for comparative
information in the applicable
cable FRF; and
 To report in accordance with the auditor’s reporting responsibilities.

Audit Procedures
(a) Perform Specific Audit Procedures
For determining that F.S. contains appropriately classified comparative audit information, auditor
should:
 Ensure that comparative information agrees with the amount and other disclosure presented in
the prior period.
 The accounting policies applied are consistent with those applied in current period.

3
  If there have been any changes in the application of accounting pol
policies
icies than they are properly
disclosed and presented.
(b) Evaluating the impact on F.S.
If the auditor becomes aware of a possible material misstatement in the comparative information,
then:
 He shall perform such additional audit procedures to obtain sufficiesufficient appropriate audit
evidence.
 If the auditor had audited the prior period’s financial statements, the auditor shall also follow
the relevant requirements of SA 560.
(c) Written Representation
As required by SA 580, auditor should also request written repres
representation.
entation. He should also obtain
a specific WR regarding any prior period item that disclosed in current year’s financial statement.

Audit Reporting - Corresponding Figures

 Auditor’s opinion shall not refer to corresponding figures except in following cases:
(1) If auditor’s report of the previous period contains modified opinion.
(2) If auditor is of the opinion, and he has sufficient evidence in this regard, that a material
misstatement
tement exists in the F.S. of prior period, which was not addressed earlier.
 If prior period F.S. are not audited, auditor should obtain sufficient audit evidence that the
opening balance does not contain any material misstatement.

Audit Reporting – Comparative

rative F.S.
 Auditor’s opinion shall refer to each period for which F.S. are presented.
 When reporting on current period’s audit, if auditor’s opinion on such prior period F.S. differs
from opinion previously issued on such F.S., auditor shall disclose the substantive reason for the
different opinion in Other Matter paragraph in his report.
 If auditor concludes that a material misstatement is present in the previously audited figures of
F.S., he should report it to appropriate level of management and re request
quest that the predecessor
auditor be informed.

Common Reporting Requirements

(a) Prior Period F.S. Audited by Another Auditor
Audit report to also contain Other Matter para, stating that:
 FS of prior period were audited by predecessor auditor.
 Type of opinion expressed by him (reasons for modifications, if any).
 Date of that report.
(b) Prior Period F.S. are Unaudited
 If prior period F.S. were not audited, auditor shall report the same in other matter paragraph
that comparative information are unaudited.
 However,
owever, disclosure does not relieve him from his responsibility of obtaining SAAE that
opening balances do not contain misstatements that materially affect the current period's
financial statements.

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 SA 720 "THE AUDITOR'S RESPONSIBILITIES RELATING TO
OTHER
ER INFORMATION" (W.E.F. 01.04.2018)
Scope of SA 720
 SA 720 deals with the auditor’s responsibilities relating to other information, whether financial or
non-financial
financial information included in an entity’s annual report.
 Auditor’s opinion on the F.S. does not cover the other information, nor does this SA require the
auditor to obtain audit evidence beyond that required to form an opinion on the F.S.
 The auditor's responsibilities under this SA do not constitute an assurance engagement on other
information or impose an obligation on the auditor to obtain assurance about the other
information.

Objectives
The objectives of the auditor, having read the other information, are:
 To consider whether there is a material inconsistency between the other informatio
information and the F.S.;
 To consider whether there is a material inconsistency between the other information and the
auditor’s knowledge obtained in the audit;
 To respond appropriately when the auditor identifies that such material inconsistencies appear to
exist, or when the auditor otherwise becomes aware that other information appears to be
materially misstated; and
 To report in accordance with this SA.

Definitions
(a) Annual Report
 A document, or combination of documents, prepared typically on an annual basis by
management or TCWG in accordance with law, regulation or custom, the purpose of which is
to provide owners with information on the entity’s operations and the entity’s financial results
and financial position as set out in the F.S.
 An annual report containss or accompanies the F.S. and the auditor’s report thereon and usually
includes information about the entity’s developments, its future outlook and risks and
uncertainties, a statement by the entity’s governing body, and reports covering governance
matters.
(b) Other Information
Financial or non-financial
financial information (other than F.S. and the auditor’s report thereon) included
in an entity’s annual report.

Requirements of this SA
(a) Obtaining Other Information
The auditor shall:
 Determine, through discussion with management, which documents comprises the annual
report, and the entity’s planned manner and timing of the issuance of such documents;
 Make appropriate arrangements with management to obtain in a timely manner and, if
possible, prior to the date of th
thee auditor's report, the final version of the documents comprising
the annual report; and
 When some or all of the documents determined above will not be available until after the date
of the auditor’s report, request management to provide a written represenrepresentation that the final

5
 version of the documents will be provided to the auditor when available, and prior to its
issuance by the entity, such that the auditor can complete the procedures required by this SA.
(b) Reading and Considering the Other Information
The auditor shall read the other information and, in doing so shall:
 Consider whether there is a material inconsistency between the other information and the
financial statements. As the basis for this consideration, the auditor shall, to evaluate their
consistency,
nsistency, compare selected amounts or other items in the other information (that are
intended to be the same as, to summarize, or to provide greater detail about, the amounts or
other items in the financial statements) with such amounts or other items in the financial
statements; and
 Consider whether there is a material inconsistency between the other information and the
auditor’s knowledge obtained the audit, in the co of audit evidence obtained and conclusions
reached in the audit.
While reading the otherr information, the auditor shall remain alert for indications that the other
information not related to the financial statements or the auditor’s knowledge obtained in the
audit appears to be materially misstated.
Other Information to be compared
Other information
formation may include amounts or other items that are intended to be the same as, to
summarize, or to provide greater detail about, the amounts or other items in the financial
statements.
Examples of such amounts or other items may include:
 Tables, charts or graphs containing extracts of the financial statements.
 A disclosure providing greater detail about a balance or account shown in the financial
statements, such as “Revenue for 20X1 comprised XXX million from product X and
YYY million from product Y Y.”
 Descriptions of the financial results, such as “Total research and development expense
was XXX in 20X1.”

Auditor's Responses
(a) When a Material Inconsistency Appears to Exist or Other Information Appears to Be
Materially Misstated:
If the auditor identifies that a material inconsistency appears to exist (or becomes aware that the
other information appears to be materially misstated), the auditor shall discuss the matter with
management and, if necessary, perform other procedures to conclude whether
whether:
CA
A material misstatement of the other information exists;
 A material misstatement of the financial statements exists; or
 The auditor’s understanding of the entity and its environment needs to be updated.
(b) When the Auditor Concludes that a Material Misstatement of the Other Information
Exists:
 If the auditor concludes that a material misstatement of the other information exists, the
auditor shall request management to correct the other information. If management:
(1) Agrees to make the correction, the auauditor
ditor shall determine that the correction has been
made; or
(2) Refuses to make the correction, the auditor shall communicate the matter with TCWG
and request that the correction be made.

6
  If the auditor concludes that a material misstatement exists in other information obtained
prior to the date of the auditor’s report, and the other information is not corrected after
communicating with TCWG, the auditor shall take appropriate action, including:
(1) Considering the implications for the auditor’s report and commun
communicating with TCWG
about how the auditor plans to address the material misstatement in the auditor’s report;
(2) Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
 If the auditor concludes that a material misstate
misstatement
ment exists in other information obtained after
the date of the auditor’s report, the auditor shall:
(1) If the other information is corrected, perform the procedures necessary in the
circumstances; or
(2) If the other information is not corrected after communicat
communicating ing with TCWG, take
appropriate action considering the auditor’s legal rights and obligations, to seek to have
the uncorrected material misstatement appropriately brought to the attention of users for
whom the auditor's report Is prepared.
(c) When a Material Misstatement in the Financial Statements Exists or the Auditor’s
Understanding of the Entity and its Environment needs to be updated
If, as a result of performing the procedures, the auditor concludes that a material misstatement in
the F.S. exists or the auditor’s understanding of the entity and its environment needs to be
updated, the auditor shall respond appropriately in accordance with the other SAs.

Reporting
(a) The auditor’s report shall include a separate section with a heading “Other Information”, or other
appropriate heading, when, at the date of the auditor’s report:
 For an audit of financial statements of a listed entity, the auditor has obtained, or expects to
obtain, the other information; or
 For an audit of financial statements of an unlisted corporate entity, the auditor has obtained
some or all of the other information.
(b) When the auditor’s report is required to include an Other Information section, it shall include:
 A statement that management is responsible for the other information;
 An identification of:
(1) Other information, if any, obtained by the auditor prior to the date of the auditor’s report;
and
(2) For an audit of financial statements of a listed entity, other information, if any, expected
to be obtained after the date of the auditor’s report;
 A statement that the auditor’s opinion does not cover the other information and, accordingly,
that the auditor does not express (or will not express) an audit opinion or any form of
assurance conclusion thereon;
 A description of the auditor’s respo
responsibilities
nsibilities relating to reading, considering and reporting
on other information as required by this SA; and
 When other information has been obtained prior to the date of the auditor’s report, either:
(1) A statement that the auditor has nothing to report; or
(2) Iff the auditor has concluded that there is an uncorrected material misstatement of the
other information, a statement that describes the uncorrected material misstatement of
the other information.

7
(c) When the auditor expresses a qualified or adverse opinion iin
n accordance with SA 705, the auditor
shall consider the implications of the matter giving rise to the modification of opinion for the
statement required in above para.

Reporting Prescribed by Law or Regulation

If the auditor is required by a relevant law or regulation to refer to the other information in the
auditor’s report using a specific layout or wording, the auditor’s report shall refer to Standards on
Auditing only if the auditor’s report includes, at a minimum:
 Identification of the other infor
information
mation obtained by the auditor prior to the date of the auditor’s
report;
 A description of the auditor’s responsibilities with respect to the other information; and
 An explicit statement addressing the outcome of the auditor’s work for this purpose.

Documentation
In addressing the requirements of SA 230 as it applies to this SA, the auditor shall include in the
audit documentation:
 Documentation of the procedures performed under this SA; and
 The final version of the other information on which the auditor has performed the work required
under this SA.

Examples of Amounts or Other Items that may be included in the "Other Information"
(a) Amounts
 Items in a summary of key financial results, such as net income, earnings per share,
dividends, sales and other operating revenues, and purchases and operating expenses.
 Selected operating data, such income from continuing operations by major operating area,
or sales by geographical segment or product line.
 Special items, such as asset dispositions, litigation provi
provisions,
sions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganization
expenses.
 Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capit
capital
al lease and minority interest obligations.
 Capital expenditures by segment or division.
 Amounts involved in, and related financial effects of, off
off-balance
balance sheet arrangements.
(b) Other Items
 Explanations of critical accounting estimates and related assumptio
assumptions.
 Identification of related parties and descriptions of transactions with them.
 Descriptions of the nature of off
off-balance sheet arrangements.
 Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cas
cases.
 Descriptions of changes in legal or regulatory requirements, such as new tax or
environmental regulations.
 General descriptions of the business environment and outlook.
 Descriptions of trends in market prices of key commodities or raw materials.
 Contrasts of supply, demand and regulatory circumstances between geographic regions.

8
 7. “Reporting” (Co’s Act wali baatein)
Duties of Auditors (Sec. 143)
Inquire into Propriety Matters - Sec. 143(1)
Auditor is required to inquire into the following matters, namely:
(a) Whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are prejudicial to the interests of
the company or its members;
(b) Whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) Where the company not being an investment company or a banking company, whether so much
of the assets of the company as consist of shares, debentures and other securities have been sold
at a price less than that at which they were purchased by the company;
(d) Whether loans and advances made by the company have been shown as deposits;
(e) Whether personal expenses have been charged to revenue account; and
(f) Where it is stated in the books and documents of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the account books and the balance
sheet is correct, regular and not misleading.
Note: In the opinion of Research Committee of the ICAI, reporting in these matters is
required only if the auditor finds answer to any of these matters in adverse.
Duty to Sign Audit Report - Sec. 145
▪ Person appointed as an auditor of the company shall sign the auditor's report or sign or certify
any other document of the company in accordance with provisions of Sec. 141(2).
▪ Qualifications, observations or comments on financial transactions or matters, which have any
adverse effect on the functioning of the company mentioned in the auditor's report shall be read
before the company in general meeting and shall be open to inspection by any member of the
company.
Duty to comply with Auditing Standards - Sec. 143(9) & 143(10)
▪ Every auditor shall comply with the auditing standards.
▪ C.G. may prescribe the standards of auditing or any addendum thereto, as recommended by the
ICAI in consultation with and after examination of the recommendations made by the National
Financial Reporting Authority (NFRA).
▪ Till Notifications of auditing standards by CG, any standard or standards of auditing specified
by the ICAI shall be deemed to be the auditing standards.
Reporting on other Matters - Sec. 143(3)
The auditor's report shall also state:
(a) whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit, and if not, the details thereof
and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books, and proper returns adequate for
the purposes of his audit have been received from branches not visited by him:

1
(c) whether report on the accounts of any branch office of the company audited u/s 143(8) by a
person other than the company's auditor has been sent to him and the manner in which he has
dealt with it in preparing his report;
(d) whether the company's balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;
(f) the observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub- section (2) of
section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts, and
other matters connected therewith;
(i) whether the company has adequate internal financial controls with reference to financial
statements in place, and the operating effectiveness of such controls;
Clause (1) shall not apply to a private company:
(i) Which is a one-person company or a small company; or
(ii) Which has turnover less than 50 crores as per latest audited F.S. and which has
aggregate borrowings from banks or financial institutions or anybody corporate at any
point of time during the financial year less than 25 Cr.
(j) Such other matters as may be prescribed. (Rule 11)
Other Matters Prescribed under Rule 11
The auditor's report shall also include auditor's views and comments on the following matters,
namely:
(a) Whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement;
(b) Whether the company has made provision, as required under any law or ASs, for material
foreseeable losses, if any, on long-term contracts including derivative contracts;
(c) Whether there has been any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company.
(d) Omitted
(e) Points:
▪ Whether management has represented that, to best of its knowledge and belief, other than as
disclosed in notes to the accounts, no funds have been advanced or loaned or invested by the
company to or in any other person(s) or entity(ies), including foreign entities
("Intermediaries"), with the understanding, whether recorded in writing or otherwise, that
the Intermediary shall, whether, directly or indirectly lend or invest in other persons or
entities identified in any manner whatsoever by or on behalf of the company ("Ultimate
Beneficiaries") or provide any guarantee, security or the like on behalf of the Ultimate
Beneficiaries;
▪ Whether management has represented, that, to the best of its knowledge and belief, other
than as disclosed in notes to accounts, no funds have been received by company from any
person(s) or entity(ies), including foreign entities ("Funding Parties"), with the
understanding, that company shall, whether, directly or indirectly, lend or invest in other
persons or entities identified in any manner whatsoever by or on behalf of Funding Party
("Ultimate Beneficiaries") or provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries; and

2
 ▪ Based on audit procedures that auditor has considered reasonable & appropriate, nothing has
come to the notice that has caused them to believe that representations under sub-clauses
(i) and (ii) contain any material mis-statement.
(f) Whether the dividend declared or paid during the year by the company is in compliance with
section 123 of the Companies Act, 2013.
(g) Points:
▪ Whether the company has used such accounting software for maintaining its books of
account which has a feature of recording audit trail (edit log) facility and the same has been
operated throughout the year for all transactions recorded in the
▪ the same has been operated throughout the year for all transactions recorded in the software
and
▪ audit trail feature has not been tampered with and
▪ The audit trail has been preserved by the company as per the statutory requirements for
record retention.
Reporting requirements as to managerial remuneration u/s 197(16)
The auditor of the company shall in his report u/s 143, make a statement as to
▪ Whether the remuneration paid by the company to its directors is in accordance with the
provisions of the Sec. 197,
▪ Whether remuneration paid to any director is in excess of the limit laid down u/s 197 and
▪ Give such other details as may be prescribed.
Note: This matter is to be covered in the auditor's report under the Section "report on Other
Legal and Regulatory Requirements".
Reasons for reservations - Sec. 143(4)
Where any of the matters required to be included in the audit report u/s 143 is answered in the
negative or with a qualification, the report shall state the reasons therefor.
Compliance with Auditing Standards – Sec.143(9) & 143(13)
▪ Every auditor shall comply with the auditing standards.
▪ C.G. may prescribe the standards of auditing or any addendum thereto, as recommended by the
ICAI in consultation with and after examination of the recommendations made by the National
Financial Reporting Authority (NFRA).
▪ Till Notifications of auditing standards by CG, any standard or standards of auditing specified by
the ICAI shall be deemed to be the auditing standards.
Reporting of Fraud – Sec.143(12) & 143(13)
A. Reporting to Central Government
▪ If an auditor of a company in the course of the performance of his duties as auditor, has reason to
believe that an offence of fraud involving such amount or amounts as may be prescribed, is being
or has been committed, in the company by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in such manner as may be prescribed
(Rule 13 of CAAR, 2014).
▪ Amount prescribed for this purpose under Rule 13 is 1 Cr. crore or above.
▪ Manner of Reporting (Rule 13):
(a) Auditor shall report the matter to Board or Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;

3
 (b) On receipt of such reply or observations, auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply
or observations of the Board or the Audit Committee) to the C.G. within 15 days from the
date of receipt of such reply or observations;
(c) In case auditor fails to get any reply or observations from Board or Audit Committee within
the stipulated period of 45 days, he shall forward his report to the CG along with a note
containing the details of his report that was earlier forwarded to the Board or the Audit
Committee for which he has not received any reply or observations;
(d) Report shall be sent to the Secretary, MCA in a sealed cover by Registered Post with
Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;
(e) Report shall be on the letter-head of the auditor containing postal address, e-mail address
and contact telephone number or mobile number and be signed by the auditor with his seal
and shall indicate his Membership Number; and
(f) Report shall be in the form of a statement as specified in Form ADT-4.
B. Reporting to the Audit Committee or Board
▪ In case of a fraud involving lesser than specified amount, auditor shall report the matter to the
audit committee constituted u/s 177 or to the Board in other cases within such time and in such
manner as may be prescribed.
▪ Manner of Reporting (Rule 13):
In case of a fraud involving amount less than 1Cr, the auditor shall report the matter to Audit
Coated constituted u/s 177 or to the Board immediately but not later than 2 days of his
knowledge of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
▪ Disclosures in Board's Report (Rule 13):
Following details of each of the fraud reported to Audit Committee or Board shall be disclosed in
the Board's Report:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
C. Applicability of Sec. 143-Sec. 143(14)
Provision regarding reporting of fraud shall also apply, mutatis mutandis, to a Cost Auditor and a
Secretarial Auditor during the performance of his duties u/s 148 and 204 respectively.
D. Penalty for Non-Compliance - Sec. 143(15)
If any auditor, cost accountant or company secretary in practice does not comply with the provisions
of Sec. 143(12), he shall be liable to a penalty of
▪ 5 lakh in case of a listed company and
▪ 1 lakh in case of any other company.
E. Definition of Fraud - SA 240 and Sec. 447 of Companies Act, 2013
▪ Definition of fraud as per SA 240 and explanation of fraud as per Sec. 447 of the Companies
Act, 2013 are similar, except that u/s 447, fraud includes 'acts with an intent to injure the
interests of the company or its shareholders or its creditors or any other person, whether or not
there is any wrongful gain or wrongful loss.'

4
▪ Auditor may not be able to detect acts that have intent to injure the interests of the company or
cause wrongful gain or wrongful loss, unless the financial effects of such acts are reflected in the
books of account/financial statements of the company.
▪ Examples:
(i) An auditor may not be able to detect if an employee is receiving pay-offs for favoring a
specific vendor, which is a fraudulent act, since such pay-offs would not be recorded in the
books of account of the company;
(ii) If password of a KMP is stolen & misused to access confidential/restricted information, the
effect of the same may not be determinable by the management or by the auditor.
▪ Auditor shall consider requirements of SAs, insofar as it relates to risk of fraud, including the
definition of fraud as stated in SA 240, in planning and performing his audit procedures in an
audit of F.S. to address the RMM due to fraud.
Reporting on Other Matters specified by CG - Sec. 143(11)
CG may, in consultation with NFRA, by general or special order, direct, in respect of such class or
description of companies, as may be specified in the order, that the auditor's report shall also include
a statement on such matters as may be specified therein.
For this purpose, C.G. notifies CARO, 2020.

5
 SA 800 “Special Considerations” to an Audit of F.S. Prepared in
accordance with Special Purpose Framework (SPF)

Scope of SA
GPFRF SPFRF
FRF
FPF CF
▪
▪ This SA is written in the context of complete set of F.S. prepared in accordance with a SPF.
▪ It does not override the requirements of the other Sas (only few additional requirements)
▪ It may not deal with all special considerations relevant in the circumstances of the
engagement.

Special Purpose Framework

▪ It is an FRF, which may be a FPF or CF
▪ designed to meet the financial information needs of specific users. (GPFRF= Wide range of
user)
Examples of special purpose frameworks
▪ Creditors:- Cash receipts and disbursements basis of accounting for cash flow information that
an entity may be requested
▪ Regulator:- Financial reporting provisions to meet the requirements their requirements; or
▪ Contractor:- Financial reporting provisions of a contract, such as a loan agreement or a project
grant.

Requirements of SA 800

Considerations Before accepting the engagement

▪ Before accepting the engagement auditor is required to determine the acceptability of FRF (as
per the requirement of SA 210). In an audit of special purpose F.S., the auditor shall obtain an
understanding of:
(1) Intended user’s financial information needs; (KEY FACTOR)
(2) Purpose for which the F.S. are prepared;
(3) Steps taken by management to determine acceptability of FRF. (only when mgt has
choice of framework)
▪ In the case of Special Purpose F.S., the financial information needs of the intended users is a
key factor in determining the acceptability of the FRF applied in the preparation of the F.S.
▪ FRF Presume it to be Acceptable-
1.) If applicable FRF contains financial reporting standards established by an organization
that is authorized to formulate standards for special purpose F.S. (SSB)
2.) Some laws or regulations may prescribe the FRFs to be used by management in the
preparation of special purpose P.S. for a certain type of entity (Regulator)
▪ Where the financial reporting standards as referred above are supplemented by regulatory
requirements, SA 210 requires the auditor to determine whether any conflicts between the
financial reporting standards (provided by SSB) and the additional requirements (provided by
regulators) exist, and prescribes actions to be taken by the auditor if such conflicts exist.
 ▪ Applicable FRF may provide the financial reporting provisions of a contract. In that case, the
acceptability of the FRF in the circumstances of the engagement is determined by considering
whether the framework exhibits attributes normally exhibited by acceptable FRFS as described
in SA 210. (is a matter of professional judgment)

Considerations when Planning and Performing an Audit

▪ In planning and performing an audit of special purpose F.S., auditor shall determine whether
application of the SAs requires special consideration in the circumstances of the engagement.
For example, in SA 320, judgments about matters that are material to users of the F.S. are based
on a consideration of the common financial information needs of users as a group. In the case
of an audit of special purpose F.S., however, those judgments are based on a consideration of
the financial information needs of the intended users.
▪ While determining the application of SA, auditor is required to consider the requirement of SA
200 on applicability of SAs. SA 200 requires the auditor to comply with
(1) Relevant ethical requirements, and
(2) All SAs relevant to the audit.
▪ Auditor is required to comply with each requirement of an SA unless entire SA is not relevant
or the requirement is not relevant because it is conditional and the condition does not exist.
▪ In the case of special purpose F.S., such as those prepared in accordance with the requirements
of a contract, management may agree with the intended users on a threshold below which
misstatements identified during the audit will not be corrected or otherwise adjusted. Existence
of such a threshold does not relieve the auditor from the requirement to determine materiality in
accordance with SA 320 for purposes of planning and performing the audit of the special
purpose F.S.
▪ In the case of special purpose F.S., persons responsible for the oversight of its preparation may
not be the same as TCWG responsible for the oversight of the preparation of general purpose
F.S. In such cases, requirements of SA 260 may not be relevant to the audit of the special purpose
F.S.

Forming an Opinion and Reporting Considerations

When forming an opinion and reporting on special purpose financial statements, the auditor shall
apply the requirements in SA 700.

Reporting Considerations
(a) Description of the Applicable Financial Reporting Framework
▪ SA 700 requires the auditor to evaluate whether the F.S. adequately refer to or describe
the applicable FRF. In the case of F.S. prepared in accordance with the provisions of a
contract, auditor shall evaluate whether the F.S. adequately describe any significant
interpretations of the contract on which the F.S. are based.
▪ SA 700 deals with the form and content of the auditor’s report. In the case of an auditor’s
report on special purpose F.S.:
(1) Auditor’s report shall also describe the purpose for which the F.S. are prepared and
the intended users; and
(2) If management has a choice of FRFs in the preparation of such F.S., the explanation
of management’s responsibility for the F.S. shall also make reference to its
 responsibility for determining that the applicable FRF framework is acceptable in
the circumstances.
(b) Alerting Readers that the F.S. are Prepared in accordance with a Special Purpose
Framework
▪ Special purpose F.S. may be used for purposes other than those for which they were
intended. (For example, a regulator may require certain entities to place the special
purpose F.S. on public record).
▪ To avoid misunderstandings, auditor alerts users of the auditor’s report that the F.S. are
prepared in accordance with a special purpose framework and, therefore, may not be
suitable for another purpose.
▪ For this purpose, auditor’s report shall include an EOM paragraph.
(c) Restriction on Distribution or Use
▪ Auditor may consider it appropriate to indicate that the auditor’s report is intended solely
for the specific users.
▪ Depending on the law or regulation applicable, this may be achieved by restricting the
distribution or use of the auditor’s report.
▪ In these circumstances, the paragraph alerting the readers may be expanded to include
these other matters, and the heading modified accordingly (apni marzi ki heading rakh
sakte hai).
 SA 805 “Special Considerations – Audits of Single F.S. and Specific
Elements of a F.S. “

Single F.S./ Element of a F.S.

▪ The term element means an element, account or item of a F.S.
▪ A single financial statement (for example, a cash flow statement) or to a specific element of a
financial statement (for example, trade receivables or cash and bank balances) includes the
related notes.
Examples of Specific Elements, Accounts or Items of a Financial Statement
▪ Accounts receivable, allowance for doubtful accounts receivable, inventory, the liability for
accrued benefits of a private pension plan, the recorded value of identified intangible assets, or
the liability for “incurred but not reported (IBNR)” claims in an insurance portfolio, including
related notes, A schedule of net tangible assets, including related notes, A schedule of
disbursements in relation to lease property, including explanatory notes, A schedule of profit
participation or employee bonuses, including explanatory notes.

Note- Full Financial statement= Complete set of Financial statement

Scope of SA 805
▪ SAs 100-700 series apply to audit of FS: to be adopted as necessary in audit of other historical
financial information.
▪ SA 805 deals with special considerations in application of these SAS: to Audit of single F.S.
or Specific element/account/item of FS, prepared in accordance with General Purpose
Framework (Only 805) or special Purpose Framework (800 & 805).

Auditor’s Objective
Address appropriately the special considerations relevant to:
▪ Engagement acceptance.
▪ Engagement planning and performance.
▪ Forming opinion and reporting on F.S.

Engagement Acceptance - Considerations

(a) Application of SA
▪ SA 200 requires the auditor to comply with
✓ (a) relevant ethical requirements and
✓ (b) all SAs relevant to the audit.
▪ Compliance with all SAs requirement applies to audit of Single F.S. or Specific Element
of a F.S. Whether or not engaged to audit the complete set of F.S.
▪ If auditor is not also engaged in complete set of F.S., he shall determine the practicability
of audit of Single F.S./Specific Element in accordance with SAS.
▪ Compliance with the requirements of SAs relevant to the audit of a Single F.S. or of a
Specific element may not be practicable when the auditor is not also engaged to audit
the entity’s complete set of F.S. Example:-
 1. In such cases, auditor often does not have the same understanding of the entity and
its environment, including its internal control, as an auditor who also audits the
entity’s complete set of F.S. (315)
2. Auditor also does not have the audit evidence about the general quality of the
accounting records or other accounting information that would be acquired in an audit
of the entity’s complete set of F.S. (500)
3. In case of an audit of a specific element, certain SAs require audit work that may be
disproportionate to the element being audited. (570)
For example, although the requirements of SA 570 are likely to be relevant in the
circumstances of an audit of a schedule of accounts receivable, complying with those
requirements may not be practicable because of the audit effort required. If auditor
concludes that an audit of a single F.S. or of a specific element may not be practicable,
auditor may discuss with management whether another type of engagement (4400) might
be more practicable.
(b) Acceptability Of FRF (Adequate disclosures & effect of material transactions)
✓ SA 210 requires the auditor to determine acceptability of FRF applied in the preparation of
the F.S. In the case of an audit of a Single F.S. or of a specific element of a F.S., this shall
include determination of following:
• Whether application of FRF will result in presentation that provides adequate
disclosures to enable intended users to understand information conveyed in Single
F.S. or element; and
• Effect of material transactions and events on information conveyed in Single F.S. or
element.
✓ A Single F.S. or a specific element may be prepared in accordance with an applicable FRF
that is based on a FRF established by an authorised or recognised standards setting
organisation for the preparation of a complete set of F.S.
✓ If this is the case, determination of acceptability of the applicable framework may involve
considering whether that framework includes all the requirements of the framework on which
it is based.

Planning and Performance Considerations (IMP)

• In planning and performing the audit of a Single F.S. or of a specific element of a F.S.,
auditor shall adapt all SAs relevant to the audit as necessary in the circumstances.
• When auditing Single F.S. or a specific Element in conjunction with complete set of F.S.,
audit evidence obtained as part of audit of complete F.S. may be useful.
• Individual F.S. that comprise a complete set of F.S., and many of the elements of those
F.S., including their related notes, are interrelated. Hence, when auditing a Single F.S. or
a Specific element, auditor may not be able to consider the F.S. or the element in isolation.
Consequently, the auditor may need to perform procedures in relation to the interrelated
items to meet the objective of the audit.
• Materiality determined for a Single F.S. or for a specific element may be lower that
materiality for complete F.S., this will affect NTE of audit procedures. (pehle jisko
immaterial bolke jaane diya ab shayad uske liye opinion modify bhi karna padh sakta hai).
GAJAB.

Form of Opinion
 ▪ SA 210 requires that agreed terms of audit engagement include the expected form of report to
be issued by auditor.
▪ Consider whether expected form of opinion is appropriate in the circumstances.
▪ The auditor’s decision as to the expected form of opinion is a matter of professional judgment.
It may be affected by whether use of the phrases “presents fairly, in all material respects”, or
“gives a true and fair view” the auditor’s opinion on a single F.S. or on a specific element of a
F.S. prepared in accordance with a fair presentation framework is generally accepted in the
particular jurisdiction. (700 mai cover kar liya)
Factors that may affect the auditor’s consideration as to whether to use the phrases “presents
fairly, in all material respects”, or “gives a true and fair view” in the auditor’s opinion
▪ Whether the applicable FRF is restricted to the preparation of a complete set of F.S.
▪ Whether the Single F.S. or the specific element of a F.S. will:
(1) Comply fully with each of those requirements of the framework (compliance framework=
“presented in all material respect in acc with framework” wali line aayegi)
(2) To achieve fair presentation
✓ Provide disclosures beyond those specifically required by the framework or,
✓ In exceptional circumstances, depart from a requirement of the framework.

Forming an Opinion and Reporting Considerations (Separate Opinion) (Clearly Differentiated)

▪ Apply SA 700 adapted, as necessary, in the circumstances of the engagement. (thankyou)
▪ If also engaged to report on complete F.S., express separate opinion on each engagement.
(GAJAB)
▪ If audited Single F.S. published with entity’s audited complete set of F.S., presentation of Single
F.S. should be clearly differentiated from complete set of F.S. (Do not issue audit report on
Single F.S. or Specific Element until satisfied with the differentiation).
Modified Opinion / EOM Para / OM Para on Full FS (assume EOM & OM para= negative)
▪ If opinion on an entity’s complete set of F.S. is modified, (or audit report includes EOM
paragraph or OM paragraph), auditor shall determine the effect that this may have on the
auditor’s report on a Single F.S. or on a Specific element.
▪ When deemed appropriate, auditor shall modify the opinion Single F.S. or on the Specific
element, or include EOM paragraph or OM paragraph in the auditor’s report, accordingly.
▪ If auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on
the entity’s complete set of F.S., SA 705 does not permit the auditor to include in the same
auditor’s report an unmodified opinion on a Single F.S. or on a Specific element. This is because
such an unmodified opinion would contradict the adverse opinion or disclaimer of opinion on
the entity’s complete set of F.S.
▪ If auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on
the entity’s complete set of F.S. but, in the context of a separate audit of a Specific Element,
auditor nevertheless considers it appropriate to express an unmodified opinion on that element,
the auditor shall only do so if:
(1) Not prohibited by Law and Regulation;
(2) Audit report on Specific Element is not published together with audit report on
complete F.S; and
(3) Specific element does not constitute a major portion of entity’s complete F.S.
NOTE
 ▪ In case modified opinion on complete set of F.S., EOM Para or OM Para does not relate to the
audited Single F.S. or element, auditor may still deemed it appropriate to refer to modification
in an OM para (EOM para ko refer karna ho toh bhi OM para me he karenge) in auditor’s report
on the Single F.S. or element because auditor judges it to be relevant to users understanding of
the audited Single F.S. or element or related auditor’s report. (users should be aware of the
broader context of the company's financials).
▪ In auditor’s report on complete set of F.S., disclaimer of opinion regarding results of operations
and cash flows; and an unmodified opinion regarding the state of affairs is permitted since the
disclaimer is being issued in respect of the results of operations and cash flows only and not in
respect of the F.S. as a whole. (koi nayi baat nahi hai)

NOTE
SA 800 and 805 do not override the requirements of the other SAs; nor do they purport to deal with
all special considerations that may be relevant in the circumstances of the engagement.
 SA 810 Special Consideration- “Engagements to Report on Summary
Financial Statements (SFS)”

Meaning Of Summary Financial Statements (SFS)

Historical financial information that is derived from F.S. but that contains less detail than the F.S.,
while still providing a structured representation consistent with that provided by the entity’s F.S.

Note- Complete set of Financial statement= Audited Financial statement

Scope of SA 810
SA 810 deals with the auditor’s responsibilities when undertaking an engagement to report on SFS
derived from financial statements audited in accordance with SAs by that same auditor.

Form of Opinion (V V V V imp for understanding purpose)

Unmodified Opinion shall be expressed on Summary F.S. if:
• Summary F.S. are consistent, in all material respects, with audited F.S., in accordance with applied
criteria, or
• Summary F.S. are a fair summary of audited F.S. in accordance with applied criteria.
(Same to same!!) (Mutatis mutandis!!)

ADDITIONAL CONSIDERATIONS (V V V V V imp, exam me que aayegaa)

(a) Qualified Opinion/EOM/OM Para in Report on Audited F.S.
When the auditor’s report on the audited F.S. contains a qualified opinion, EOM Para, or OM
Para, but Auditor is satisfied that Summary F.S. are consistent in all material respects, with or
are a fair summary of audited F.S. in accordance with applied criteria, auditor’s report on
Summary F.S. shall also:
• State that auditor’s report on Audited F.S. contains qualified opinion/ EOM/OM para and
Describe:
• Basis for qualified opinion on audited F.S., and that qualified opinion; or EOM/OM para;
and
• Effect there of on Summary F.S., if any.
(b) Adverse Opinion/ Disclaimer of Opinion on Audited F.S.
When the auditor’s report on the audited F.S. contains an adverse opinion or a disclaimer of
opinion, the auditor’s report on the Summary F.S. shall, include the following:
• Statement that auditor’s report on audited F.S. contains adverse opinion or disclaimer of
opinion;
• Description on basis of such opinion; and
• Statement that as a result of adverse opinion or disclaimer of opinion it is inappropriate
to express an opinion on Summary F.S.
(c) Modified Opinion on Summary F.S.
Express adverse opinion if:
• Summary F.S. are not consistent in all material respects with or are not a fair summary of
audited F.S. in accordance with applied criteria.

1
 Reporting in audit report on summary FS (chart)

SFS CONSISTENT WITH AFS SFS NOT CONSISTENT WITH AFS

(SFS=AFS) (SFS not equal to AFS)

Adverse Opinion in
Unmodified opinion in Modified opinion in
SFS.
AFS AFS

Unmodified QO, EOM, OM, in AFS AO, DO in AFS

opinion in SFS

Describe the same in Opinion Denial of opinion on SFS

section in SFS (AR) (Opinion mattt do)

Engagement Acceptance
▪ Accept the engagement only when also engaged to audit, in accordance with SAs, those F.S.,
from which these Summary F.S. have been derived.
▪ Before accepting Engagement, auditor shall:
(1) Determine whether the applied criteria are acceptable.
(2) Obtain the agreement of management that acknowledges and understands its
responsibilities: (Bachpan ki yaadien)
(i) For the preparation of Summary F.S. in accordance with the applied criteria;
(ii) To make the audited FS available to the intended users of Summary F.S. without
undue difficulty; and
(iii)To include the auditor’s report on Summary F.S. in any document that contains the
Summary F.S. and that indicates that the auditor has reported on them.
▪ Agree with management the form & content of opinion to be expressed on the Summary F.S.
▪ Do not accept engagement if: (time pass)
(1) Criteria are not acceptable; or
(2) Unable to obtain management agreement,
Unless required by law (thankyouu)

NOTE
▪ Meaning of Applied criteria: The criteria applied by Management in the preparation of
Summary F.S. (FRF ka fancy name)

2
 Criteria for the preparation of Summary F.S. may be established by an authorised or recognised
standards setting organisation (SSO) or by law or regulation (L&R). Where established criteria
do not exist, criteria may be developed by management (MGT), for example, based on practice
in a particular industry. If the auditor concludes that the applied criteria are unacceptable, auditor
shall not accept the engagement to report on the Summary F.S., unless required by law or
regulation or criteria established by SSO to do so. (very simple)
▪ Responsibility for Preparation of Summary F.S.:
✓ Management is responsible for the determination of the information that needs to be reflected
in the Summary F.S. so that they are consistent with or represent a fair summary of the audited
F.S.
✓ Because in Summary F.S., there is an increased risk that they may not contain the information
necessary so as not to be misleading in the circumstances.
✓ This risk increases when established criteria for the preparation of Summary F.S. do not exist
or not acceptable. (thankyou)
▪ Factors affecting the auditor’s determination of the acceptability of the applied criteria:
(1) Nature of the entity
(2) Purpose of the Summary F.S.
(3) Information needs of the intended users of the Summary F.S.; and
(4) Whether the applied criteria will result in Summary F.S. that are not misleading in the
circumstances.
▪ Factors affecting auditor’s evaluation whether the audited F.S. are available to the
intended users without undue difficulty:
(1) Whether Summary F.S. describe clearly from whom or where the audited F.S. are
available.
(2) Whether the audited F.S. are on public record; or
(3) Whether management has established a process by which the intended users of the
Summary F.S. can obtain ready access to the audited F.S.

Nature of Procedures
(a) EVALUATE:
(1) Whether Summary F.S. adequately disclose their summarized nature; and
(2) Whether Summary F.S. adequately disclose the applied criteria.
(3) Whether Summary F.S. are prepared in accordance with applied criteria,
(4) Whether Summary F.S. contain necessary information and are appropriately aggregated
so as not to be misleading.
(5) Whether audited F.S. are available to intended users without undue difficulty.
(b) COMPARE:
Summary F.S. with related information in audited F.S. to determine whether Summary F.S.
agree with or can be re-calculated from related information in audited F.S.

Auditor’s Report On Summary F.S.

Elements of the Auditor’s Report:
(a) Title
Clearly indicating it as the report of an independent auditor.
(b) Addressee

3
 If addressee of Summary F.S. is not the same as the addressee of the auditor’s report on audited
F.S., evaluate the appropriateness of using a different addressee.
Factors affecting auditor’s evaluation of appropriateness of the addressee:
• Terms of the engagement
• Nature of the entity
• Purpose of Summary F.S.
(c) Introductory Paragraph
• Identifies Summary F.S. on which the auditor is reporting, including the title of each statement
included in Summary F.S.;
• Identifies the audited F.S.;
• Refers to the auditor’s report on the audited F.S., the date of that report, and, subject to other
requirements of this SA, the fact that an unmodified opinion is expressed on the audited F.S.;
• If the date of the auditor’s report on Summary F.S. is later than the date of the auditor’s report
on the audited F.S., states that Summary F.S. and audited F.S. do not reflect the effects of
events that occurred subsequent to date of the auditor’s report on the audited F.S.; and
• A statement indicating that Summary F.S. do not contain all the disclosures required by FRF
applied in the preparation of audited F.S., and that reading Summary F.S. is not a substitute
for reading the audited F.S.
(d) Management’s responsibility para
Explaining that management is responsible for the preparation of the summary financial
statements in accordance with the applied criteria.
(e) Auditor responsibility statement
A statement that the auditor is responsible for expressing an opinion on the summary financial
statements based on the procedures required by this SA.
(f) Auditor Opinion
A paragraph clearly expressing an opinion.
(g) Auditor’s signature
Along with the firm registration number, wherever applicable, and the membership number
assigned by the ICAI. Besides, UDIN is required to be stated.
(h) Date of Auditor’s Report
The auditor shall date the auditor’s report on the Summary F.S. no earlier than date of the
auditor’s report on the audited F.S.
(i) Place Of Signature
City

Restriction on Distribution/Use
When distribution or use of the auditor’s report on the audited F.S. is restricted, or the auditor’s report
on the audited F.S. alerts readers that the audited F.S. are prepared in accordance with a special
purpose framework (ONLY), auditor shall include a similar restriction or alert in the auditor’s report
on Summary F.S.

Comparatives (SA 710)

▪ If audited F.S. contain comparatives, but Summary F.S. do not, determine whether such
omission is reasonable in the circumstances of the engagement.

4
 ▪ Determine the effect of unreasonable omission on the auditor’s report on Summary F.S.

Unaudited Supplementary Info Presented With Summary F.S. (SA 700)

▪ Evaluate whether such information is clearly differentiated from Summary F.S.
▪ If entity’s presentation of such information is not clearly differentiated from Summary F.S., the
auditor shall ask management to change the presentation of such information.
▪ If management refuses to do so, the auditor to explain in auditor’s report on Summary F.S. that
such information is not covered by that report.

Other Information in Documents Containing Summary F.S. (read oi, MI b/w- OI & Summary FS)
▪ Auditor shall read the other information included in a document containing the Summary F.S.
and related Auditor’s Report to consider whether there is a material inconsistency between the
other information and the Summary F.S.
▪ If auditor identifies a material inconsistency, he shall determine whether Summary F.S. or the
other information needs to be revised.
▪ If auditor becomes aware that the other information needs to be revised, he shall discuss the
matter with management.

Auditor Association
If auditor becomes aware that entity plans to state that auditor has reported on Summary F.S. in a
document containing Summary F.S., but does not plan to include the related auditor's report, the
auditor shall request management to include the auditor’s report in the document. If management does
not do so, the auditor shall determine and carry out other appropriate actions designed to prevent
management from inappropriately associating the auditor with the Summary F.S. in that document.
Auditor engaged to report on F.S. while not engaged to report on Summary F.S.
▪ The auditor may be engaged to report on the F.S. of an entity, while not engaged to report on
the Summary F.S. If, in this case, auditor becomes aware that the entity plans to make a
statement in a document that refers to the auditor and the fact that Summary F.S. are derived
from the F.S. audited by the auditor, auditor shall be satisfied that:
(1) Reference to the auditor is made ONLY in the context of the auditor’s report on the audited
F.S.; and
(2) Statement does not give the impression that the auditor has reported on the Summary F.S.
▪ If (a) or (b) are not met, auditor shall request management to change the statement to meet them,
or not to refer to the auditor in the document. Alternatively, entity may engage the auditor to
report on the Summary F.S. and include the related auditor’s report in the document.
▪ If management does not change the statement, delete the reference to the auditor, or include an
auditor’s report on the Summary F.S. in the document containing the Summary F.S., auditor
shall advise management that he disagrees with the reference to the auditor, and he shall
determine and carry out other appropriate actions designed to prevent management from
inappropriately referring to the auditor.

Timing of Work and Subsequent Events (GAJAB)

▪ When the auditor reports on the Summary F.S. after the completion of the audit of the F.S., he
is not required to obtain additional audit evidence on the audited F.S., or report on the effects of
events that occurred subsequent to the date of the auditor’s report on the audited F.S. since
the Summary F.S. are derived from the audited F.S.
5
▪ Auditor’s report on Summary F.S. should state that the Summary F.S. and the audited F.S. do
not reflect the effects of events that occurred subsequent to the date of the auditor’s report on
the audited F.S.

6
 SA 402 "AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING SO"

Scope of SA 402
(i) Many entities outsource aspects of their business to organizations that provide services ranging
from performing a specific task under the direction of an entity to replacing an entity’s entire
business units or functions, such as the tax compliance function. however, not all those services
are relevant to the audit.
(ii) Relevant to financial reporting = Relevant to the audit
(iii) A SO’s services are part of a user entity’s information system, including related business
processes, relevant to financial reporting if these services affect any of the following:-
 The classes of transactions that are significant to FS.
 The procedures by which the user entity’s transactions are initiated, recorded, processed
(bookkeeping)
 The related accounting records that are used to report the transactions
 How the user entity’s information system captures events and conditions, that are significant
to the financial statements (estimates)
 The financial reporting process used to prepare the user entity’s financial statements
 Controls surrounding journal entries, including non-standard journal entries used to record
non-recurring, unusual transactions or adjustments.

Auditor's Objective
 To obtain an understanding of nature and significance of service provided by the SO and their
effect on the user’s entity internal control relevant to the audit, sufficient to identify and assess the
risk of material misstatement (ROMM)
 To design and perform audit procedures responsive to those risks (Response)

Meaning of terms used in SAs

(a) User Entity
An entity that uses a SO and whose financial statements are being audited.
(b) User Auditor
An Auditor who audits and reports on the financial statements of a user entity.
(c) SO
A third-party organisation that provides services to user entities that are part of those entities
information systems relevant to financial reporting.
(d) Service Auditor
An Auditor who provides an assurance report on the controls of a SO. (SAE-3402 me padhenge)

(Step-1) Obtaining understanding of services provided by SO

The user auditor shall obtain an understanding of how user entity uses the services of a SO in the user
entity operation, including:
 Nature and significance of service provided by the SO
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  Nature and materiality of the transactions processed or financial reporting processes affected by
SOs.
 Nature of relationship between user entity and the SO including the relevant contractual terms
for the activities undertaken by the SO.
 The degree of interaction between activities of SOs and those of the user entity.

(Step-2) Obtaining an understanding of Internal control at User entity (related to SO)

The user auditor shall evaluate the DIM of relevant controls of user entity that relate to the services
provided by SO.

(Step-3) Determine whether step1 & step2 provided sufficient understanding for assessment of
ROMM
The user auditor shall determine whether a sufficient understanding of nature and significance of
services provided by SO and their effect on the user entity internal control relevant to the audit has been
obtained, to provide basis for identification and assessment of risk of Material Misstatement. (Objective)

(Step-4) Specific audit procedure to obtain sufficient understanding

If user auditor is unable to obtain a sufficient understanding from the user entity, the auditor shall obtain
that understanding from one or more of the following procedures:
 Obtaining a Type 1 or Type 2 Report, if available.
 Contacting the SO, through the user entity, to obtain the sufficient information.
 Using another auditor to perform procedures at the SO.
 Visiting the SO.

Type 1 & Type 2 Reports

(a) Type I Report
Report on the description and design of internal controls at a SO. This report comprises of:
(1) A description prepared by management of the SO, of
 The SO’s system,
 Control objectives
 Related controls
that have been designed and implemented as at a specified date
(2) A report by the service auditor with the objective of conveying reasonable assurance that
includes
 The service auditor’s opinion on the description of the SO’s system, control
objectives and related controls.

(b) Type II Report

Report on the description, design and operating effectiveness of controls at a SO. This report
comprises of:
(3) A description prepared by management of the SO, of
 The SO’s system,
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  Control objectives
 Related controls and
 Operating effectiveness of the control
that have been designed and implemented as at a specified date or throughout a
specified period
(4) A report by the service auditor with the objective of conveying reasonable assurance that
includes:
 The service auditor’s opinion on the description of the SO’s system, control
objectives and related controls and the operating effectiveness of the control
 A description of the service auditor’s tests of the controls and the results thereof.

Using Type 1 or Type 2 Report

(i) In determining the sufficiency and appropriateness of the audit evidence provided by a Type 1 or
Type 2 report, the user auditor shall be satisfied as to:
 The service auditor’s professional competence (except where the service auditor is a
member of the ICAI) and independence from the SO; and
 The adequacy of the standards under which the Type 1 or Type 2 report was issued.
(ii) If the user auditor plans to use a Type 1 or Type 2 report as audit evidence to support the user
auditor’s understanding about the design and implementation of controls at the SO, the user
auditor shall:
 Evaluate whether the description and design of controls at the SO is at a date or for a period
that is appropriate for the user auditor’s purposes;
 Evaluate the sufficiency and appropriateness of the evidence provided by the report for the
understanding of the user entity’s internal control relevant to the audit; and
 Determine whether complementary user entity controls identified by SO are relevant to the
user entity and, if so, obtain an understanding of whether the user entity has designed and
implemented such controls.
(iii) Complementary user entity controls refer to controls that the SO assumes, in the design of its
service, will be implemented by user entities, and which, if necessary to achieve control objectives,
are identified in the description of its system.

Responding to Assessed Risk of Material Misstatement

Determine whether Sufficient Appropriate Audit Evidence w.r.t. F.S. assertions are available from
records held at User Entity. If Not:
 Perform further audit procedures to obtain SAAE; (overall level, assertion level)
 Use another auditor to perform those procedures at SO.

Tests of Controls
When the user auditor’s risk assessment includes an expectation that controls at the SO are operating
effectively, the user auditor shall obtain audit evidence about the operating effectiveness of those
controls from one or more of the following procedures:
 Obtaining a Type 2 report, if available; (savdhannn)
3
  Performing appropriate tests of controls at the SO; or
 Using another auditor to perform tests of controls at the SO on behalf of the user auditor.

Using a Type 2 report as audit evidence that controls at the SO are operating effectively
If, the user auditor plans to use a Type 2 report as audit evidence that controls at the SO are operating
effectively, he shall determine whether the service auditor’s report provides SAAE about the
effectiveness of the controls to support the user auditor’s risk assessment by:
 Evaluating whether the description, design and operating effectiveness of controls at the SO is at
a date or for a period that is appropriate for the user auditor’s purposes;
 Determining whether complementary user entity controls identified by the SO are relevant to the
user entity and, if so, obtaining an understanding of whether the user entity has designed and
implemented such controls and, if so, testing their operating effectiveness;
 Evaluating the adequacy of the time period covered by the tests of controls and the time elapsed
since the performance of the tests of controls; and
 Evaluating whether the tests of controls performed by the service auditor and the results thereof,
as described in the service auditor’s report, are relevant to the assertions in the user entity’s F.S.
and provide SAAE to support the user auditor’s risk assessment.

Audit Procedures in case of Fraud or Non-Compliance

 Inquire of User Entity Management whether the SO has reported instances of any Fraud, Non-
compliance with Law and Regulations or Uncorrected Misstatement affecting F.S. of User Entity.
 Evaluate impact on Nature, timing and extent of further audit procedures, Including Auditor’s
Conclusions and Audit report.

Reporting by User Auditor

 The User Auditor shall modify opinion if he is unable to obtain SAAE, regarding the services
provided by SO, relevant to audit of User Entity F.S.

Reference to Service auditor in user entity’s audit report (Rachit’s Special)

 The User Auditor shall not refer to report of Service auditor unless required by Law and
Regulation.
 If such reference is required by law or regulation, the user auditor’s report shall indicate that the
reference does not diminish the user auditor’s responsibility for the audit opinion.
 If reference to the work of a service auditor is relevant to an understanding of a modification to
the user auditor's opinion, the user auditor's report shall indicate that such reference does not
diminish the user auditor's responsibility for that opinion.

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 SAE 3402 "ASSURANCE REPORTS ON CONTROLS AT A SO"

Scope of SAE 3402

 SAE 3402 deals with assurance engagements undertaken by a professional accountant
(CA/Auditor use nahi karne ka) in public practice to provide a report on the controls at a SO for
use by user entities and their auditors.
 Reports prepared in accordance with this SAE are capable of providing appropriate evidence under
SA 402.

Meaning of Terms used in SAE

(a) Service Auditor
(b) SO (SO)
(c) User Auditor REFER SA
(d) User Entity 420
(e) Type I Report
(f) Type II Report
(g) Controls at SO
 Controls over the achievement of a control objective that is covered by the service auditor’s
assurance report.
 Such controls may include aspects of a SO’s – control environment, monitoring and control
activities related to the services provided.
Importance of controls of a SO (SO) to user entity’s internal controls relating to financial
reporting
 Controls related to a SO operations and compliance objectives may be relevant to a user
entity’s internal control as it relates to financial reporting. Such controls may pertain to
assertions about presentation and disclosure relating to account balances, classes of
transactions, or disclosures, or may pertain to evidence that the user auditor evaluates or
uses in applying auditing procedures.
 Example: A company has outsourced its payroll processing functions to a SO. SO is
responsible for the accurate preparation of payrolls and timely remittance of statutory dues
to government authorities on behalf of the company. Payroll processing SO controls related
to the timely remittance of payroll deductions to government authorities may be relevant to
the company (user entity) as late remittances could result in interest & penalties resulting
in liabilities for the user entity.

Objective
 To obtain reasonable assurance about whether, in all material respects, based on suitable
criteria: (COBIT)
(1) SO description of its system fairly presents the system as designed and implemented
throughout the specified period (or as at a specified date, in case of Type 1 report);
(2) Control Objectives stated in the SO description of its system were achieved throughout the
specified period.
5
 (3) Controls related to the control objectives stated in SO description of its system were suitably
designed throughout the specified period (or as at a specified date, in case of Type 1 report);
 To report on the matters stated above in accordance with the findings.

Compliance of Ethical Requirements

Service auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to assurance engagements.

Determination Of Management and TCWG

Service auditor shall determine the appropriate person(s) within the SO’s management or governance
structure with whom to interact.

Agreeing the terms of Engagement

(a) Acceptance and Continuance
Before agreeing to accept or continue, an engagement service auditor shall determine whether:
 He has the capabilities and competence to perform the engagement;
 Criteria to be applied by SO to prepare the description of its system will be suitable and
available to user entities and their auditors; and
 Scope of the engagement and the SO description of its system will not be so limited that
they are unlikely to be useful to user entities and their auditors.
(b) Changes in terms of engagement
If the So requests a change in the scope of the engagement before the completion of the
engagement, service auditor shall be satisfied that there is a reasonable justification for the
change.

Assessing the suitability of Criteria

Service auditor shall assess whether the SO has used suitable criteria in preparing the description of its
system, in evaluating whether controls are suitably designed, and, in the case of a type 2 reports, in
evaluating whether controls are operating effectively
Definition of Criteria : Benchmarks used to evaluate or measure a subject matter including, where
relevant, benchmarks for presentation and disclosure.

Consideration of Materiality
When planning and performing the engagement, the service auditor shall consider materiality with
respect to the fair presentation of the description, the suitability of the design of controls and, in the case
of a type 2 report, the operating effectiveness of controls.

Obtaining an Understanding
Service auditor shall obtain an understanding of the SO System, including controls that are included in
the scope of the engagement.

Collection of Evidences
(a) Regarding Description
6
 Service auditor shall obtain and read the SO’s description of its system, and shall evaluate
whether those aspects of the description included in the scope of the engagement are fairly
presented.
(b) Regarding Design of Controls
Service auditor shall determine which of the controls at the SO are necessary to achieve the
control objectives stated in the SO’s description of its system, and shall assess whether those
controls were suitably designed.
(c) Regarding operating Effectiveness of Controls
When providing a type 2 report, the service auditor shall test those controls that he has determined
are necessary to achieve the control objectives stated in the SO’s description of its system and
assess the operating effectiveness throughout the period.
(d) Evaluation of Internal Audit Function
If SO has an internal audit function, the service auditor shall obtain an understanding of the nature
of the responsibilities of the internal audit function and of the activities performed in order to
determine whether the internal audit function is likely to be relevant to the engagement in order
for the service auditor to use specific work of the internal auditors.
(e) Obtaining Written Representation
Service auditor shall request SO to provide written representations:
 That reaffirm the assertion accompanying the description of the system;
 That it has provided the service auditor with all relevant information and access agreed to;
and
 That it has disclosed to the service auditor any of the following of which it is aware:
(1) Non-compliance with laws and regulations, fraud, or uncorrected deviations
attributable to the SO that may affect one or more user entities;
(2) Design deficiencies in controls;
(3) Instances where controls have not operated as described; and
(4) Any events subsequent to the period covered by organization’s description of its
system up to the date of the service auditor’s assurance report that could have a
significant effect on the service auditor’s assurance report.
(f) Subsequent Events
Service auditor shall inquire whether SO is aware of any events subsequent to the period covered
by the SO description of its system up to the date of the service auditor’s assurance report that
could have a significant effect on the service auditor’s assurance report.

Documentation
The service auditor shall prepare documentation that is sufficient to enable an experienced service
auditor, having no previous connection with the engagement to understand:
 The NTE of the procedures performed to comply with this SAE and applicable legal and
regulatory requirements;
 The results of the procedures performed, and the evidence obtained; and
 Significant matters arising during the engagement, and the conclusions reached thereon and
significant professional judgments made in reaching those conclusions.

7
Elements of Assurance Report
 A title that clearly indicates the report is an independent service auditor’s assurance report.
 An addressee.
 Identification of:
(1) SO description of its system, and the SO’s assertion.
(2) Those parts of the SO description of its system, if any, that are not covered by the service
auditor’s opinion.
(3) If the description refers to the need for complementary user entity controls, a statement that
the service auditor has not evaluated the suitability of design or operating effectiveness of
complementary user entity controls.
(4) If services are performed by a subSO, the nature of activities performed by the subSO as
described in the SO description of its system.
 Identification of the criteria, and the party specifying the control objectives.
 A statement that the report is intended only for user entities and their auditors.
 A statement that the SO is responsible for:
(1) Preparing the description of its system, including the completeness, accuracy and method of
presentation of that description;
(2) Providing the services covered by the SO description of its system;
(3) Stating the control objectives; and
(4) Designing and implementing controls to achieve the control objectives stated in the SO
description of its system.
 A statement that the service auditor’s responsibility is to express an opinion on the SO description,
on the design of controls related to the control objectives stated in that description and, in the case
of a type 2 report, on the operating effectiveness of those controls, based on the service auditor’s
procedures.
 A statement that the engagement was performed in accordance with SAE 3402.
 A summary of the service auditor’s procedures to obtain reasonable assurance and a statement of
the service auditor’s belief that the evidence obtained is sufficient and appropriate to provide a
basis for the service auditor’s opinion, and, in the case of a type 1 report, a statement that the
service auditor has not performed any procedures regarding the operating effectiveness of controls
and therefore no opinion is expressed thereon.
 A Statement of the limitations of controls.
 The service auditor’s opinion, expressed in the positive form, on whether, in all material respects,
based on suitable criteria:
(1) In the case of a type 2 report:
(i) The description fairly presents the SO system that had been designed and
implemented throughout the specified period;
(ii) The controls related to the control objectives stated in the SO description of its system
were suitably designed throughout the specified period; and
(iii) The controls tested, which were those necessary to provide reasonable assurance that
the control objectives stated in the description were achieved, operated effectively
throughout the specified period.
(2) In the case of a type 1 report:
8
 (i) The description fairly presents the SO system that had been designed and
implemented as at the specified date; and
(ii) The controls related to the control objectives stated in the SO description of its system
were suitably designed as at the specified date.
 The date of the service auditor’s assurance report, which shall be no earlier than the date on which
the service auditor has obtained sufficient appropriate evidence on which to base the opinion.
 Practitioner’s Signature: Report should be signed by the practitioner.
 Place of signature: Report should name specific location, which is ordinarily the city where the
report is signed.
Additional matters requiring reporting in type 2 report
 In the case of a type 2 report, service auditor’s assurance report shall include a separate section
after the opinion, or an attachment, that describes the tests of controls that were performed and the
results of those tests.
 In describing the tests of controls, the service auditor shall clearly state which controls were tested,
identify whether the items tested represent all or a selection of the items in the population, and
indicate the nature of the tests in sufficient detail to enable user auditors to determine the effect of
such tests on their risk assessments.
 If deviations have been identified, the service auditor shall include the extent of testing performed
that led to identification of the deviations (including the sample size where sampling has been
used), and the number and nature of the deviations noted.
 The service auditor shall report deviations even if, on the basis of tests performed, the service
auditor has concluded that the related control objective was achieved.

Modified Opinion
A modified opinion is required to be expressed if auditor concludes that:
 The SO description does not fairly present, in all material respects, the system as Designed and
implemented;
 The controls related to the control objectives stated in the description were not suitably designed,
in all material respects;
 In the case of a type 2 report, the controls tested, which were those necessary to reasonable
assurance that the control objectives stated in the SO description of its system were achieved, did
not operate effectively, in all material respects; or
 The service auditor is unable to obtain sufficient appropriate evidence, the service auditor’s
opinion shall be modified, and the service auditor’s assurance report shall contain a clear
description of all the reasons for the modification.

9
 SAE 3400 "THE EXAMINATION OF PROSPECTIVE FINANCIAL
INFORMATION"
Timings Purpose of SAE 3400
 Purpose of SAE 3400 is to establish standards and provide guidance on engagements to examine
and report on prospective financial information (PFI) including examination procedures for best-
estimate and hypothetical assumptions.
 Principles laid down in the SAs should be used by the auditor, to the extent practicable, in
applying this SAE.
NOTE:
Term “auditor” is used throughout this SAE when describing services involving examination of
PFI. However, examination of PFI need not necessarily be performed by statutory auditor.

Meaning of Prospective Financial Information (PFI)

 Financial information based on:
(1) Assumptions about events that may occur in the future and
(2) Possible actions by an entity.
 It is highly subjective in nature & its preparation requires exercise of considerable judgment.
 PFI can be in form of:
(1) A forecast or
(2) A projection or
(3) A combination of both, for example, a 1-year forecast plus a 5-year projection.
(a) Forecast
PFI prepared on the basis of:
 Assumptions as to future events which management expects to take place and
 The actions management expects to take as of the date the information is prepared.
NOTE:
Forecast are being based on best estimate assumption, i.e., an assumption that reflects
anticipated experience with no provision for risk of adverse deviation.
(b) Projection
PFI is prepared on the basis of:
 Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or
are considering a major change in the nature of operations;
OR
 A mixture of best-estimate and hypothetical assumptions.

Nature Of Assurance Regarding PFI

 PFI relates to events & actions that have not yet occurred & might not occur. While evidence
may be available to support the assumptions on which PFI is based, such evidence is itself
generally future oriented & therefore speculative in nature, as distinct from evidences ordinarily
available in examination of historical financial information.
 Auditor, therefore, is not in a position to express an opinion as to whether the results shown in the
PFI will be achieved.

1
Management’s Responsibility
Management is responsible for preparation of PFI including:
 Disclosure of PFI;
 Explaining the basis of assumptions;
 Underlying assumptions.

Association of Professional Accountants with PFI

 As per Clause 3 of Part I of the Second Schedule to the Chartered Accountants Act, 1949 a CA in
practice shall be deemed to be guilty of professional misconduct, if he permits his name or name
of his firm to be used in connection with an estimate of earnings contingent upon future
transactions in a manner which may lead to the belief that he vouches for the accuracy of the
forecast.
 This clause does not preclude a CA from associating his name with PFI. A CA can participate in
preparation of financial forecasts and can review them, provided indicates clearly in his report the
sources of information, the basis of forecasts and also the major assumptions made in arriving at
the forecasts and so long as he does not vouch for the accuracy of the forecasts.
 Same rule also applies to projections made on basis of hypothetical assumptions about future
events and management actions which are not necessarily expected to take place so long as
vouching for the accuracy of the projection is not made.

Auditor’s duty
While examining PFI, auditor should obtain sufficient appropriate evidence as to whether
 Management’s best-estimate assumptions on which the PFI is based are unreasonable and, in
the case of hypothetical assumptions, such assumptions are consistent with the purpose of the
information; not
 The PFI is properly prepared on the basis of the assumptions;
 The PFI is properly presented and all material assumptions are adequately disclosed. Including
a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions;
and
 The PFI is prepared on a consistent basis with historical F.S., using appropriate accounting
principles.

Acceptance of Engagement
Before accepting engagement to examine PFI, auditor would consider, amongst other things:
 The intended use of the information;
 Whether the information will be for general or limited distribution;
 The nature of the assumptions, that is, whether they are best-estimates or hypothetical
assumptions;
 The elements to be included in the information; and
 The period covered by the information.
Auditor should not accept, or should withdraw from an engagement when the assumptions are
clearly unrealistic or when the auditor believes that the PFI will be inappropriate for its intended use.

2
Examination Procedures
When determining NTE of examination procedures, auditor should consider matters such as:
 The knowledge obtained during any previous engagements;
 Management’s competence regarding the preparation of PFI;
 The likelihood of material misstatement;
 The extent to which the PFI is affected by the management’s judgment;
 The sources of information considered by the management for the purpose, their adequacy,
reliability of the underlying data, including data derived from third parties, such as industry
statistics, to support the assumptions;
 The stability of entity’s business; and
 The engagement team’s experience with the business and the industry in which the entity
operates and with reporting on PFI.

Presentation & disclosure of PFI

When assessing the presentation & disclosure of PFI and underlying assumptions, auditor need to
consider whether:
 Presentation of PFI is informative and not misleading;
 Accounting policies are clearly disclosed in the notes to the PFI;
 Assumptions are adequately disclosed in the notes to the PFI. It needs to be clear whether
assumptions represent management’s best-estimates or are hypothetical;
 Date as of which the PFI was prepared is disclosed. Management needs to confirm that the
assumptions are appropriate as of this date, even though the underlying information may have
been accumulated over a period of time;
 Basis of establishing points in a range is clearly indicated and the range is not selected in a
biased or misleading manner when results shown in the PFI are expressed in terms of a range;
and
 There is any change in the accounting policy of the entity from that disclosed in the most
recent historical F.S. and whether reason for the change and the effect of such change on the
PFI has been adequately disclosed.

Documentation
Matters, which are important in providing evidence to support report on examination of PPI, and
evidence that such examination was carried out in accordance with this SAE should be documented.

 Report on examination of PFI

It should contain the followings:
 Title
 Addressee
 Identification of PFI
 Reference to the SAE applicable to the examination of PFI
 Statement that management is responsible for the PFI including underlying assumptions;
 When applicable, a reference to the purpose and/or restricted distribution of the PFI;
 Statement that the examination procedures included examination, on a test basis, of evidence
supporting the assumptions, amounts and other disclosures in the forecast or projection;
 Statement of negative assurance as to whether the assumptions provide a reasonable basis for
the PFI;

3
  Opinion as to whether the PFI is properly prepared on the basis of the assumptions and is
presented in accordance with the relevant FRF;
 Appropriate caveats concerning the achievability of the results indicated by the PFI;
 Date of Report;
 Place of Signature; and
 Signature
NOTE:
 Report shall cover the following:
 State whether, based on the examination of the evidence supporting the assumptions, anything
has come to auditor’s attention, which causes him to believe that the assumptions do not
provide a reasonable basis for the PFI.
 Express an opinion as to whether the PFI is properly prepared on the basis of the assumptions
and is presented in accordance with the relevant FRF.
 State that:
(1) Actual results are likely to be different from the PFI since anticipated events frequently
do not occur as expected and the variation could be material; and
(2) In the case of a projection, the PFI has been prepared for (intended use), using a set of
assumptions that include hypothetical assumptions about future events and
management’s actions that are not necessarily expected to occur.

4
SAE 3420 "ASSURANCE ENGAGEMENTS TO REPORT ON THE COMPILATION
OF PRO FORMA FINANCIAL INFORMATION INCLUDED IN A PROSPECTUS"
Scope of SAE 3420
SAE 3420 deals with reasonable assurance engagements undertaken by a practitioner to report on
the responsible party’s compilation of pro forma financial information (PFFI) included in a
prospectus.
▪ The SAE applies where:
✓ Such reporting is required by securities law or the regulation of the securities exchange
in the jurisdiction in which the prospectus is to be issued; or
✓ This reporting is generally accepted practice in such jurisdiction.

Meaning of Pro forma financial information (PFFI)

Unadjusted Financial information (BS ka extract) shown together with adjustments to illustrate the
impact of an event or transaction on unadjusted FI as if the event had occurred at an earlier date
selected for purposes of the illustration.
NOTE
▪ PFFI is used in the offer documents to demonstrate the effect of a transaction on the F.S. of a
company as if those transactions had occurred at an earlier date. (Prospectus bolna chahte hai)
▪ PFFI may take the form of Statement of P&L and Balance Sheet to illustrate how the might
have affected the assets, liabilities and earnings of the Issuer.
▪ They also include notes in relation to the significant aspects of the transactions, assumptions
used to prepare the PFPI and the adjustments made. (3 chizze =PL, BS, Notes)
▪ Pro forma Adjustments: Pro forma adjustments include:
(1) Adjustments to unadjusted FI that illustrate the impact of a significant event or transaction
as if the event had occurred or the transaction had been undertaken at an earlier date
selected for purposes of the illustration and
(2) Adjustments to unadjusted FI those are necessary for the PFFI to be compiled on a basis
consistent with the applicable FRF of the reporting entity and its accounting policies under
that framework.

Purpose of PFFI (purpose= Definition)

▪ Purpose of PFFI included in a prospectus is solely to illustrate the impact of a significant event
or transaction on unadjusted FI of the entity as if the event had occurred or the transaction had
been undertaken at an earlier date selected for purposes of the illustration.

Gajab ka Note= PFFI does not represent the entity’s actual financial position (bs), financial
performance (pl). (mandatory to include this note in PFFI)
▪

Objective
The objectives of the practitioner are: (same as 200)
▪ To obtain reasonable assurance about whether the PFFI as a whole has been compiled, in all
material respects, on the basis of the applicable criteria; and
▪ To report in accordance with the practitioner’s findings.

Compilation of Pro Forma Financial Information (PFFI)

1.1
Compilation of PFFI involves the responsible party gathering, classifying, summarizing and
presenting = financial information that illustrates the impact of a significant event or transaction on
unadjusted FI of the entity as if the event had occurred or the transaction had been undertaken at the
selected date. (defn of compilation + defn of PFFI)
Steps involved are: (mazzak)
▪ Identifying the source of the unadjusted FI to be used in compiling the PFFI, and extracting the
unadjusted FI from that source; (Historical FS)
▪ Making pro forma adjustments to the unadjusted FI for the purpose for which the PFFI is
presented; and
▪ Presenting the resulting PFFI with accompanying disclosures.

Practitioner’s Responsibility (yeah toh bachpan se 55 tak padh liya)

▪ The practitioner has no responsibility to compile the PFFI for the entity; such responsibility
rests with the responsible party.
▪ The practitioner’s sole responsibility is to report on whether the PFFI has been compiled, in all
material respects, by the responsible party on the basis of the applicable criteria.
▪ It is a reasonable assurance engagement to report on the compilation of PFFI involving
performing the procedures to assess whether the applicable criteria used by the responsible
party in the compilation of the PFFI provide a reasonable basis for presenting the significant
effects directly attributable to the event or transaction.

Steps Involved

Preparing the
Engagement Planning and Written Forming the
assurance
acceptance performing Representations opinion
report

Engagement Acceptance (A)

Before agreeing to accept an engagement, the practitioner shall:
▪ Determine that he has the capabilities and competence to perform the engagement;
▪ Determine that the applicable criteria are suitable and that it is unlikely that the PFFI will be
misleading for the purpose for which it is intended; (nakal me bhi akal bhi zarurat hoti hai)
▪ Evaluate the wording of the opinion prescribed by the relevant law or regulation, if any, to
determine that he will likely be able to express the opinion so prescribed based on performing
the procedures specified in this SAE;
▪ Where the sources from which the unadjusted FI have been extracted, have been audited or
reviewed and a modified audit opinion or review conclusion has been expressed, or the report
contains an EOM paragraph, consider whether or not the relevant law or regulation permits the
use of, or reference in the practitioner’s report to, the modified audit opinion or review
conclusion or the report containing the EOM paragraph with respect to such sources;

1.2
 GST in India – A brief Introduction

▪ If the entity’s HFI has never been audited or reviewed, consider whether the practitioner can
obtain a sufficient understanding of the entity and its accounting and financial reporting
practices to perform the engagement;
▪ If the event or transaction includes an acquisition and the acquiree's HFI has never been audited
or reviewed, consider whether the practitioner can obtain a sufficient understanding of the
acquiree and its accounting and financial reporting practices to perform the engagement;
▪ Obtain the agreement of the responsible party that it acknowledges and understands its
responsibility for: (Management Ack)
(1) Adequately disclosing and describing the applicable criteria to the intended users;
(2) Compiling the pro forma financial information on the basis of the applicable criteria;
(3) Providing the practitioner with:
(i) Access to all information such as records, documentation and other relevant material.
(ii) Additional information that the practitioner may request from the responsible party for
the purpose of the engagement;
(iii) Access to those within the entity and the entity’s advisors from whom the practitioner
determines it necessary to obtain evidence; and
(iv) Access to appropriate individuals within the acquiree (in a business combination)

Applicable criteria
▪ Criteria used by the responsible party when compiling the PFFI.
▪ Criteria may be established by an authorized or recognized standard-setting organization (SSO)
or by law or regulation.
▪ Where established criteria do not exist, they will be developed by the responsible party.

Planning and Performing an Engagement (P)

▪ Suitability of Applicable Criteria: Practitioner shall assess whether the applicable criteria are
suitable, as required by the Framework for Assurance Engagements. (bakwaas again)
▪ Materiality: Practitioner shall consider materiality with respect to evaluating whether the PFFI
has been compiled, in all material respects, on the basis of the applicable criteria.
▪ Obtaining an Understanding: Practitioner shall obtain an understanding of how the
responsible party has compiled the PFFI and other engagement circumstances.
➢ Obtaining Evidences about the appropriateness of the Source:
(1) Practitioner shall obtain evidence about the appropriateness of the source from which the
unadjusted FI has been extracted.
(2) If there is no audit or review report on the source from which the unadjusted FIhas been
extracted, the practitioner shall perform procedures to be satisfied that the source is
appropriate.
(3) The practitioner shall determine whether the responsible party has appropriately extracted
the unadjusted FI from the source.
▪ Obtaining Evidence about the Appropriateness of the Pro Forma Adjustments.
▪ Evaluating the Presentation of PFFI: Practitioner shall evaluate presentation of PFFI.

1.3
▪ Reading Other Information: Practitioner shall read the other information included in the
Prospectus containing the PFFI to identify material inconsistencies, if any, with PFFI.

Written Representations
The practitioner shall request written representations from the responsible party that:
▪ In compiling PFFI, the responsible party has identified all appropriate pro forma adjustments
necessary to illustrate the impact of the event or transaction at the date or for the period of the
illustration; and
▪ PFFI has been compiled, in all material respects, on the basis of the applicable criteria.

Documentation (time pass)

As in case of all assurance engagements, documentation has to be ensured by the practitioner while
performing engagement under SAE 3420.

Form of Opinion (R)

(a) Unmodified Opinion
Practitioner shall express an unmodified opinion when he concludes that the PFFI has been
compiled, in all material respects, by the responsible party on the basis of the applicable
criteria.
(b) Modified Opinion
▪ Where the relevant law or regulation precludes publication of a prospectus that contains a
modified opinion with regard to whether the PFFI has been compiled, in all material
respects, on the basis of the applicable criteria and the practitioner concludes that a
modified opinion is nevertheless appropriate in accordance with the Framework for
Assurance Engagements, the practitioner shall discuss the matter with the responsible
party.
▪ If the responsible party does not agree to make the necessary changes, the practitioner
shall:
(1) Withdraw from the engagement; or
(2) Consider seeking legal advice.
▪ Where the relevant law or regulation may not preclude publication of a prospectus that
contains a modified opinion with regard to whether the PFFI has been compiled, in all
material respects, on the basis of the applicable criteria and practitioner determines that a
modified opinion is appropriate in accordance with the Framework for Assurance
Engagements, practitioner shall apply the requirements in the Framework for Assurance
Engagements regarding modified opinions.
(c) Emphasis of Matter Paragraph
▪ In some circumstances, practitioner may consider it necessary to draw users’ attention to a
matter presented or disclosed in the PFFI or the accompanying explanatory notes.
▪ This would be the case when, In practitioner’s opinion, matter is of such importance that it
is fundamental to users’ understanding of whether the PFFI has been compiled, in all
material respects, on the basis of the applicable criteria. In such circumstances, practitioner
shall include an EOM paragraph in his report provided that he has obtained sufficient

1.4
 GST in India – A brief Introduction

appropriate evidence that the matter does not affect whether the PFFI has been compiled,
in all material respects, on the basis of the applicable criteria.
▪ Such a paragraph shall refer only to information presented or disclosed in the PFFI or the
accompanying explanatory notes.

Preparing the Assurance Report (self)

The practitioner’s report shall include the following basic elements:
▪ A title that clearly indicates that the report is an independent assurance report;
▪ An addressee, as agreed in the terms of engagement; (Board of directors)
▪ Introductory paragraphs that identify:
(1) The pro forma financial information;
(2) The source from which the unadjusted FI has been extracted;
(3) The period covered by, or the date of, the PFFI; and
(4) A reference to the applicable criteria on the basis of which the responsible party has
performed the compilation of the PFFI and the source of the criteria;
▪ A statement that the responsible party is responsible for compiling the PFFI on the basis of the
applicable criteria;
▪ A description of the practitioner’s responsibilities, including statements that:
(1) The practitioner’s responsibility is to express an opinion about whether the PFFI has been
compiled, in all material respects, by the responsible party on the basis of the applicable
criteria;
(2) For purposes of this engagement, the practitioner is not responsible for updating or
reissuing any reports or opinions on any HFI used in compiling the PFFI, nor has the
practitioner, in the course of this engagement, performed an audit or review of the financial
information used in compiling the PFFI; and
(3) The purpose of PPFI included in a prospectus is solely to illustrate the impact of a
significant event or transaction on unadjusted FI of the entity as if the event had occurred
or the transaction had been undertaken at an earlier date selected for purposes of the
illustration.
▪ A statement that the engagement was performed in accordance with SAE 3420, ‘Assurance
Engagements to Report on the Compilation of Pro Forma Financial Information Included in a
Prospectus’, which requires that the practitioner comply with ethical requirements and plan
and perform procedures to obtain reasonable assurance about whether the responsible party has
compiled, in all material respects, the PFFI on the basis of the applicable criteria;
▪ Statements that:
(1) A reasonable assurance engagement to report on whether the PFFI has been compiled, in
all material respects, on the basis of the applicable criteria involves performing procedures
to assess whether applicable criteria used by the responsible party in the compilation of the
PFFI provide a reasonable basis for presenting the significant effects directly attributable to
the event or transaction, and to obtain sufficient appropriate evidence about whether:
(i) The related pro forma adjustments give appropriate effect to those criteria; and

1.5
 (ii) The PFFI reflects the proper application of those adjustments to the unadjusted
financial information;
(2) The procedures selected depend on the practitioner’s judgment, having regard to the
practitioner’s understanding of the nature of the entity, the event or transaction in respect
of which the PFFI has been compiled, and other relevant engagement circumstances; and
(3) The engagement also involves evaluating the overall presentation of the PFFI;
▪ Unless otherwise required by law or regulation, the practitioner’s opinion using one of the
following phrases, which are regarded as being equivalent:
(1) The PFFI has been compiled, in all material respects, on the basis of the
applicable criteria (practically yahi language use karte hai); or
(2) The PFFI has been properly compiled on the basis stated;
▪ The practitioner’s signature;
▪ The date of the report; and
▪ The place of signature

Rachit’s Special (change of language in this standard)

▪ Practitioner NOT auditor
▪ Responsible party NOT Management
▪ Criteria NOT FRF

1.6
 SRE 2400 "ENGAGEMENTS TO REVIEW HISTROICAL FINANCIAL
STATEMENTS"

Scope of SRE 2400

SRE 2400 deals with:
▪ Practitioner's responsibilities when engaged to perform a review of historical F.S., when the
practitioner is not the auditor of the entity's F.S.; and
▪ Form and Content of the practitioner's report on the F.S.

Engagement to Review Historical F.S.

▪ Practitioner performs primarily inquiry and analytical procedures to obtain sufficient
appropriate evidence as the basis for a conclusion on the F.S.
▪ If the practitioner becomes aware of a matter that causes him to believe the F.S. may be
materially misstated, he may design and performs additional procedures, as considers
necessary in the circumstances, to be able to conclude on the F.S. (Inc= AI, or Other procedures)
(Withdraw or Modified opinion)

Objectives
Practitioner’s objectives in a review of F.S. under this SRE are to:
▪ Obtain limited assurance, primarily by performing inquiry and analytical procedures, about
whether the F.S. as a whole are free from material misstatement, whether due to fraud or error
and
▪ Report on the F.S. as a whole and communicate, as required by this SRE.
In all cases when limited assurance cannot be obtained and a qualified conclusion is insufficient,
practitioner either disclaim a conclusion or withdraw from the engagement.

Ethical Requirements
Practitioner shall comply with relevant ethical requirements, including those pertaining to
independence and the EP is responsible for overall quality of each review engagement.

Acceptance and Continuance of Client Relationships and Review Engagements

(a) Factors affecting Acceptance and Continuance of Client Relationships and Review
Engagements
Unless required by law or regulation, practitioner shall not accept a review engagement if:
▪ The Practitioner is not satisfied:
(1) That a review engagement would be appropriate in the circumstances;
(2) That there is a rational purpose for the engagement; or
▪ Circumstances indicates that information (SAE) needed to perform the review
engagement is likely to be unavailable or unreliable;
▪ Practitioner has cause to doubt management’s integrity;
▪ Practitioner has reason to believe that relevant ethical requirements, including
independence, will not be satisfied;

1
 ▪ Management or TCWG impose a limitation on the scope such that the practitioner
believes the limitation will result in the practitioner disclaiming a conclusion on the F.S.
(b) Preconditions for Accepting Review Engagement (same)
Prior to a Accepting a review engagement, the practitioner shall:
▪ Determine whether the FRF applied in the preparation of the F.S. is acceptable.
▪ Obtain the agreement of management that it acknowledges and understands its
responsibilities:
(1) For preparation of F.S. in accordance with applicable FRF;
(2) For such internal control which is necessary to enable the preparation of F.S. that
are free from material misstatement, whether due to fraud or error; and
(3) To provide practitioner with:
(i) Access to all information of which management is aware that is relevant to
the preparation of the F.S., such as records, documentation and other matters;
(ii) Additional information that the practitioner may request from management
for the purpose of the review; and
(iii) Unrestricted access to persons within the entity from whom practitioner
determines it necessary to obtain evidence.
(c) Agreeing the Terms of Engagement (same)
▪ Practitioner shall agree terms of the engagement with management or TCWG, as
appropriate.
▪ Agreed terms shall be recorded in an engagement letter or other suitable form of written
agreement.
▪ In case of recurring engagements, practitioner shall evaluate whether circumstances
require the terms to be revised and whether there is a need to remind management or
TCWG of existing terms.
▪ If, prior to completing review engagement, practitioner is requested to change the terms
of engagement, he shall determine whether there is reasonable justification for doing so.
Practitioner shall not agree to a change, where there is no reasonable justification.
▪ If the terms of engagement are changed during the course of the engagement, practitioner
and the management or TCWG, shall agree on and record the new terms of engagement
in an engagement letter or any other suitable form of written agreement.

Performing the Engagement

(a) Materiality in a Review of F.S. (MCQ)
▪ The practitioner’s judgement about what is material in relation to the FS as a whole is the
same regardless of the level of assurance obtained by a practitioner. (MCQ)
▪ Revise materiality in the event of becoming aware of information during the review that
would have caused him to have determined a different amount initially. (same)
(b) Obtaining Understanding of entity (same)
The practitioner shall obtain an understanding of the entity and its environment, and the
applicable FRF, to identify areas in the F.S. where the entity material misstatements are likely
to arise and thereby provide a basis for
(c) Designing and Performing Procedures

2
In obtaining sufficient appropriate evidence as the basis for a conclusion on the financial
statements as a whole, the practitioner shall design and perform inquiry and analytical
procedures:
▪ To address all material items in the F.S., including disclosures; and
▪ To focus on addressing areas in the F.S. where ROMM are likely to arise.
(1) Inquiry
▪ Inquiry includes seeking information from management and others.
▪ Inquiries may include matters such as those relating to
(i) Making of accounting estimates,
(ii) Identification of related parties,
(iii) Events occurring between date of F.S. and practitioner’s report,
(iv) Events or conditions that appear to cast doubt on the entity’s ability to
continue as a going concern,
(v) Significant, complex or unusual transactions,
(vi) Existence of any actual, suspected or alleged fraud,
▪ Inquiries may also be extended to obtain non-financial Data.
▪ Depending on the circumstances, inquiries may also include inquiries about:
(i) Actions taken at meetings of owners, TCWG and its committees that affect
the information and disclosures contained in the F.S. (Inspection of Minutes)
(ii) Communications entity has received, or expects to receive or obtain, from
regulatory agencies. (External conf= Legal firm)
(iii) Matters arising in the course of applying other procedures.
(2) Analytical Procedures (data must be Adequate)
▪ In designing analytical procedures, the practitioner shall consider whether the data
from entity’s accounting system and accounting records are adequate for the purpose
of performing the analytical procedures.
▪ Various methods may be used to perform analytical procedures ranging from
performing simple comparisons to performing complex analysis using statistical
techniques.
(3) Importance of Inquiry in Review
▪ Evidence obtained through inquiry is often the principal source of evidence about
management intent.
However, information available to support management’s intent may be limited. In
that case, understanding of :
(i) Management’s past history of carrying out its stated intentions, (past)
(ii) Management’s ability to pursue a specific course of action (present)
(iii) Management’s reasons for choosing particular course of action (future)
may provide relevant information to corroborate the evidence obtained through
inquiry.
▪ Performing inquiry also assists practitioner in obtaining or updating his
understanding of entity and its environment
(4) Importance of Analytical Procedures in Review
In a review of F.S., performing analytical procedures assists the practitioner in:
3
 ▪ Obtaining or updating understanding of entity and its environment
▪ Providing corroborative evidence in relation to other inquiries.
▪ Identifying variances from expected trends, values or norms in the F.S. with key
data.
▪ Serving as additional procedures when the practitioner becomes aware of matters
that cause the practitioner to believe that the F.S. may be materially misstated.

Procedures to Address Specific Circumstances

(a) Related parties (same)
▪ Practitioner shall remain alert for information (Prof skept) that may indicate the existence
of RP relationships or transactions that the management has not previously identified or
disclosed to the practitioner.
▪ If the practitioner identifies significant transactions outside the entity’s normal course of
business, he shall inquire:
(1) Nature of those transactions,
(2) Possible involvement of RP and
(3) The business rationale of those transactions.
(b) Fraud and Non-compliance with laws or Regulations (same)
▪ When there is an indication that fraud or NOCLAR has occurred, practitioner shall
communicate to the appropriate level of senior management or TCWG and request
management’s assessment of the effects, if any, on the F.S.
▪ Practitioner has to consider the effect, if any, of management’s assessment of the effects
of fraud or NOCLAR communicated to him on his conclusion on the F.S. and on his
report.
▪ Determine whether there is a responsibility to report the occurrence or suspicion of fraud
or illegal acts to a party outside the entity.
(c) Going concern (same)
If practitioner becomes aware of events or conditions that may cast significant doubt about
entity’s ability to continue as a going concern, he shall:
▪ Inquire of management about plans for future actions, feasibility of those plans, and also
whether management believes that the outcome of those plans will improve the situation.
▪ Evaluate results of inquiries, to consider whether management’s responses provide a
sufficient basis to:
(1) Continue to present the F.S. on the going concern basis if the applicable FRF
includes the assumption of an entity’s continuance as a going concern or
(2) Conclude whether the F.S. are materially misstated, or are otherwise misleading
regarding the entity’s ability to continue as a going concern and
▪ Consider management’s responses in light of all relevant information of which he is
aware.
(d) Use of work performed by others (same)
▪ If practitioner uses work performed by another practitioner or an expert, he shall take
appropriate steps to be satisfied that the work performed is adequate for his purposes.

4
 ▪ When the practitioner is engaged to review the F.S. of a group of entities, planned NTE
of the procedures are directed at achieving practitioner’s objectives for the review
engagement in accordance with this Standard but in the context of the group F.S.

Additional Procedures When Practitioner becomes Aware that the F.S. may be Materially
Misstated
▪ If the practitioner becomes aware of matters that causes him to believe the F.S. may be materially
misstated, he shall design and perform additional procedures sufficient to enable the practitioner
to:
(1) Conclude that the matters are not likely to cause the F.S. as a whole to be materially
misstated; or
(2) Determine that the matters cause the F.S. as a whole to be materially misstated.
▪ Additional procedures may be:
(1) Additional AI procedures being performed in greater detail or being focused on the
affected items; or
(2) Other types of procedures, for example, test of details or external confirmations.
Example illustrating need to perform additional procedures and practitioner’s response
▪ In the course of performing inquiry and analytical procedures, practitioner’s analysis of accounts
receivable shows a material amount of past due accounts receivable, for which there is no
allowance for bad or doubtful debts.
▪ Practitioner believes that the accounts receivable balance in the F.S. may be materially misstated.
He inquires management whether there are uncollectible accounts receivable that would need to
be shown as being impaired.
▪ Depending on management’s response, the practitioner’s evaluation of the response may:
(1) Enable the practitioner to conclude that the accounts receivable balance is not likely to be
materially misstated. In that case, no further procedures are required.
(2) Enable the practitioner to determine that the matter causes F.S. to be materially misstated.
No further procedures are required, and he would form the conclusion that the F.S. as a
whole are materially misstated.
(3) Lead the practitioner to continue to believe that the accounts receivable balance is likely
to be materially misstated, while not providing sufficient appropriate evidence to
determine that they are in fact misstated.
In that case, he is required to perform additional procedures, for example, requesting from
management an analysis of amounts received for those accounts after the balance sheet
date to identify uncollectible accounts receivable.
The evaluation of the results of the additional procedures may enable the practitioner to
get to (a) or (b) above. If not, he is required to:
(i) Continue performing additional procedures until the practitioner reaches either (a)
or (b) above; or
(ii) If the practitioner is not able to conclude that the matter is not likely to cause the
F.S. to be materially misstated, or to determine that the matter does cause the F.S. to
be materially misstated, then a scope limitation exists and he is not able to form an
unmodified conclusion on the F.S.

5
Subsequent Events (ek dum same)
▪ If the practitioner becomes aware of events occurring between date of F.S. and date of the
practitioner’s report that require adjustment of, or disclosure in, the F.S., he shall request
management to correct those misstatements.
▪ Practitioner has no obligation to perform any procedures regarding the F.S. after date of the
practitioner’s report. However, if, after date of practitioner’s report but before the date the F.S.
are issued, a fact becomes known to him that, had it been known to him at the date of the report,
may have caused him to amend the report, he shall:
(1) Discuss the matter with management or TCWG, as appropriate;
(2) Determine whether the F.S. need amendment; and
(3) If so, inquire how management intends to address the matter in the F.S.
▪ If management does not amend the F.S. in circumstances where he believes they need to be
amended, and the practitioner’s report has already been provided to the entity, the practitioner
shall notify management and TCWG not to issue the F.S. to third parties before the necessary
amendments have been made.
▪ If the F.S. are nevertheless subsequently issued without the necessary amendments, practitioner
shall take appropriate action to seek to prevent reliance on his report.

Written Representations (WR)

▪ Practitioner shall request management to provide WR that management has fulfilled its
responsibilities and WR shall include that:
(1) Management has fulfilled its responsibility for the preparation of F.S. in accordance with
the applicable FRF and has provided the practitioner with all relevant information and
access to information as agreed in the terms of the engagement; and
(2) All transactions have been recorded and are reflected in the financial statements.
▪ Practitioner shall also request management’s WR that management has disclosed to the
practitioner: (jiss matter ki inquiry ki uska he WR lena hai)
(1) Identity of RPs and all RP relationships and transactions of which management is aware;
(2) Significant facts relating to any frauds or suspected frauds known to management;
(3) Known actual or possible NOCLAR that may affect the entity’s financial statements;
(4) All information relevant to use of the going concern assumption in the F.S.;
(5) That all events occurring subsequent to the date of the F.S. and for which the applicable
FRF requires adjustment or disclosure, have been adjusted or disclosed;
(6) Material commitments, contractual obligations or contingencies that have affected or may
affect the entity’s F.S., including disclosures;
(7) Material non-monetary transactions undertaken by the entity.
▪ If management does not provide one or more of the requested WRs, practitioner shall:
(1) Discuss the matter with management and TCWG;
(2) Re-evaluate integrity of management and evaluate effect on reliability of representations
(oral or written) and evidence in general; and
(3) Take appropriate actions, including determining the possible effect on the conclusion.
▪ Practitioner shall disclaim a conclusion on the F.S., or withdraw from the engagement if
withdrawal is permitted if:

6
 (1) There exists sufficient doubt on the integrity of management such that WR are not reliable;
or
(2) Management does not provide the required representations.

Evaluating Evidence Obtained from the Procedures Performed

▪ Practitioner shall evaluate whether sufficient appropriate evidence has been obtained from the
procedures performed and, if not, the practitioner shall perform other procedures judged by the
practitioner to be necessary in the circumstances to be able to form a conclusion on the financial
statements.
▪ If the practitioner is not able to obtain sufficient appropriate evidence to form a conclusion, the
practitioner shall discuss with management and TCWG, as appropriate, the effects such
limitations have on the scope of the review.

Forming the Practitioner’s Conclusion on the Financial Statements

(a) Unmodified Conclusion (2 negatives)
▪ Practitioner shall express an unmodified conclusion when he has obtained limited
assurance to be able to conclude that nothing has come to his attention that causes him to
believe that the F.S. are not prepared, in all material respects, in accordance with
applicable FRF.
▪ Unmodified conclusion may be expressed as follow:
(1) Fair Presentation Framework:
“Based on our review, nothing has come to our attention that causes us to believe
that the F.S. do not give a true and fair view in accordance with the applicable FRF”
OR
(2) Compliance Framework:
“Based on our review, nothing has come to our attention that causes us to believe
that the F.S. are not prepared, in all material respects, in accordance with the
applicable FRF.
(b) Modified Conclusion
▪ Practitioner shall express a modified conclusion when he:
(1) Determines that the F.S. are materially misstated; or
(2) Is unable to obtain sufficient appropriate evidence (SAE) in relation to one or more
items in the F.S. that are material.
▪ In case of modified conclusion, practitioner shall:
(1) Use heading “Qualified Conclusion,” “Adverse Conclusion” or “Disclaimer of
Conclusion,” as appropriate;
(2) Provide a description of the matter giving rise to the modification, under an
appropriate heading, for example, “Basis for Qualified Conclusion,” “Basis for
Adverse Conclusion” or “Basis for Disclaimer of Conclusion,” as appropriate, in a
separate paragraph immediately before conclusion paragraph.
(1) Financial statements are materially misstated (QC/AC)
▪ If F.S. are materially misstated, the practitioner shall express:
(1) A qualified conclusion, when effects of the matters giving rise to modification
are material, but not pervasive; or
7
 (2) An adverse conclusion, when the effects of the matters giving rise to the
modification are both material and pervasive.
▪ When the practitioner expresses a qualified conclusion because of a material
misstatement, practitioner shall use one of the following phrases, as appropriate:
(i) Fair Presentation Framework:
“Based on our review, except for the effects of the matters described in the
Basis for Qualified Conclusion paragraph, nothing has come to our attention
that causes us to believe that the F.S. do not give a true and fair view in
accordance with applicable FRF”.
(ii) Compliance Framework:
“Based on our review, except for the effects of the matters described in the
Basis for Qualified Conclusion paragraph, nothing has come to our attention
that causes us to believe that the F.S. are not prepared, in all material respects,
in accordance with the applicable FRF”.
▪ When the practitioner expresses an adverse conclusion, he shall use one of the
following phrases, as appropriate:
(i) Fair Presentation Framework:
“Based on our review, due to the significance of the matter(s) described in the
Basis for Adverse Conclusion paragraph, the F.S. do not give a true and fair
view, in accordance with the applicable FRF
(ii) Compliance Framework:
“Based on our review, due to the significance of the matter(s) described in the
Basis for Adverse Conclusion paragraph, the F.S. are not prepared, in all
material respects, in accordance with the applicable FRF”.
▪ In Basis for conclusion paragraph, the practitioner shall:
(i) Describe and quantify the financial effects of the misstatement, unless
impracticable, in which case the practitioner shall so state;
(ii) Explain how disclosures are misstated if the material misstatement relates to
narrative disclosures; or
(iii) Describe the nature of omitted information if the material misstatement relates
to the non-disclosure of information required to be disclosed.
(2) Inability to obtain sufficient appropriate evidence (QC/DC)
▪ If practitioner is unable to form a conclusion due to inability to obtain sufficient
appropriate evidence, he shall:
(i) Express a qualified conclusion if possible effects on the F.S. of undetected
misstatements, if any, could be material but not pervasive; or
(ii) Disclaim a conclusion if possible effects on the F.S. of undetected
misstatements, if any, could be both material and pervasive.
▪ Withdrawal from Engagement:
Practitioner shall withdraw from the engagement if the following conditions are
present:

8
 (i) Due to a limitation on scope imposed by management after practitioner has
accepted the engagement, the practitioner is unable to obtain sufficient
appropriate evidence to form a conclusion;
(ii) Practitioner has determined that the possible effects on the F.S. of undetected
misstatements are material and pervasive; (disclaimer)
(iii)Withdrawal is possible under applicable law or regulation.

▪ For qualified conclusion, practitioner shall use any of the following phrases, as
appropriate:
(i) Fair Presentation Framework:
“Based on our review, except for the possible effects of the matter(s) described
in the Basis for Qualified Conclusion paragraph, nothing has come to our
attention that causes us to believe that the F.S. do not give a true and fair view,
in accordance with the applicable FRF”.
(ii) Compliance Framework:
“Based on our review, except for the possible effects of the matter(s) described
in the Basis for Qualified Conclusion paragraph, nothing has come to our
attention that causes us to believe that the F.S. are not prepared, in all material
respects, in accordance with the applicable FRF”.
▪ When disclaiming a conclusion, practitioner shall state in the conclusion
paragraph that:
(i) Due to the significance of the matter(s) described in the Basis for Disclaimer
of Conclusion paragraph, the practitioner is unable to obtain sufficient
appropriate evidence to form a conclusion on the financial statements; and
Accordingly, the practitioner does not express a conclusion on the financial
statements.
▪ In the basis for conclusion paragraph, practitioner shall include the reason(s) for the
inability to obtain sufficient appropriate evidence.

The Practitioner’s Report

The practitioner's report for the review engagement shall be in writing, and shall contain the following
elements:
▪ A title, which shall clearly indicate that it is the report of an independent practitioner for a review
engagement;
▪ The addressee(s), as required by the circumstances of the engagement;
▪ An introductory paragraph that:
(1) Identifies the financial statements reviewed, including identification of the title of each of
the statements contained in the set of financial statements and the date and period covered
by each financial statement;
(2) Refers to the summary of significant accounting policies and other explanatory
information; and
(3) States that the financial statements have been reviewed;
▪ A description of the responsibility of management for the preparation of the financial statements,
including an explanation that management is responsible for:
9
 (1) Their preparation in accordance with the applicable financial reporting framework
including, where relevant, their fair presentation;
(2) Such internal control as management determines is necessary to Engagements to Review
Historical Financial Statements enable the preparation of F.S. that are free from material
misstatement, whether due to fraud or error;
▪ If the financial statements are special purpose financial statements:
(1) A description of the purpose for which the F.S. are prepared and, if necessary, the intended
users, or reference to a note in the special purpose F.S. that contains that information; and
(2) If management has a choice of FRFs in the preparation of such F.S., a reference within
the explanation of management’s responsibility for the F.S. to management’s
responsibility for determining that the applicable FRF is acceptable in the circumstances;
▪ A description of the practitioner’s responsibility to express a conclusion on the F.S. including
reference to this SRE and, where relevant, applicable law or regulation;
▪ A description of a review of F.S. and its limitations, and the following statements:
(1) A review engagement under this SRE is a limited assurance engagement;
(2) The practitioner performs procedures, primarily consisting of making inquiries of
management and others within the entity, as appropriate, and applying analytical
procedures, and evaluates the evidence obtained; and
(3) The procedures performed in a review are substantially less than those performed in an
audit conducted in accordance with SAs, and, accordingly, the practitioner does not
express an audit opinion on the F.S.;
▪ A paragraph under the heading “Conclusion” that contains:
(1) The practitioner’s conclusion on the F.S. as a whole, as appropriate; and
(2) A reference to the applicable FRF used to prepare the financial statements.
▪ When the practitioner’s conclusion on the financial statements is modified:
(1) A paragraph under the appropriate heading that contains the practitioner’s modified
conclusion, as appropriate; and
(2) A paragraph, under an appropriate heading, that provides a description of the matter(s)
giving rise to the modification;
▪ A reference to the practitioner’s obligation under this SRE to comply with relevant ethical
requirements;
▪ The date of the practitioner’s report: Practitioner shall date the report no earlier than the date
on which the practitioner has obtained sufficient appropriate evidence as a basis for the
practitioner’s conclusion on the F.S., including being satisfied that:
(1) All the statements that comprise the F.S. under the applicable FRF, including the related
notes where applicable, have been prepared; and
(2) Those with the recognized authority have asserted that they have taken responsibility for
those F.S.
▪ The practitioner’s signature; and
▪ The place of signature.

EOM and OM Paragraphs in Practitioner’s Report

(a) EOM Paragraphs

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 ▪ Practitioner may consider it necessary to draw users’ attention to a matter presented or
disclosed in F.S. that, in his judgment, is of such importance that it is fundamental to
users’ understanding of the F.S.
▪ In such cases, he shall include an EOM paragraph in the report, provided he has obtained
sufficient appropriate evidence to conclude that matter is not likely to be materially
misstated as presented in the F.S.
▪ Such paragraph shall refer only to information presented or disclosed in the F.S.
▪ EOM paragraph shall be included immediately after the paragraph that contains the
practitioner’s conclusion on the financial statements under the heading “Emphasis of
Matter”.
(b) Other Matter Paragraphs (Same)
If the practitioner considers it necessary to communicate a matter other than those that are
presented or disclosed in the F.S. that, in the practitioner’s judgment, is relevant to users’
understanding of the review, the practitioner’s responsibilities or the practitioner’s report and
this is not prohibited by law or regulation, the practitioner shall do so in a paragraph in the
practitioner’s report with the heading “Other Matter”.

Other Reporting Responsibilities (Same)

▪ A practitioner may be requested to address other reporting responsibilities in the practitioner’s
report that are in addition to the practitioner’s responsibilities under this SRE to report on the
financial statements.
▪ In such situations, those other reporting responsibilities shall be addressed by the practitioner in
a separate section in the practitioner’s report headed “Report on Other Legal and Regulatory
Requirements,” or otherwise as appropriate to the content of the section, following the section
of the report headed “Report on the Financial Statements.

Documentation (yeah nahi padhte)

▪ Practitioner shall document the following aspects of the engagement in a timely manner,
sufficient to enable an experienced practitioner, having no previous connection with the
engagement, to understand:
(1) NTE of the procedures performed to comply with this SRE and applicable legal and
regulatory requirements;
(2) Results obtained from the procedures, and the practitioner’s conclusions formed on the
basis of those results; and
(3) Significant matters arising during the engagement, the practitioner’s conclusions reached
thereon, and significant professional judgments made in reaching those conclusions.
▪ In documenting NTE of procedures performed as required in this SRE, the practitioner shall
record:
(1) Who performed the work and the date such work was completed; and
(2) Who reviewed the work performed for the purpose of quality control for the engagement,
and the date and extent of the review.
▪ The practitioner shall also document discussions with management, TCWG and others as
relevant to the performance of the review of significant matters arising during the engagement,
including the nature of those matters.
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▪ If, in the course of the engagement, the practitioner identified information that is inconsistent
with the practitioner’s findings regarding significant matters affecting the financial statements,
the practitioner shall document how the inconsistency was addressed.

Difference between audit & review

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 SRE 2410 "REVIEW OF INTERIM FINANCIAL INFORMATION
PERFORMED BY INDEPENDENT AUDITOR OF THE ENTITY"

Interim Financial Information (IFI)

Financial information, prepared and presented in accordance with applicable FRF and comprises either
a complete or condensed set of F.S. for a period that is shorter than entity’s financial year (Interim-
generally in india= Quarterly)

Scope of SRE 2410

▪ SRE 2410 deals with the auditor’s professional responsibilities when he undertakes an
engagement to review IFI of an audit client, and on the form and content of the report.
▪ This SRE is directed towards a review of IFI by an entity’s auditor. However, it is to be applied,
adapted as necessary, when an entity’s auditor undertakes an engagement to review historical
financial information other than IFI of an audit client.
Review of F.S. Review of IFI
Independent auditor SRE 2410 SRE 2410
Other Practitioner SRE 2400 SRE 2400

Objective of Engagement to Review IFI

▪ Objective of an engagement to review IFI is to enable auditor to express a conclusion whether,
on the basis of the review, anything has come to auditor’s attention, that causes auditor to believe,
that IFI is not prepared, in all material respects, in accordance with applicable FRF.
▪ Auditor makes inquiries, and performs analytical and other review procedures in order to reduce
to a moderate level the risk of expressing an inappropriate conclusion when the Interim financial
information is materially misstated.

Objective of Review of IFI vis-à-vis Objective of Audit:

▪ Review of IFI does not provide a basis for expressing an opinion whether the financial
information gives a true and fair view, or is presented fairly, in all material respects, in
accordance with applicable FRF.
▪ Review not designed to obtain reasonable assurance that IFI is free from material misstatement.
▪ Review consists of making inquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures.
▪ Review may bring significant matters affecting IFI to the auditor’s attention, but it does not
provide all of the evidence that would be required in an audit.

Agreeing the Terms of Engagement

▪ Auditor and client should agree on Terms of Engagement.
▪ Terms of Engagement ordinarily recorded in engagement letter.
▪ Terms of Engagement helps in avoiding misunderstandings w.r.t.:
(1) Nature of engagement.
(2) Objective and scope of review.

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 (3) Management’s responsibilities.
(4) Auditor’s responsibilities.
(5) Assurance obtained.
(6) Nature and form of report.

Understanding The entity and Its environment

▪ Auditor should have an understanding of entity and its environment, including internal control,
as it relates to preparation of both annual and IFI, sufficient to plan and conduct the engagement
so as to be able to:
(1) Identify types of potential material misstatement and consider the likelihood of their
occurrence; and
(2) Select inquiries, analytical and other review procedures that will provide him with a basis
for reporting whether anything has come to his attention that causes him to believe that
IFI is not prepared, in all material respects, in accordance with applicable FRF.
▪ Auditor has obtained understanding of entity and its environment, including its internal control,
as it relates to the preparation of annual financial information that was sufficient to conduct the
audit.
▪ In planning a review of IFI, auditor updates this understanding.
▪ Auditor also obtains a sufficient understanding of internal control as it relates to the preparation
of IFI as it may differ from internal control as it relates to annual financial information.

Procedures performed by the auditor to update the understanding of the entity and its
environment, including its internal control
▪ Reading documentation, to the extent necessary, of the preceding year’s audit and reviews of
prior interim period(s) of the current year and corresponding interim period(s) of the prior year,
to enable the auditor to identify matters that may affect the current-period IFI.
▪ Reading the most recent annual and comparable prior period IFI.
▪ Considering any significant risks, including the risk of management override of controls, that
were identified in the audit of the prior year’s FS.
▪ Considering materiality with reference to the applicable FRF as it IFI to assist in determining
nature and extent of procedures to be performed and evaluating effect of misstatements.
▪ Considering the nature of any corrected material misstatements and any identified uncorrected
immaterial misstatements in the prior year’s FS.
▪ Considering significant financial accounting and reporting matters that may be of continuing
significance such as material weaknesses in I.C.
▪ Considering results of any audit procedures performed with respect to the current year FS.
▪ Considering results of any internal audit performed and the subsequent actions taken by
management.
▪ Inquiring of management about the results of management’s assessment of the risk that the IFI
may be materially misstated as a result of fraud.
▪ Inquiring of management about the effect of changes in the entity’s business activities.
▪ Inquiring of management about any significant changes in internal control and the potential
effect of any such changes on the preparation of IFI.

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 ▪ Inquiring of management of the process by which the IFI has been prepared and the reliability
of the underlying accounting records to which the IFI is agreed or reconciled.

Inquires, Analytical and Other Review Procedures

▪ Auditor should make inquiries, primarily of persons responsible for financial and accounting
matters, and perform analytical and other review procedures to enable him to conclude whether,
on the basis of the procedures performed, anything has come to the auditor’s attention that causes
the auditor to believe that the IFI is not prepared, in all material respects, in accordance with the
applicable FRF.
▪ Review ordinarily does not require tests of the accounting records through inspection,
observation or confirmation.
▪ Procedures for performing a review of IFI are ordinarily limited to making inquiries and applying
analytical and other review procedures.

Procedures performed to collect evidences

▪ Reading minutes of meetings of shareholders, TCWG, and other committees to identify matters
that may affect the IFI, and inquiring about matters dealt with at meetings for which minutes are
not available that may affect the IFI.
▪ Considering effect, if any, of matters giving rise to a modification of audit or review report,
accounting adjustments or unadjusted misstatements, at the time of the previous audit or reviews.
▪ Communicating, where appropriate, with other auditors who are performing a review of the IFI
of the reporting entity’s significant components.
▪ Inquiring of members of management responsible for financial and accounting matters, and
others as appropriate about the following:
(1) Whether IFI has been prepared and presented in accordance with applicable FRF.
(2) Whether there have been any changes in accounting principles.
(3) Whether any new transactions have necessitated application of a new accounting
principle.
(4) Whether IFI contains any known uncorrected misstatements.
(5) Unusual or complex situations that may have affected the IFI, such as a business
combination or disposal of a segment of the business.
(6) Significant assumptions that are relevant to fair value measurement or disclosures and
management’s intention and ability to carry out specific courses of action on behalf of the
entity.
(7) Whether RP transactions have been appropriately accounted for and disclosed in IFI.
(8) Significant changes in commitments and contractual obligations.
(9) Significant changes in contingent liabilities including litigation or claims.
(10) Compliance with debt covenants.
(11) Matters about which questions have arisen in the course of applying the review
procedures.
(12) Significant transactions occurring in the last several days of the interim period or the first
several days of the next interim period.
(13) Knowledge of any fraud or suspected fraud affecting the entity involving:

15
 (i) Management;
(ii) Employees who have significant roles in internal control; or
(iii)Others where the fraud could have a material effect on the IFI.
(14) Knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s interim
financial information communicated by employees, former employees, analysts,
regulators, or others.
(15) Knowledge of any actual or possible noncompliance with laws and regulations that could
have a material effect on the interim financial information.
▪ Applying analytical procedures to the IFI designed to identify relationships and individual items
that appear to be unusual and that may reflect a material misstatement in the IFI.
▪ Reading the IFI, and considering whether anything has come to the auditor’s attention that causes
the auditor to believe that the IFI is not prepared, In all material respects, in accordance with the
applicable FRF.

Collection of Evidences
▪ Obtain evidence that the IFI agrees or reconciles with the underlying accounting records. For
this purpose, auditor may trace the IFI to:
(1) The accounting records, such as the general ledger, or a consolidating schedule that agrees
or reconciles with the accounting records; and
(2) Other supporting data in the entity’s records as necessary.
▪ Auditor should inquire whether management has identified all events up to date of review report
that may require adjustment to or disclosure in IFI. It is not necessary for the auditor to perform
other procedures to identify events occurring after the date of the review report.
▪ Inquire whether management has changed its assessment of the entity’s ability to continue as a
going concern.
▪ When, as a result of this inquiry or other review procedures, the auditor becomes aware of events
or conditions that may cast significant doubt on the entity’s ability to continue as a going concern,
the auditor should:
(1) Inquire of management as to its plans for future actions based on its going concern
assessment, the feasibility of these plans, and whether management believes that the
outcome of these plans will improve the situation; and
(2) Consider the adequacy of the disclosure about such matters in the IFI.
▪ When a matter comes to the auditor’s attention that leads the auditor to question whether a
material adjustment should be made for the IFI to be prepared, in all material respects, in
accordance with the applicable FRF, the auditor should make additional inquiries or perform
other procedures to enable the auditor to express a conclusion in the review report.

Evaluation of Misstatements
▪ Evaluate, individually and in aggregate, whether uncorrected misstatements that have come to
auditor’s attention are material to IFI.
▪ Not required to obtain reasonable assurance that IFI is free of material misstatements.
▪ Exercise professional judgment in evaluating materiality of misstatements.

16
Management Representations
Obtain written representations from management that:
▪ It acknowledges its responsibility for design and implementation of internal control to prevent
and detect fraud and error.
▪ IFI is prepared and presented in accordance with applicable FRF.
▪ It believes uncorrected misstatements aggregated by auditor during review are immaterial, both
individually and in the aggregate, to IFI.
▪ It has disclosed to the auditor:
(1) All significant facts relating to any frauds or suspected frauds known to management that
may have affected the entity.
(2) Results of its assessment of the risks that the IFI may be materially misstated as a result
of fraud.
(3) All known actual or possible non-compliance with laws and regulations whose effects are
to be considered when preparing the IFI.
(4) All significant events that have occurred subsequent to the balance sheet date and through
to the date of the review report that may require adjustment to or disclosure in IFI.

Auditor’s Responsibility For Accompanying Information

▪ The auditor should read the other information that accompanies the IFI to consider whether any
such information is materially inconsistent with the IFI.
▪ If a matter comes to the auditor’s attention that causes the auditor to believe that the other
information appears to include a material misstatement of fact, the auditor should discuss the
matter with the entity’s management.

Communication
▪ If auditor believes that it is necessary to make a material adjustment to IFI, he should
communicate this matter as soon as practicable to appropriate level of management.
▪ If management does not respond appropriately within reasonable time, inform to TCWG.
▪ If TCWG do not respond appropriately within reasonable time, consider:
(1) Whether to modify the report; or
(2) Possibility of withdrawing from engagement; and
(3) Possibility of resigning from appointment to audit the annual FS.
▪ If a matter comes to auditor’s attention that causes auditor to believe in existence of fraud or
NOCLAR; communicate that matter as soon as practicable to appropriate level of management.
▪ Communicate relevant matters of governance interest arising from review of IFI to TCWG.

Reporting the Nature, Extent and Results of Review of IFI

The auditor should issue a written report that contains the following:
▪ An appropriate title.
▪ An addressee, as required by the circumstances of the engagement.

17
 ▪ Identification of IFI reviewed including identification of title of each statement contained in
complete set of financial statements and the date and period covered by them.
▪ If IFI comprises a complete set of general purpose F.S. prepared in accordance with a FRF
designed to achieve fair presentation, a statement that management is responsible for the
preparation and fair presentation of the IFI in accordance with applicable FRF.
▪ A statement that auditor is responsible for expressing a conclusion on IFI based on review.
▪ A statement that Review was conducted in accordance with SRE 2410 and such review consists
of making inquiries, primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures.
▪ A statement that review is substantially less in scope than an audit conducted in accordance with
SAs and consequently does not enable the auditor to obtain reasonable assurance and that
accordingly no audit opinion is expressed.
▪ If IFI comprises a complete set of general purpose F.S. prepared in accordance with a FRF
designed to achieve fair presentation, a conclusion as to whether anything has come to auditor’s
attention that causes him to believe that the IFI does not give a true and fair view, or does not
present fairly, in all material respects, in accordance with the applicable FRF
▪ The date of the report.
▪ Place of Signature.
▪ The auditor’s signature and membership number
▪ The Firm’s registration number of the member of the Institute, wherever applicable, as allotted
by ICAI.
Besides, UDIN has also to be generated and stated for review engagement as it is also in nature of an
assurance engagement.

Departure from applicable FRF

▪ Auditor shall express a qualified or adverse conclusion, when a matter has come to his attention
that causes him to believe that a material adjustment should be made to the IFI for It to be
prepared, in all material respects, in accordance with the applicable FRF.
▪ If matters have come to the auditor’s attention that cause him to believe that the IFI is or may be
materially affected by a departure from the applicable FRF, and management does not correct
the IFI, the auditor modifies the review report.
▪ Modification describes the nature of departure and, if practicable, states the effects on the IFI. If
the information that auditor believes is necessary for adequate disclosure is nor included in the
IFI, the auditor modifies the review report and, if practicable, includes the necessary information
in the review report.
▪ The modification to the review report is ordinarily accomplished by adding an explanatory
paragraph to the review report and qualifying the conclusion.
▪ When effect of departure is so material and pervasive to the IFI that the auditor concludes a
qualified conclusion is not adequate to disclose the misleading or incomplete nature of the IFI,
the auditor expresses an adverse conclusion.

Limitation on Scope
▪ If unable to complete review:

18
 (1) Communicate in writing to appropriate level of management and to TCWG the reason
why review cannot be completed, and
(2) Consider whether it is appropriate to issue a report.
▪ Do not accept review engagement: If preliminary knowledge indicates inability to complete
review due to limitation on scope by Management.
▪ If after accepting engagement, limitation imposed by management:
(1) Request removal of limitation.
(2) If management refuses, communicate in writing to management and TCWG w.r.t. why
engagement cannot be completed.
(3) Consider legal and regulatory responsibilities.

Going Concern and Significant Uncertainties

▪ If, as a result of inquiries or other review procedures, a material uncertainty relating to an event
or condition comes to the auditor’s attention that may cast significant doubt on the entity’s ability
to continue as a going concern, and adequate disclosure is made in the IFI, auditor modifies the
review report by adding an EOM paragraph.
▪ Auditor may have modified a prior audit or review report by adding an EOM paragraph to
highlight a material uncertainty relating to an event or condition that may cast significant doubt
on the entity’s ability to continue as a going concern. If the material uncertainty still exists and
adequate disclosure is made in the IFI, auditor modifies the review report on the current IFI by
adding a paragraph to highlight the continued material uncertainty.
▪ If a material uncertainty that casts significant doubt about the entity’s ability to continue as a
going concern is not adequately disclosed in the IFI, auditor should express a qualified or adverse
conclusion, as appropriate.

Documentation
Auditor should prepare review documentation that is sufficient and appropriate to provide a basis for
the auditor’s conclusion and to provide evidence that the review was performed in accordance with
this SRE and applicable legal and regulatory requirements.

19
 SRS 4400 “Engagements to perform Agreed Upon Procedures
regarding Financial Information (Gumrah)”

Agreed Upon Procedures (definition)

 When auditor is engaged by the client
 to issue a report of factual findings,
 based on specified procedures (audit nature) on specified subject matter (805) of specified
elements, accounts or items of a financial statement,
it is to be considered as an engagement to perform agreed-upon procedures.
 Such engagement may require the auditor to perform certain procedures concerning individual
items of financial data, say, accounts payable, accounts receivable or a F.S., say, a balance sheet
(805) or even a complete set of F.S (atii pagalpanti).
NOTE
Person performing related services need not necessarily be the auditor of entity. (ho bhi sakta hai)

Audit Vs. Agreed-upon Procedures

 A key difference between an audit and agreed-upon procedures relates to assurance.
 An audit expresses an opinion and provides assurance to users.
 However, in an agreed-procedures engagement, only a report of the factual findings of agreed-
upon procedures is provided. No assurance is given to users. Instead, users draw their own
conclusions based on factual findings stated in the report.
Example: An agreed upon procedures engagement to evaluate validity of accounts payable may
state the following: (normal eg)
(1) Comparing of names of major suppliers and the amounts outstanding as on a date to the
related names and amounts in the trial balance.
(2) Obtaining suppliers statements or confirmations from suppliers to confirm balances
outstanding on a date.
(3) Comparison of such statements or confirmations to the amounts in trial balance.

Rachit’s Special
Audit Agreed-upon Procedures
Reasonable Assurance No Assurance
Expresses an opinion in a report called Audit  Does NOT express an opinion &
Report  Only provides a Report of the factual
findings. (Basis of Opinion)
 Users draw their own conclusions based on
factual findings stated in the report

Objective in Accordance with SRS 4400

 The objective of an agreed upon procedure engagement for auditor is to carry out procedure of
audit nature, to which the auditor and the entity and any appropriate third parties have agreed
and to report on factual finding thereon.

1
 Report is generally restricted to those parties that have agreed to the procedures to be performed.
(Limitation on Use/Distribution para in Report)

General Principles of agreed upon procedure

Auditor should comply with Code of Ethics issued by ICAI. Ethical Principles are:
 Integrity;
 Objectivity
 Professional competence and due care;
 Confidentiality;
 Professional conduct; and
 Technical standards (jabbardasti wala point)
NOTE
Independence is not a requirement for agreed-upon procedures engagement, however, the terms or
objective of the engagement may require the auditor to comply with the independence
requirements of the Code of Ethics issued by the ICAI. Where the auditor is not independent, a
statement to that effect should be made in the report of factual findings. (Aflatunnn)

Defining the terms of Engagement (thoda kaam ka hai)

There should be a clear understanding among the auditor, the client and other specified parties
(agreement banana wale log).

The terms to be agreed include the following:

 Stated purpose for the engagement. (ROFF)
 NTE of the specific procedures (Audit Nature)
 Identification of financial information (NFI also) to which the AUP will be applied. (805)
 Fact that the procedures performed will not constitute an audit or a review and that accordingly
no assurance will be expressed.
 Limitation on distribution of the report of factual findings.

Note- If such limitation would be in conflict with the legal requirements, the auditor would NOT
accept the engagement.

Issue of Engagement Letter

 It is in the interests of both client and auditor that the auditor sends an engagement letter
documenting the key terms of the appointment. (OPTIONAL hai, yeah toh gajab hai)
 Engagement letter confirms the auditor’s acceptance of the appointment and helps avoid
misunderstanding (regarding such matters as the objectives and scope of the engagement, the
extent of the auditor’s responsibilities and the form of reports to be issued.)
 Engagement Letter shall include the following matters: (LBH)
(1) List of the procedures to be performed as agreed-upon between the parties.
(2) A statement that the distribution of the report of factual findings would be restricted to the
specified parties who have agreed to the procedures to be performed.

Planning (thankyou)
The auditor should plan the work so that an effective engagement will be performed.

2
 Procedures and Evidence
 Auditors should carry out necessary procedures and use the evidence obtained as basis for report
of factual findings. (audit nature)
 The procedures applied in an engagement to perform AUP may include:
(1) Inquiry and analysis
(2) Re computation, comparison (AP) and other clerical accuracy checks, Observation
(3) Inspection
(4) Obtaining confirmations (EC)

Note- Methods to obtain AE (except Reperformance)

Reporting
The report of factual findings should contain:
 Title;
 Addressee
 Identification of specific financial or non-financial information to which the agreed-upon
procedures have been applied
 A statement that the procedures performed were those agree-upon with the recipient.
 A statement that the engagement was performed in accordance with this standard and terms of
engagement.
 Identification of the Purpose.
 A listing of the specific procedures performed.
 A description of the auditor’s factual findings including sufficient details of errors and exceptions
found.
 A statement that the procedures performed do not constitute either an audit or a review and, as
such, no assurance is expressed.
 A statement that the report is restricted to those parties that have agreed to the procedures to be
performed.
 A statement (when applicable) that the report relates only to the elements specified and that it
does not extend to the entity’s financial statements taken as a whole
 Date of the report
 Place of signature
 Auditor’s signature

Documentation (Pratha)
Auditor should document matters which are important in providing the evidence to support the
report of factual findings, and evidence that the engagement was carried out in accordance with this
SRS and the terms of the engagement.

Rachit’s Special

- Report of Factual Finding (ROFF) NOT Audit report

3
 SRS 4410 "COMPILATION ENGAGEMENT" (ASSIST)

Scope of this SRS

 SRS 4410 deals with practitioner’s responsibilities when engaged to assist management with
the preparation and presentation of historical financial information without obtaining any
assurance on that information, and to report on the engagement in accordance with this SRS.
 This SRS applies to compilation engagements for historical financial information and may adapt
as necessary to:-
a. compilation engagements for financial information other than historical financial
information, (OHFI)
b. compilation engagements for non-financial information, after necessary adaptation. (NFI)

Relationship with SQC 1 (SRS ke liye bhi SQC ke hisaab se QCPP banana padega)
 The provisions of this SRS regarding quality control at the level of individual compilation
engagements are premised on the basis that the firm is subject to SQC 1.

Meaning and Concept of Compilation Engagement

 Compilation engagement is an engagement in which a
 practitioner applies accounting and financial reporting expertise
 to assist management
 in the preparation and presentation of financial information of an entity
 in accordance with an applicable FRF and
 issues a report.
 Management may request a professional accountant in public practice to assist with the
preparation and presentation of financial information of an entity. (koi nai baat nahi hai)
 Since a compilation engagement is not an assurance engagement, a compilation engagement
does not require the practitioner to verify the accuracy or completeness of the information
provided by management for the compilation, or otherwise to gather evidence to express an audit
opinion or a review conclusion on the preparation of the financial information.
 Financial information that is the subject of a compilation engagement may be required for
various purposes including:
(1) To comply with mandatory periodic financial reporting requirements established in law or
regulation, if any; or
(2) For purposes unrelated to mandatory financial reporting under relevant law or regulation,
including for example:
(i) Management or TCWG, may prepare financial information for internal use.
(ii) For periodic financial reporting undertaken for external parties under a contract or
other form of agreement (such as financial information provided to a funding body to
support provision or continuation of a grant).
(iii) For transactional purposes, for example to support a transaction involving changes to
the entity’s ownership or financing structure (such as for a merger or acquisition).

Objectives
The practitioner’s objectives in a compilation engagement under this SRS are to:

4
  Apply accounting and financial reporting expertise to assist management in the preparation
and presentation of financial information in accordance with an applicable financial reporting
framework based on information provided by management; (iss baar RA nahi lena hai)
 Report in accordance with the requirements of this SRS.

Scope of Compilation Engagements

 Scope of a compilation engagement will vary depending on the circumstances.
 However, in every case it will involve assisting management in the preparation and presentation
of the entity's financial information in accordance with the FRF, based on information provided
by management.
 Management retains responsibility for the financial information and the basis on which it is
prepared and presented. That responsibility includes application of the judgment required for the
preparation and presentation of the financial information, including the selection and application
of appropriate accounting policies and, where needed, developing reasonable accounting
estimates.
 Different FRF can be used to prepare and present financial information, ranging from a simple
entity-specific basis of accounting to established financial reporting standards. The FRF is
adopted by management to prepare and present the financial information on the nature of the
entity and the intended use of the information. (GPFRF/SPFRF)

Ethical Requirements
 The practitioner shall comply with relevant ethical requirements.
 In complying with the Code of Ethics, threats are required to be identified and appropriately
addressed.
 Being in nature of non-assurance engagement, independence requirements do not apply to
compilation engagements. However, laws or regulations may specify requirements or
disclosure rules pertaining to independence. (GAJAB GAJAB GAJAB !!! non- independence ko
disclose karne ki zarurat nahi hai)

Engagements Acceptance and Continuance

The practitioner shall not accept the engagement unless the practitioner has agreed the terms of
engagement with management, including:
 Intended use and distribution of the financial information, and any restrictions on either its
use or its distribution where applicable;
 Identification of the applicable FRF;
 Objective and scope of the compilation engagement;
 Responsibilities of the practitioner, including the requirement to comply with relevant ethical
requirements;
 Responsibilities of management for:
(1) The financial information, and for the preparation and presentation thereof, in accordance
with a FRF that is acceptable in view of the intended use of the financial information and
the intended users;
(2) Design, implementation and maintenance of such internal control as management
determines is necessary to enable the preparation of F.S. that are free from material
misstatement, whether due to fraud or error;

5
 (3) The accuracy and completeness of the records, documents, explanations and other
information provided by management for the compilation engagement; and
(4) Judgments needed in the preparation and presentation of the financial information,
including those for which the practitioner may provide assistance in the course of the
compilation engagement; and
 The expected form and content of the practitioner’s report.
The practitioner shall record the agreed terms of engagement in an engagement letter or other
suitable form of written agreement, prior to performing the engagement.

Recurring Engagements
The practitioner shall evaluate whether circumstances, including changes in the engagement
acceptance considerations, require the terms of engagement to be revised and whether there is need
to remind management of the existing terms of engagement.

Performing the Engagement

(a) The Practitioner's Understanding
The practitioner shall obtain an understanding of the following matters sufficient to be able to
perform the compilation engagement:
 The entity’s business and operations, including the entity’s accounting system and
accounting records; and
 The applicable FRF, including its application in the entity’s industry.
(b) Compiling the Financial Information
 The practitioner shall compile the financial information using the records, documents,
explanations and other information, including significant judgments, provided by
management.
 The practitioner shall discuss with management, or TCWG as appropriate, those
significant judgments, for which the practitioner has provided assistance in the course
of compiling the financial information.
 Prior to completion of the compilation engagement, the practitioner shall read the
compiled financial information in light of his understanding of the entity’s business and
operations, and of the applicable FRF.
 If, in the course of the compilation engagement, the practitioner becomes aware that the
records, documents, explanations or other information, including significant judgments,
provided by management for the compilation engagement are incomplete, inaccurate or
otherwise unsatisfactory, the practitioner shall bring that to the attention of management
and request the additional or corrected information.
 If the practitioner is unable to complete the engagement because management has failed
to provide records, documents, explanations other information, including significant
judgments, as requested, the practitioner shall withdraw from the engagement and
inform management and TCWG of the reasons for withdrawing.
 If the practitioner becomes aware during the course of the engagement that:
(1) The compiled financial information does not adequately refer to or describe the
applicable FRF;
(2) Amendments to the compiled financial information are required for the financial
information not to be materially misstated; or

6
 (3) The compiled financial information is otherwise misleading,
the practitioner shall propose the appropriate amendments to management.
 If management declines, or does not permit the practitioner to make the proposed
amendments to the compiled financial information, the practitioner shall withdraw from
the engagement and inform management and TCWG of the reasons for withdrawing.
 If withdrawal from the engagement is not possible, the practitioner shall determine the
professional and legal responsibilities applicable in the circumstances.
 The practitioner shall obtain an acknowledgement from management or TCWG, as
appropriate, that they have taken responsibility for the final version of the compiled
financial information.

Communication with Management and TCWG

Practitioner shall communicate with management or TCWG, as appropriate, on a timely basis
during the course the compilation engagement, all matters concerning the compilation engagement
that, in the practitioner’s professional judgment, are of sufficient importance to merit the attention
of management or TCWG, as appropriate.

The Practitioner's Report

Practitioner’s report shall clearly communicate the nature of the compilation engagement, and the
practitioner’s role and responsibilities in the engagement. The practitioner’s report is not a vehicle
to express an opinion or conclusion on the financial information in any form.
Report shall be in writing, and shall include the following elements:
 The report title;
 The addressee(s), as required by the terms of the engagement;
 A statement that the practitioner has compiled the financial information based on information
provided by management;
 A description of the responsibilities of management, or TCWG as appropriate, in relation to
the compilation engagement, and in relation to the financial information;
 Identification of the applicable FRF and, if a special purpose FRF is used, a description or
reference to the description of that special purpose FRF in the financial information;
 Identification of the financial information, including the title of each element of the financial
information if it comprises more than one element, and the date of the financial information
or the period to which it relates;
 A description of the practitioner’s responsibilities in compiling the financial information,
including that the engagement was performed in accordance with this SRS, and that the
practitioner has complied with relevant ethical requirements;
 A description of what a compilation engagement entails in accordance with this SRS;
 Explanations that:
(1) Since a compilation engagement is not an assurance engagement, the practitioner is not
required to verify the accuracy or completeness of the information provided by
management for the compilation; and
(2) Accordingly, the practitioner does not express an audit opinion or a review conclusion
on whether the financial information is prepared in accordance with the applicable
financial reporting framework.

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  If the financial information is prepared using a special purpose FRF, an explanatory
paragraph that:
(1) Describes the purpose for which the financial information is prepared and, if necessary,
the intended users, or contains a reference to a note in the financial information that
discloses this information; and
(2) Draws the attention of readers of the report to the fact that the financial information is
prepared in accordance with a special purpose framework and that, as a result, the
information may not be suitable for other purposes;
 The date of the practitioner’s report
 The practitioner’s signature; and
 The Place of signature.
 The practitioner shall date the report on the date the practitioner has completed the
compilation engagement in accordance with this SRS.

Engagement level Quality Control (Engagement Level= EP) (Firm Level= MP)
EP shall take responsibility for:
 The overall quality of each compilation engagement to which that partner is assigned; and
 The engagement being performed in accordance with the firm’s quality control policies and
procedures.

Documentation (Pratha)
The practitioner shall include in the engagement documentation:
 Significant matters arising during the compilation engagement and how those matters were
addressed by the practitioner;
 A record of how the compiled financial information reconciles with the underlying records,
documents, explanations and other information, provided by management; and
 A copy of the final version of the compiled financial information for which management or
those charged with governance, as appropriate, has acknowledged their responsibility, and the
practitioner’s report.
The practitioner may consider also including in the engagement documentation a copy of the
entity’s trial balance, summary of significant accounting records or other information that the
practitioner used to perform the compilation.

Rachit’s Special:-
1. Report is given in BOTH stds
2. Opinion is NOT given in BOTH stds
3. EOM/OM para will NOT be included in BOTH
4. Independence is NOT mandatory in BOTH (But communication for non independence is
mandatory in SRS 4400)
5. Both applies in (700 or 800/ 700 or 805)

8
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-1)

(a) Difference between bank & NBFC

- NBFC cannot accept demand deposits (No CASA)
- Cannot issue cheques drawn on itself & hence cannot provide payment settlement services
- DICGC not available to depositors

(b) Meaning of NBFC

Sec. 45-1(f) of the RBI (Amendment) Act, 1997 defines a NBFC as:
 a financial institution which is a company,
 a non-banking institution which is a company with principal business of receiving of
deposits or lending in any manner;
 such other non-banking institution or class of such institutions, as the RBI, with the
previous approval of the C.G. may specify by notification in the Official Gazette.
NOTE
1. In order to identify whether a particular company is an NBFC, it is to be determined
whether the financial activity is the principal business of the company. (50-5 test)
2. Financial activity will be considered as principal business if the company’s financial
assets constitute more than 50% of the total assets (netted off by intangible assets) and
income from financial assets constitute more than 50% of the gross income

(c) Registration and regulation of NBFC (NBFC ko yeah karna padega)

 Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
commence or carry on (gajab) the business of a NBFC without:
1. obtaining a certificate of registration issued by the RBI; and
2. having the net owned fund (NOF) of 25 lakhs or such other amount, not
exceeding 100 Cr., as the Bank may, by notification in the Official Gazette,
specify.
NOTE
For all companies currently applying for registration as a NBFC, minimum NOF requirement
is 10 Crores (Pehle 2 Cr tha.)
All existing companies should meet NOF of 10 Crores in a phased manner by 31st March
2027. However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer
interface, the NOF shall continue to be 2 Crores.
 The registration is required where the financing activity is a principal business of the
company. (thankyou)
 However, to obviate dual regulation, certain categories of NBFC which are regulated by
other regulators are exempted from requirement of registration with the RBI, for example:
companies registered with SEBI or IRDA. (time pass)

1
  The RBI has issued directions to NBFC on acceptance of public deposits, prudential
norms, risk exposure norms & other measures to monitor financial solvency and reporting
by NBFC. (index of chapter)
 RBI also issued directions to auditors to report to the RBI, BOD and shareholders, any
noncompliance with the RBI Act and regulations made by the RBI.
Companies exempted from registration under RBI
1. Housing Finance Institutions (regulated by National Housing Bank);
2. Merchant Banking Companies (regulated by SEBI);
3. Stock Exchanges (regulated by SEBI);
4. Companies engaged in the business of stock-broking/sub-broking (regulated by SEBI);
5. Venture Capital Fund Companies (regulated by SEBI);
6. Nidhi Companies (regulated by MCA, Government of India);
7. Insurance Companies (regulated by IRDA);
8. Chit Companies (as defined in clause (b) of section 2 of the Chit Funds Act, 1982);
9. Micro Finance Companies;
10. Asset Reconstruction Companies;
NOTE
Core Investment Companies
 with asset size of less than 100 Cr.,
 with asset size of 100 Cr. and above but not accessing public funds
are exempted from registration with the RBI. (Varna saari choti moti HC ko rbi regulate
karne lag jayega)

(d) Types of NBFC

RBI vide its circular in the year 2006 classified the NBFC into following categories:
1. Investment and Credit Company (ICC).
2. Infrastructure Finance Company.
3. Systemically Important Core Investment Company.
4. Infrastructure debt Fund-NBFC.
5. NBFC-Micro Finance Institution.
6. Non-Banking Financial Company – Factors (NBFC-Factors).
7. Non-Operative Financial Holding Company (NOFHC).
NOTE
All NBFCs are either deposit taking or non-deposit taking. If they are non-deposit taking, ND is
suffixed to their name (NBFC-ND).
The NBFCs which have asset size of 500 Cr. or more are known as Systemically
Important NBFC.

2
(e) Scale Based Regulation (SBR): Revised Regulatory Framework for NBFCs
NBFC Layers based on SBR
(1) Base Layer
Base Layer shall comprise of:
 non-deposit taking NBFCs below the asset size of 1000 Cr. and
 NBFCs undertaking the following activities: (Always base layer)
(i) NBFC-Peer to Peer Lending Platform, (only provides platform)
(ii) NBFC-Account Aggregator, (Protean)
(iii) Non-Operative Financial Holding Company (IDFC, Bandhan)
(iv) NBFCs not availing public funds not having any customer interface. (very little)
(2) Middle Layer
Middle Layer shall consist of:
 all deposit taking NBFCs (NBFC-Ds), irrespective of asset size.
 Non-deposit taking NBFCs with asset size of 1000 Cr. and above and
 NBFCs undertaking the following activities:
(i) Standalone Primary Dealers, (icici securities PD ltd)
(ii) Infrastructure Debt Fund NBFC, (naam se samaj aa raha hoga)
(iii) Core Investment Companies. (Tata sons – just for eg)
(iv) Housing Finance Companies (HDFC- HFC)
(v) Infrastructure Finance Companies
(3) Upper Layer
 Upper Layer shall comprise of those NBFCs which are specifically identified by the
RBI as warranting enhanced regulatory requirement based on a set of parameters and
scoring methodology.
 Top ten (asset size) eligible NBFCs in terms of their shall always reside in the upper
layer, irrespective of any other factor.
(4) Top Layer
 Top Layer will ideally remain empty.
 This layer can get populated if the RBI is of the opinion that there is a substantial
increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such
NBFCs shall move to the Top Layer from the Upper Layer.

Categorisation of NBFCs carrying out specific activity

Following prescriptions shall apply in respect of the NBFCs:
NBFC-ND & asset size less than 100 crore Always= Base Layer
NBFC-AA, NBFC-P2P, NOFHC
NBFC W/O (public fund) (customer interface)

3
 Government owned NBFCs Base Layer or Middle Layer
ND & asset size more than/Equal 100 crore Middle Layer (Can be shifted to UL)
CIC, HFC, IFC
NBFC-D
SPD , IDF (Always in ML)
Remaining NBFCs any of the layers based on limits
(Inv & credit co, Mortgage gurantee, Micro finance,
Factors)
Top 10 NBFC;s based on Asset size AND Always Upper layer
Based on RBI defined criteria
Empty list- Only for potential Systemic Risk Top layer

Transition of Law
PAST PRESENT

NBFC-ND-SI NBFC-ND-NSI= BL
NBFC-ND-NSI NBFC-ND-SI (500 to 1000 cr) = BL
NBFC-D-SI
NBFC-D-NSI NBFC-D = ML
NBFC-ND-SI (1000 cr or more) = ML
(Asset Upto 500 cr= NSI
More than/equal= SI)

Department of Non banking supervision (RBI)- forms

Form No Filing Date Purpose Type of NBFC
NBS-1 15- Jul/Oct/Jan/Apr Returns of Deposits NBFC-D
NBS-2 15- Jul/Oct/Jan/Apr Return on prudential norms NBFC-D
NBS-3 15- Jul/Oct/Jan/Apr Return on Liquidity NBFC-D
NBS-7 15- Jul/Oct/Jan/Apr Return on prudential norms NBFC-ND-SI

4
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-2)

Prudential Norms (NBS- 2/7)

Capital Requirements
 Every NBFC shall maintain a capital ratio consisting of (Tier I and Tier II) capital of its
(aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance
sheet items), which shall not be less than 15%.
 The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDF-
NBFC), at any point of time, shall not be less than 10%.
 NBFCs engaged in lending against gold jewellery shall maintain a minimum Tier I capital
of 12%. (Muthoot, Mannapuram, Cholamandalam)
Summary
Tier 1 + Tier 2 15%
Tier 1 (remaining) 10%
Tier 1 (Jewellery) 12%

Income Recognition (same as banks)

 In case of NPA, income including interest/discount/hire charges/lease rentals etc. shall be
recognised only when it is actually realised. (NPA= cash basis)
 In case of NPA, any income recognised before the asset became NPA and remaining
unrealised shall be reversed. (Pre NPA accrual Income = Reverse)

Asset Classification
Every NBFC shall, after taking into account the degree of well-defined credit weaknesses and
extent of dependence on collateral security for realisation, classify its lease/hire purchase assets,
loans and advances and any other forms of credit into the following classes, namely:
1. Standard assets;
2. Sub-standard assets;
3. Doubtful assets; and
4. Loss assets.
(1) Standard Assets
The asset in respect of which, no default in repayment of principal or payment of interest is
perceived and which does not disclose any problem or carry more than normal risk attached
to the business.
(2) Sub-standard Assets
 An asset which has been classified as NPA for a period not exceeding 12 months (18
months in case of NSI-ND taking company) for the financial year ending March 31,
2018 and thereafter.

5
  An asset where the terms of the agreement regarding interest and/or principal have
been renegotiated or rescheduled or restructured after commencement of operations,
until the expiry of one year of satisfactory performance under the renegotiated or
rescheduled or restructured terms.
(3) Doubtful assets
An Asset which remains a sub-standard asset for a period exceeding 12 months (18 months
in case of NSI-ND taking company) for the financial year ending March 31, 2018 and
thereafter.
(4) Loss Assets
 An asset identified as loss asset by the applicable NBFC or its internal or external
auditor or by the Bank during the inspection of the applicable NBFC, to the extent it
is not written off by the applicable NBFC; and
 An asset which is adversely affected by a potential threat of non-recoverability due to
either erosion in the value of security or non-availability of security or due to any
fraudulent act or omission on the part of the borrower.
(5) Non-Performing Assets
 When remained overdue for a period of 6 months or more from due date
 In case of ND-SI taking Company and Deposit taking Company, period of ‘6 months
or more’ stipulated shall be readed as ‘3 months or more’.
 If lease rental and hire purchase instalment, which has become overdue for a period of
12 months or more (In case of SI-ND taking Company and Deposit taking Company,
period of ’12 months or more’ stipulated in sub-clause (g) shall be ‘3 months or
more’.);

ND NSI 6 months from due date (NPA), (Lease/HP= 12 months)

ND-SI/ Deposit 3 months from due date (NPA)

ND NSI 18 months from NPA (remain sub standard)

ND-SI/ Deposit 12 months from NPA (remain sub standard)

Provisioning Requirements
(1) Standards Assets
Every applicable NBFC shall make provisions for standard assets at 0.40% (0.25% in case
of NSI-ND taking company) the end of March, 2018 and thereafter
The provision towards standard assets need not be netted from advances but shall be shown
separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.
(2) Substandard Assets
A general provision of 10% of total outstanding shall be made.

6
(3) Doubtful Assets
(i) Unsecured portion
100% to the extent to which the advance is not covered by the realisable value of the
security.
(ii) Secured portion
Period for which the asset has been % of
considered as doubtful provision
Up to one year 20
One to three years 30
More than three years 50
(4) Loss Assets
The entire asset shall be written off. If the assets are permitted to remain in the books for
any reason, 100% of the outstanding shall be provided for.

7
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-3)

Audit Procedure
(a) Ascertaining the Business (Understanding the entity & its env)
To ascertain the business of the company, auditor is required to study the following:
1. Memorandum and Articles of Association of the company. (MOA/AOA)
2. Business Policies of the company. (type of nbfc)
3. Minutes of the Board/Committee meetings.
(b) Evaluation of Internal Control System (Including internal control)
 Auditor is required to evaluate internal control system prevailing in the NBFC to ensure
that the internal controls put in place by the NBFC are adequate and are being effectively
followed.
 Auditor is required, in particular, to review the effectiveness of system of recovery and
periodical review of advances because any deficiency in these systems may result in high
level of NPAs.
(c) Registration with the RBI (Obvious point for NBFC)
Auditor should obtain a copy of the certificate of registration granted by the RBI or in case the
registration has not been granted, a copy of the application form filed with the RBI needs to be
obtained.
(d) Compliance of Public Deposit Directions (Transactions while accepting deposits)
1. Credit Rating:
 Obtain a copy of the credit rating assigned to NBFC and
 check whether the public deposits are in accordance with the level of credit rating
assigned to it.
 In the event of upgrading/downgrading of credit rating, the auditor should bear in
mind that the NBFC will have to increase/reduce its public deposits in accordance
with the revised credit rating assigned.
 Ensure that the NBFC has informed about the same to the RBI in writing.
In the event of downgrading of credit rating below the minimum specified investment
grade, a NBFC, being an investment and credit company or a factor, shall regularise the
excess deposit as provided hereunder:
 with immediate effect, stop accepting fresh public deposits and renewing existing
deposits;
 all existing deposits shall run off to maturity; and
 report the position within 15 working days, to the concerned Regional Office of the
RBI where the NBFC is registered.

8
 2. Custody of investments: Check whether investments made in approved liquid assets
have been lodged in safe custody with a designated bank. Obtain a certificate from the
bank to that effect.
3. Interest and Brokerage payments: Test checks the interest and brokerage calculations
to ascertain that the NBFC has not paid in excess.
4. Deposit Register: Verify deposit register and test check particulars that have been
entered therein in respect of each depositor with supporting receipts issued to the
depositors.
5. Filing of Returns: Check whether the NBFC has filed its returns in specified time.
6. Written Application: Examine whether the NBFC has accepted or renewed any public
deposit only after a written application form the depositor in the specified form.
7. Board Resolution in case of non-acceptance of public deposits: In case NBFC is not
accepting/holding public deposits, check whether a board resolution has been passed by
the NBFC to the effect that it has neither accepted any public deposits nor would it
accept any public deposits during the year.
(e) Compliance of Prudential Norms by NBFC (Time pass)
1. Prudential Norms: The auditor has to verify the compliance of prudential norms
relating to:
 Income recognition;
 Income from investments;
 Asset classification
 Provision for bad & doubtful debts;
 Capital adequacy norm;
 Prohibition of granting loans against its own shares;
 Prohibition on loans & investments for failure to repay public deposits &
 Norms for concentration of credit etc.
2. Policy for demand Loans: The auditor shall ensure that Board of the NBFC shall frame
a policy for granting demand/call loans and implement the same.
3. Classification of Advances: The auditor should verify the classification of advances and
loans as standard/sub-standard/doubtful/loss and that proper provision has been made in
accordance with the directions.
4. Income from NPA: Auditor should ensure that unrealised income from non-performing
assets has not been taken to profit and Loss Account.
5. Recovery in NPA Accounts: The auditor should check all NPAs of the previous year to
verify whether during the current year any payments have been received or still they
continue to be NPA during the current year also.

9
Master Direction – Monitoring of Frauds in NBFC (Reserve Bank) Directions, 2016
Classification of Frauds
In order to have uniformity in reporting, frauds have been classified as under mainly based on the
provisions of the Indian Penal Code:
 Misappropriation and criminal breach of trust.
 Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property.
 Unauthorised credit facilities extended for reward or for illegal gratification.
 Negligence and cash shortages.
 Cheating and forgery.
 Irregularities in foreign exchange transactions.
 Any other type of fraud not coming under the specific heads as above.
NOTE
Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’ referred
to in items (d) and (f) above are to be reported as fraud if the intention to cheat/defraud is
suspected/proved. However, the following cases where fraudulent intention is not suspected/proved, at
the time of detection, will be treated as fraud and reported accordingly:
 Cases of cash shortages more than 10,000; and
 Cases of cash shortages more than 5,000 if detected by management/auditor/ inspecting officer
and not reported on the occurrence by the persons handling cash.

Audit Check List/ Audit Procedures

(a) Investment and Credit Company (tata capital)
(1) Points related to investment
(i) Authorization: Verify the Board Minutes for purchase and sale of investments.
(ii) Physical Verification: Auditor should physically verify the securities held by a
NBFC. Where any security is lodged with an institution or a bank, a certificate from
the bank/institution to that effect must be verified.
(iii) External Confirmations: In respect of shares/securities held through a depository,
obtain a confirmation from the depository regarding the shares/securities held by it on
behalf of the NBFC. Obtain a confirmation from the approved intermediary regarding
securities deposited with/borrowed from it as at the year end.
(iv) Classification: Ascertain from the Board resolution or obtain a management certificate
to the effect that the investments so acquired are current investments or Long Term
Investments.
(v) Valuation: Check whether the investments have been valued in accordance with the
NBFC Prudential Norms Directions and adequate provision for fall in the market value
10
 of securities, wherever applicable, have been made there against, as required by the
Directions.
(vi) Compliance of AS 13: An auditor will have to ascertain whether the requirements of
AS 13 “Accounting for Investments” or other accounting standard, as applicable, (to
the extent they are not Inconsistent with the Directions) have been duly complied with
by the NBFC.
(vii) Income recognition: Verify that dividend income has been duly received and
accounted for. Dividend income on shares and units of mutual funds to be recognised
on cash basis. However, NBFC has an option to account dividend income on accrual
basis, if same has been declared by the body corporate in its AGM and its right to
receive the payment has been established.
Income from bonds/debentures to be accounted on accrual basis only if the interest rate
on these instruments is predetermined and interest is serviced regularly and not in
arrears.
(2) Points Related to Credit (loans & advances)
(i) Sanctioning: Auditor should examine whether each loan or advance has been properly
sanctioned.
(ii) Security: Auditor should verify the security obtained and the agreements entered into,
if any, with the concerned parties in respect of the advances given. Ascertain the nature
and value of security and the net worth of the borrower/guarantor.
(iii) Loan against own shares: Verify whether the NBFC has not advanced any loans
against the -security of its own shares. (GAJAB)
(iv) Compliance of Prudential Norms: Check whether the NBFC has not lent/invested in
excess of the specified limits to any single borrower or group of borrowers as per
NBFC Prudential Norms Directions.
(v) Classification: Check the classification of loans and advances Assets, Sub-Standard
Assets, Doubtful Assets and Loss Assets and the adequacy of provision for bad and
doubtful debts.
(vi) Appraisal and follow up System: Verify whether NBFC has an adequate system of
proper appraisal and follow up of loans and advances. In addition, he may analyse the
trend of its recovery performance to ascertain that the NBFC does not have an unduly
high level of NPAs.

(b) NBFC-P2P
 Obtain an understanding of business conducted by NBFC-P2P. Verify verified that
company undertakes only permissible activities like providing online marketplace to
participants for lending and borrowing. It should not be engaged in business of lending
funds on its own.
 Verify certificate of registration obtained from RBI.
 Verify adherence to lending and borrowing guidelines prescribed by RBI.

11
  Ensure compliance with reporting requirements of RBI.
 Verify Board approved policy setting out eligibility criteria for participants i.e. lenders and
borrowers.
 Verify Board approved policy for pricing of services.
 Verify Board approved policy for grievance redressal and complaints.
 Verify the appropriateness of arrangements entered into among participants & NBFC-P2P.

NBFC Auditor’s Report (Reserve Bank) Directions, 2016

In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the auditor shall
also make a separate report to the Board of Directors of the Company on the matters as specified in
paragraphs 3 and 4 of the directions.
(a) Matters to be reported in case of all NBFC – Para 3(A)
 Whether company has obtained a Certificate of Registration (CoR);
 In case of a company holding CoR, whether company is entitled to continue to hold such
CoR in terms of its Principal Business Criteria as on March 31 of the applicable year;
 Whether NBFC is meeting the required net owned fund requirement.
NOTE
NBFC shall submit a Certificate from its Statutory Auditor that it is engaged in the business of
non-banking financial institution requiring it to hold a CoR and is eligible to hold it, within one
month from the date of finalization of the balance sheet and in any case not later than December
30th of that year.
(b) Matters to be reported in case of NBFC Accepting Public Deposits – Para 3(B)
Apart from the matters enumerated in (A) above, auditor shall include a statement on the
following matters, namely:
1. Whether the public deposits accepted are within the limits admissible to the company;
accepting;
2. Whether the public deposits held by the company in excess of permissible quantum are
regularised in the manner provided;
3. Whether NBFC is accepting “public deposit” without minimum investment grade credit
rating;
4. Whether capital adequacy ratio has been correctly determined and whether such ratio is
in compliance with the minimum prescribed CRAR;
5. Whether company has violated any restriction on acceptance of public deposit;
6. Whether company has defaulted in paying to its depositors the interest and/or principal
amount of the deposits after such interest and/or principal became due;
7. Whether company has complied with the prudential norms on income recognition
accounting standards, asset classification, provisioning for bad and doubtful debts etc.;

12
 8. Whether company has complied with the prescribed liquid assets requirement and
whether details of the designated bank in which approved securities are held is
communicated to the office concerned of the RBI in terms of NBS 3;
9. Whether company has furnished return on deposits in prescribed from (NBS 1);
10. Whether company has furnished to the Bank the quarterly return on prudential norms
within the prescribed time.
(c) Matters to be reported in case of NBFC not accepting public deposits – Para 3(C)
Apart from the aspects enumerated in (A) above, auditor shall include a statement on the
following matters, namely:
1. Whether BOD has passed a resolution for non-acceptance of any public deposits;
2. Whether company has accepted any public deposits during the relevant period/year.
3. Whether company has complied with the prudential norms relating to income
recognition, accounting standards, asset classification and provisioning for bad and
doubtful debts etc.,
4. In respect of Systemically Important Non-deposit taking NBFCs:
 Whether capital adequacy ratio as disclosed in the return submitted to RBI in form
NBS-7 has been correctly arrived at and whether such ratio is in compliance with
minimum CRAR prescribed by RBI;
 Whether company has furnished annual statement of capital funds, risk assets/
exposures and risk asset ratio within the stipulated period.
5. Whether the NBFC has been correctly classified as NBFC Micro Finance Institutions
(MFI).
(d) Reasons to be stated for unfavourable or qualified statements – Para 4
 Where, in auditor’s report, statement regarding any of the items referred to in paragraph 3
above is unfavourable or qualified, the auditor’s report shall also state the reasons for such
unfavourable or qualified statement, as the case may be.
 Where the auditor is unable to express any opinion on any of the items referred to in
paragraph 3 above, his report shall indicate such fact together with reasons therefore.
(e) Obligation of auditor to submit exception report to the Bank – Para 5
Where, the statement regarding any of the items referred to in para 3, is unfavourable or to
qualified, or in the opinion of the auditor the company has not complied with:
1. the provisions of Chapter III-B of Reserve Bank of India Act, 1934; or
2. the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
3. NBFC-NSI-ND taking Company (Reserve Bank) Directions, 2016 and NBFC-SI-ND
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016,
it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be, to

13
 concerned Regional Office of the Department of Non-Banking Supervision of the Bank under
whose jurisdiction the registered office of the company is located.
NOTE
Duty of the Auditor to submit exception report shall be to report only the contraventions of the
provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not
contain any statement with respect to compliance of any of those provisions.

Compliance with CARO, 2020

(a) Para 3(iii)
Reporting Requirement
Whether during the year the company has made investments in, provided any Requirements
guarantee or security or granted any loans or advances in the nature of loans, Secured or
unsecured , to companies, firms, LLPs or any other parties, If so:
 whether the investments made, guarantees provided, security given and the terms and
conditions of the grant of all loans and advances in the nature of guarantees provided are
not prejudicial to the company’s interest,
 in respect of loans and advances in the nature of loans, whether the schedule of repayment
of principal and payment of interest has been stipulated and whether the repayments or
receipts are regular;
 if the amount is overdue, state the total amount overdue for more than ninety days, and
whether reasonable steps have been taken by the company recovery of the principal and
interest; for
 whether the company has granted any loans or advances in the loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the
aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans
granted to Promoters, related parties as defined in Sec. 2(76) of the Companies Act, 2013.
(b) Para 3(xvi)
(1) Reporting Requirement
 Whether the company is required to be registered under Section 45-1A of the RBI
Act, 1934 and if so, whether the registration has been obtained;
 Whether the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of
India as per the Reserve Bank of India Act, 1934;
 Whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the
criteria of a CIC, and in case the company is an exempted or unregistered CIC,
whether it continues to fulfil such criteria;

14
  Whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICs which are part of the Group;
Meaning of Core Investment Company
A NBFC carrying on business of acquisition of shares and securities and which satisfies the
following conditions as on the date of the last audited balance sheet:
(i) holds not less than 90% of its net assets in form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
(ii) its investments in the equity shares in group companies and units of Infrastructure
Investment Trust only as sponsor constitute not less that 60% of its net assets;
(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
(iv) it does not carry on any other financial activity.
(2) Related Provisions
 Sec. 45-1A of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
commence or carry on the business of a NBFC without obtaining a certificate of
registration from RBI.
 The registration is required where the financing activity is a principal business of the
company.
 Financial activity will be considered as principal business if company’s financial
assets constitute more than 50% of total assets and income from financial assets
constitute more than 50% of the gross income, A company which fulfils both criteria
is required to get itself registered as NBFC with RBI.
 This test is popularly known as 50-50 test and is applied to determine whether or not
a company is into financial business.
(3) Audit Procedure and Reporting
 Examine the transactions of the company with relation to the activities covered under
the RBI Act and directions to determine whether the company is engaged in financial
activity.
 Examine the financial statements to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.
 Ascertain whether the net owned funds of the company exceed such amount so as to
require the company to get itself registered as NBFC with RBL
 Ascertain whether the company has obtained the registration as NBFC, if not, the
reasons should be sought from the management and documented.
 Auditor’s Report under CARO, 2020 shall incorporate the following:
1. Whether registration is required u/s 45-IA of the RBI Act, 1934.
2. If so, whether it has obtained the registration.

15
 3. If the registration not obtained, reasons thereof.

IND AS and Schedule III

(a) Applicability of Ind AS on NBFCs
NBFCs are required to comply with Indian Accounting Standards (Ind AS) as under:
1. Accounting periods beginning 1 April 2018: Listed and unlisted NBFCs having a net
worth NBFCs of > 500 Cr. and holding, subsidiary, joint venture or associate
companies of such NBFCs;
2. Accounting periods beginning 1 April 2019: All other listed NBFCs, unlisted NBFCs
having a net worth of ≥ 250 Cr. or more but < 500 Cr. and holding, subsidiary, joint
venture or associate companies of such NBFCs.
(b) Schedule III
Schedule III to the Companies Act, 2013 has been divided into three divisions:
 Division I deal with F.S. for a company whose F.S. are required to comply with the
Companies (AS) Rules, 2006. (Normal co= AS)
 Division II deals with F.S. for a company whose F.S. are drawn up in compliance of the
Companies (Ind AS) Rules, 2015. (Normal co=Ind As)
 Division III deals with F.S. for a Non-Banking Financial Company (NBFC) whose F.S.
are drawn up in compliance of the Companies (Ind AS) Rules, 2015. (NBFC= Ind As)

(1) Parts of Division III

Division III has been divided as follows:
 Part I contains the form in which the Balance Sheet of a company required to comply
with Ind AS and states the general instructions as regard to preparation of Balance
Sheet.
 Part II contains the form and states the general instructions as regard to preparation of
Statement of Profit and Loss.
 Part III contains general instructions for preparation of Consolidated F.S.
(2) Differences between Division II & Division III
The presentation requirements under Division III for NBFCs are similar to Division II
(Non-NBFC) to a large extent except for the following:
(i) NBFCs have been allowed to present the items of the balance sheet in order of their
liquidity which is not allowed to companies required to follow Division II.
Additionally, NBFCs are required to classify items of the balance sheet into financial
and non-financial whereas other companies are required to classify the items into
current and non-current.
(ii) An NBFC is required to separately disclose by way of a note any item of ‘other
income’ or ‘other expenditure’ which exceeds 1% of the total income. Division II, on

16
 the other hand, requires disclosure for any item of income or expenditure which
exceeds 1% of the revenue from operations or 10 lakhs, whichever is higher.
(iii) NBFCs are required to separately disclose under ‘receivables’, the debts due from any
Limited Liability Partnership (LLP) in which its director is a partner or member.
(iv) NBFCs are also required to disclose items comprising ‘revenue from operations’ and
‘other comprehensive income’ on the face of the Statement of profit and loss instead of
showing those only as part of the notes.
(v) Separate disclosure of trade receivable which have significant increase in credit risk &
credit impaired.
(vi) The conditions or restrictions for distribution attached to statutory reserves have to be
separately disclose in the notes as stipulated by the relevant statute.

Particulars Normal co (Division 2) NBFC (Division 3)

Present the items of the balance sheet Not allowed in order of their liquidity
classify items of the balance sheet current and non-current financial and non-financial
Disclose of ‘other income’ or ‘other exceeds (WEH) exceeds 1% of the total income
expenditure’ 1% of the revenue or
10 lakhs
disclose under ‘receivables’ Not to be done debts due from LLP
(director = partner or member)
Items comprising ‘revenue from Disclose them only as part Disclose them on the face of
operations’ ‘OCI’ of the notes. P&L
disclosure of TR which have Sig No Yes
increase in credit risk & credit
impaired
Disclosure of restrictions for No Yes
distribution of statutory reserves

17
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-1)

Difference between bank & NBFC

✓ NBFC cannot accept demand deposits (No CASA)
✓ Cannot issue cheques drawn on itself & hence cannot provide payment settlement services
✓ DICGC not available to depositors

Meaning of NBFC
Sec. 45-1(f) of the RBI (Amendment) Act, 1997 defines a NBFC as:
▪ a financial institution which is incorporated under Companies Act, 2013,
▪ a non-banking institution which is a company with principal business of receiving of deposits or
lending in any manner;
▪ such other non-banking institution or class of such institutions, as the RBI, with the previous
approval of the C.G. may specify by notification in the Official Gazette.
NOTE
1. In order to identify whether a particular company is an NBFC, it is to be determined whether the
financial activity is the principal business of the company. (50-5 test)
2. Financial activity will be considered as principal business if the company’s financial assets
constitute more than 50% of the total assets (netted off by intangible assets) and income from
financial assets constitute more than 50% of the gross income

Registration and regulation of NBFC (NBFC ko yeah karna padega)

Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry
on (gajab) the business of a NBFC without:
1. obtaining a certificate of registration issued by the RBI; and
2. having the net owned fund (NOF) of ` 25 lakhs or such other amount, not exceeding ` 100
Cr., as the Bank may, by notification in the Official Gazette, specify.
NOTE
✓ For all companies currently applying for registration as a NBFC, minimum NOF requirement
is 10 Crores (Pehle 2 Cr tha)
✓ All existing companies should meet NOF of ` 10 Crores in a phased manner by 31st March
2027. However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer
interface, the NOF shall continue to be ` 2 Crores.
✓ The registration is required where the financing activity is a principal business of the company.
(thankyou)
✓ However, to obviate dual regulation, certain categories of NBFC which are regulated by other
regulators are exempted from requirement of registration with the RBI, for example: companies
registered with SEBI or IRDA. (time pass)

1
 ✓ The RBI has issued directions to NBFC on acceptance of public deposits, prudential norms,
risk exposure norms & other measures to monitor financial solvency and reporting by NBFC.
(index of chapter)
✓ RBI also issued directions to auditors to report to the RBI, BOD and shareholders, any
noncompliance with the RBI Act and regulations made by the RBI.
Companies exempted from registration under RBI
1. Housing Finance Institutions (regulated by National Housing Bank);
2. Merchant Banking Companies (regulated by SEBI);
3. Stock Exchanges (regulated by SEBI);
4. Companies engaged in the business of stock-broking/sub-broking (regulated by SEBI);
5. Venture Capital Fund Companies (regulated by SEBI);
6. Nidhi Companies (regulated by MCA, Government of India);
7. Insurance Companies (regulated by IRDA);
8. Chit Companies (as defined in clause (b) of section 2 of the Chit Funds Act, 1982);
9. Micro Finance Companies;
10. Asset Reconstruction Companies;
NOTE
Core Investment Companies
✓ with asset size of less than ` 100 Cr.,
✓ with asset size of ` 100 Cr. and above but not accessing public funds
are exempted from registration with the RBI. (Varna saari choti moti HC ko rbi regulate karne lag
jayega)

Types of NBFC
RBI vide its circular in the year 2006 classified the NBFC into following categories:
1. Investment and Credit Company (ICC).
2. Infrastructure Finance Company.
3. Systemically Important Core Investment Company.
4. Infrastructure debt Fund-NBFC.
5. NBFC-Micro Finance Institution.
6. Non-Banking Financial Company – Factors (NBFC-Factors).
7. Non-Operative Financial Holding Company (NOFHC).
NOTE
All NBFCs are either deposit taking or non-deposit taking. If they are non-deposit taking, ND is
suffixed to their name (NBFC-ND).

2
 The NBFCs which have asset size of ` 500 Cr. or more are known as Systemically
Important NBFC.

Scale Based Regulation (SBR): Revised Regulatory Framework for NBFCs

NBFC Layers based on SBR
(1) Base Layer
Base Layer shall comprise of:
▪ non-deposit taking NBFCs below the asset size of ` 1000 Cr. and
▪ NBFCs undertaking the following activities: (Always base layer)
(i) NBFC-Peer to Peer Lending Platform, (only provides platform)
(ii) NBFC-Account Aggregator, (Protean)
(iii) Non-Operative Financial Holding Company (IDFC, Bandhan)
(iv) NBFCs not availing public funds not having any customer interface. (very little)
(2) Middle Layer
Middle Layer shall consist of:
▪ all deposit taking NBFCs (NBFC-Ds), irrespective of asset size.
▪ Non-deposit taking NBFCs with asset size of ` 1000 Cr. and above and
▪ NBFCs undertaking the following activities:
(i) Standalone Primary Dealers, (icici securities PD ltd)
(ii) Infrastructure Debt Fund NBFC, (naam se samaj aa raha hoga)
(iii) Core Investment Companies. (Tata sons – just for eg)
(iv) Housing Finance Companies (HDFC- HFC)
(v) Infrastructure Finance Companies
(3) Upper Layer
▪ Upper Layer shall comprise of those NBFCs which are specifically identified by the RBI as
warranting enhanced regulatory requirement based on a set of parameters and scoring
methodology.
▪ Top ten (asset size) eligible NBFCs in terms of their shall always reside in the upper layer,
irrespective of any other factor.
(4) Top Layer
▪ Top Layer will ideally remain empty.
▪ This layer can get populated if the RBI is of the opinion that there is a substantial increase in
the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall
move to the Top Layer from the Upper Layer.

Categorisation of NBFCs carrying out specific activity

Following prescriptions shall apply in respect of the NBFCs:

3
 NBFC-ND & asset size less than 100 crore Always= Base Layer
NBFC-AA, NBFC-P2P, NOFHC
NBFC W/O (public fund) (customer interface)
Government owned NBFCs Base Layer or Middle Layer
ND & asset size more than/Equal 100 crore Middle Layer (Can be shifted to UL)
CIC, HFC, IFC
NBFC-D
SPD , IDF (Always in ML)
Remaining NBFCs any of the layers based on limits
(Inv & credit co, Mortgage gurantee, Micro finance,
Factors)
Top 10 NBFC;s based on Asset size AND Always Upper layer
Based on RBI defined criteria
Empty list- Only for potential Systemic Risk Top layer

Transition of Law
PAST PRESENT

NBFC-ND-SI NBFC-ND-NSI= BL
NBFC-ND-NSI NBFC-ND-SI (500 to 1000 cr) = BL
NBFC-D-SI
NBFC-D-NSI NBFC-D = ML
NBFC-ND-SI (1000 cr or more) = ML
(Asset Upto 500 cr= NSI
More than/equal= SI)

Department of Non banking supervision (RBI)- forms

Form No Filing Date Purpose Type of NBFC
NBS-1 15- Jul/Oct/Jan/Apr Returns of Deposits NBFC-D
NBS-2 15- Jul/Oct/Jan/Apr Return on prudential norms NBFC-D
NBS-3 15- Jul/Oct/Jan/Apr Return on Liquidity NBFC-D
NBS-7 15- Jul/Oct/Jan/Apr Return on prudential norms NBFC-ND-SI

4
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-2)
(Prudential Norms (NBS- 2/7))

Capital Requirements
▪ Every NBFC shall maintain a capital ratio consisting of (Tier I and Tier II) capital of its
(aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet
items), which shall not be less than 15%.
▪ The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDF-NBFC), at any
point of time, shall not be less than 10%.
▪ NBFCs engaged in lending against gold jewellery shall maintain a minimum Tier I capital of
12%. (Muthoot, Mannapuram, Cholamandalam)

Summary
Tier 1 + Tier 2 15%
Tier 1 (remaining) 10%
Tier 1 (Jewellery) 12%

Income Recognition (same as banks)

▪ In case of NPA, income including interest/discount/hire charges/lease rentals etc. shall be
recognised only when it is actually realised. (NPA= cash basis)
▪ In case of NPA, any income recognised before the asset became NPA and remaining unrealised
shall be reversed. (Pre NPA accrual Income = Reverse)

Asset Classification
Every NBFC shall, after taking into account the degree of well-defined credit weaknesses and extent of
dependence on collateral security for realisation, classify its lease/hire purchase assets, loans and
advances and any other forms of credit into the following classes, namely:
1. Standard assets;
2. Sub-standard assets;
3. Doubtful assets; and
4. Loss assets.
(1) Standard Assets
The asset in respect of which, no default in repayment of principal or payment of interest is
perceived and which does not disclose any problem or carry more than normal risk attached to the
business.
(2) Sub-standard Assets

5
 ▪ An asset which has been classified as NPA for a period not exceeding 12 months (18 months
in case of NSI-ND taking company) for the financial year ending March 31, 2018 and
thereafter.
▪ An asset where the terms of the agreement regarding interest and/or principal have been
renegotiated or rescheduled or restructured after commencement of operations, until the
expiry of one year of satisfactory performance under the renegotiated or rescheduled or
restructured terms.
(3) Doubtful assets
An Asset which remains a sub-standard asset for a period exceeding 12 months (18 months in case
of NSI-ND taking company) for the financial year ending March 31, 2018 and thereafter.
(4) Loss Assets
▪ An asset identified as loss asset by the applicable NBFC or its internal or external auditor or
by the Bank during the inspection of the applicable NBFC, to the extent it is not written off
by the applicable NBFC; and
▪ An asset which is adversely affected by a potential threat of non-recoverability due to either
erosion in the value of security or non-availability of security or due to any fraudulent act or
omission on the part of the borrower.
(5) Non-Performing Assets
▪ When remained overdue for a period of 6 months or more from due date
▪ In case of ND-SI taking Company and Deposit taking Company, period of ‘6 months or
more’ stipulated shall be readed as ‘3 months or more’.
▪ If lease rental and hire purchase instalment, which has become overdue for a period of 12
months or more (In case of SI-ND taking Company and Deposit taking Company, period of
’12 months or more’ stipulated in sub-clause (g) shall be ‘3 months or more’.);

ND NSI 6 months from due date (NPA), (Lease/HP= 12 months)

ND-SI/ Deposit 3 months from due date (NPA)

ND NSI 18 months from NPA (remain sub standard)

ND-SI/ Deposit 12 months from NPA (remain sub standard)

Provisioning Requirements
(1) Standards Assets
Every applicable NBFC shall make provisions for standard assets at 0.40% (0.25% in case of NSI-
ND taking company) the end of March, 2018 and thereafter
The provision towards standard assets need not be netted from advances but shall be shown
separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.
(2) Substandard Assets
A general provision of 10% of total outstanding shall be made.

6
(3) Doubtful Assets
(i) Unsecured portion
100% to the extent to which the advance is not covered by the realisable value of the security.
(ii) Secured portion
Period for which the asset has been % of
considered as doubtful provision
Up to one year 20
One to three years 30
More than three years 50
(4) Loss Assets
The entire asset shall be written off. If the assets are permitted to remain in the books for any
reason, 100% of the outstanding shall be provided for.

All asset NPA= Borrower wise

Lease/HP= Facility wise

7
 AUDIT OF NON-BANKING FINANCIAL COMPANIES (Part-3)

Audit Procedure
(a) Ascertaining the Business (Understanding the entity & its env)
To ascertain the business of the company, auditor is required to study the following:
1. Memorandum and Articles of Association of the company. (MOA/AOA)
2. Business Policies of the company. (type of nbfc)
3. Minutes of the Board/Committee meetings.
(b) Evaluation of Internal Control System (Including internal control)
▪ Auditor is required to evaluate internal control system prevailing in the NBFC to ensure
that the internal controls put in place by the NBFC are adequate and are being effectively
followed.
▪ Auditor is required, in particular, to review the effectiveness of system of recovery and
periodical review of advances because any deficiency in these systems may result in high
level of NPAs.
(c) Registration with the RBI (Obvious point for NBFC)
Auditor should obtain a copy of the certificate of registration granted by the RBI or in case the
registration has not been granted, a copy of the application form filed with the RBI needs to be
obtained.
(d) Compliance of Public Deposit Directions (Transactions while accepting deposits)
1. Credit Rating:
▪ Obtain a copy of the credit rating assigned to NBFC and
▪ check whether the public deposits are in accordance with the level of credit rating
assigned to it.
▪ In the event of upgrading/downgrading of credit rating, the auditor should bear in
mind that the NBFC will have to increase/reduce its public deposits in accordance
with the revised credit rating assigned.
▪ Ensure that the NBFC has informed about the same to the RBI in writing.
In the event of downgrading of credit rating below the minimum specified investment
grade, a NBFC, being an investment and credit company or a factor, shall regularise the
excess deposit as provided hereunder:
▪ with immediate effect, stop accepting fresh public deposits and renewing existing
deposits;
▪ all existing deposits shall run off to maturity; and
▪ report the position within 15 working days, to the concerned Regional Office of the
RBI where the NBFC is registered.

8
 2. Custody of investments: Check whether investments made in approved liquid assets
have been lodged in safe custody with a designated bank. Obtain a certificate from the
bank to that effect.
3. Interest and Brokerage payments: Test checks the interest and brokerage calculations
to ascertain that the NBFC has not paid in excess.
4. Deposit Register: Verify deposit register and test check particulars that have been
entered therein in respect of each depositor with supporting receipts issued to the
depositors.
5. Filing of Returns: Check whether the NBFC has filed its returns in specified time.
6. Written Application: Examine whether the NBFC has accepted or renewed any public
deposit only after a written application form the depositor in the specified form.
7. Board Resolution in case of non-acceptance of public deposits: In case NBFC is not
accepting/holding public deposits, check whether a board resolution has been passed by
the NBFC to the effect that it has neither accepted any public deposits nor would it
accept any public deposits during the year.
(e) Compliance of Prudential Norms by NBFC (Time pass)
1. Prudential Norms: The auditor has to verify the compliance of prudential norms
relating to:
▪ Income recognition;
▪ Income from investments;
▪ Asset classification
▪ Provision for bad & doubtful debts;
▪ Capital adequacy norm;
▪ Prohibition of granting loans against its own shares;
▪ Prohibition on loans & investments for failure to repay public deposits &
▪ Norms for concentration of credit etc.
2. Policy for demand Loans: The auditor shall ensure that Board of the NBFC shall frame
a policy for granting demand/call loans and implement the same.
3. Classification of Advances: The auditor should verify the classification of advances and
loans as standard/sub-standard/doubtful/loss and that proper provision has been made in
accordance with the directions.
4. Income from NPA: Auditor should ensure that unrealised income from non-performing
assets has not been taken to profit and Loss Account.
5. Recovery in NPA Accounts: The auditor should check all NPAs of the previous year to
verify whether during the current year any payments have been received or still they
continue to be NPA during the current year also.

9
Master Direction – Monitoring of Frauds in NBFC (Reserve Bank) Directions, 2016
Classification of Frauds
In order to have uniformity in reporting, frauds have been classified as under mainly based on the
provisions of the Indian Penal Code:
▪ Misappropriation and criminal breach of trust.
▪ Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property.
▪ Unauthorised credit facilities extended for reward or for illegal gratification. (Bribe)
▪ Negligence and cash shortages.
▪ Cheating and forgery.
▪ Irregularities in foreign exchange transactions.
▪ Any other type of fraud not coming under the specific heads as above.
NOTE
Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’ referred
to in items (d) and (f) above are to be reported as fraud if the intention to cheat/defraud is
suspected/proved.

However, the following cases where fraudulent intention is not suspected/proved, at the time of
detection, will be treated as fraud and reported accordingly: (MCQ MCQ MCQ)
▪ Cases of cash shortages more than ` 10,000; and
▪ Cases of cash shortages more than ` 5,000 if detected by management/auditor/ inspecting officer
and not reported on the occurrence by the persons handling cash. (cashier ne nahi padka)

Audit Check List/ Audit Procedures

(a) Investment and Credit Company (tata capital)
(1) Points related to investment
(i) Authorization: Verify the Board Minutes for purchase and sale of investments.
(ii) Physical Verification: Auditor should physically verify the securities held by a
NBFC. Where any security is lodged with an institution or a bank, a certificate from
the bank/institution to that effect must be verified.
(iii) External Confirmations: In respect of shares/securities held through a depository,
obtain a confirmation from the depository regarding the shares/securities held by it on
behalf of the NBFC. Obtain a confirmation from the approved intermediary regarding
securities deposited with/borrowed from it as at the year end.
(iv) Classification: Ascertain from the Board resolution or obtain a management certificate
to the effect that the investments so acquired are current investments or Long Term
Investments.

10
 (v) Valuation: Check whether the investments have been valued in accordance with the
NBFC Prudential Norms Directions and adequate provision for fall in the market value
of securities, wherever applicable, have been made there against, as required by the
Directions.
(vi) Compliance of AS 13: An auditor will have to ascertain whether the requirements of
AS 13 “Accounting for Investments” or other accounting standard, as applicable, (to
the extent they are not Inconsistent with the Directions) have been duly complied with
by the NBFC.
(vii) Income recognition: Verify that dividend income has been duly received and
accounted for. Dividend income on shares and units of mutual funds to be recognised
on cash basis. However, NBFC has an option to account dividend income on accrual
basis, if same has been declared by the body corporate in its AGM and its right to
receive the payment has been established.
Income from bonds/debentures to be accounted on accrual basis only if the interest rate
on these instruments is predetermined and interest is serviced regularly and not in
arrears.
(2) Points Related to Credit (loans & advances)
(i) Sanctioning: Auditor should examine whether each loan or advance has been properly
sanctioned.
(ii) Security: Auditor should verify the security obtained and the agreements entered into,
if any, with the concerned parties in respect of the advances given. Ascertain the nature
and value of security and the net worth of the borrower/guarantor.
(iii) Loan against own shares: Verify whether the NBFC has not advanced any loans
against the -security of its own shares. (GAJAB)
(iv) Compliance of Prudential Norms: Check whether the NBFC has not lent/invested in
excess of the specified limits to any single borrower or group of borrowers as per
NBFC Prudential Norms Directions.
(v) Classification: Check the classification of loans and advances Assets, Sub-Standard
Assets, Doubtful Assets and Loss Assets and the adequacy of provision for bad and
doubtful debts.
(vi) Appraisal and follow up System: Verify whether NBFC has an adequate system of
proper appraisal and follow up of loans and advances. In addition, he may analyse the
trend of its recovery performance to ascertain that the NBFC does not have an unduly
high level of NPAs.

(b) NBFC-P2P
▪ Obtain an understanding of business conducted by NBFC-P2P. Verify verified that
company undertakes only permissible activities like providing online marketplace to
participants for lending and borrowing. It should not be engaged in business of lending
funds on its own.
▪ Verify certificate of registration obtained from RBI.

11
 ▪ Verify adherence to lending and borrowing guidelines prescribed by RBI.
▪ Ensure compliance with reporting requirements of RBI.
▪ Verify Board approved policy setting out eligibility criteria for participants i.e. lenders and
borrowers.
▪ Verify Board approved policy for pricing of services.
▪ Verify Board approved policy for grievance redressal and complaints.
▪ Verify the appropriateness of arrangements entered into among participants & NBFC-P2P.

NBFC Auditor’s Report (Reserve Bank) Directions, 2016

In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the auditor shall
also make a separate report to the Board of Directors of the Company on the matters as specified in
paragraphs 3 and 4 of the directions.
(a) Matters to be reported in case of all NBFC – Para 3(A)
▪ Whether company has obtained a Certificate of Registration (CoR);
▪ In case of a company holding CoR, whether company is entitled to continue to hold such
CoR in terms of its Principal Business Criteria as on March 31; (50-50 test)
▪ Whether NBFC is meeting the required net owned fund requirement. (2cr / 10cr)
NOTE
NBFC shall submit a Certificate from its Statutory Auditor that it is engaged in the business of
non-banking financial institution requiring it to hold a CoR and is eligible to hold it, within one
month from the date of finalization of the balance sheet and in any case not later than December
30th of that year.
(b) Matters to be reported in case of NBFC Accepting Public Deposits – Para 3(B)
Apart from the matters enumerated in (A) above, auditor shall include a statement on the
following matters, namely:
1. Whether the public deposits accepted are within the limits admissible to the company;
accepting;
2. Whether the public deposits held by the company in excess of permissible quantum are
regularised in the manner provided;
3. Whether NBFC is accepting “public deposit” without minimum investment grade credit
rating;
4. Whether capital adequacy ratio has been correctly determined and whether such ratio is
in compliance with the minimum prescribed CRAR;
5. Whether company has violated any restriction on acceptance of public deposit;
6. Whether company has defaulted in paying to its depositors the interest and/or principal
amount of the deposits after such interest and/or principal became due;

12
 7. Whether company has complied with the prudential norms on income recognition
accounting standards, asset classification, provisioning for bad and doubtful debts etc.;
8. Whether company has complied with the prescribed liquid assets requirement and
whether details of the designated bank in which approved securities are held is
communicated to the office concerned of the RBI in terms of NBS 3;
9. Whether company has furnished return on deposits in prescribed from (NBS 1);
10. Whether company has furnished to the Bank the quarterly return on prudential norms
within the prescribed time.
(c) Matters to be reported in case of NBFC not accepting public deposits – Para 3(C)
Apart from the aspects enumerated in (A) above, auditor shall include a statement on the
following matters, namely:
1. Whether BOD has passed a resolution for non-acceptance of any public deposits;
2. Whether company has accepted any public deposits during the relevant period/year.
3. Whether company has complied with the prudential norms relating to income
recognition, accounting standards, asset classification and provisioning for bad and
doubtful debts etc.,
4. In respect of Systemically Important Non-deposit taking NBFCs:
▪ Whether capital adequacy ratio as disclosed in the return submitted to RBI in form
NBS-7 has been correctly arrived at and whether such ratio is in compliance with
minimum CAR prescribed by RBI;
▪ Whether company has furnished annual statement of capital funds, risk assets/
exposures and risk asset ratio within the stipulated period.
5. Whether the NBFC has been correctly classified as NBFC Micro Finance Institutions
(MFI).
(d) Reasons to be stated for unfavourable or qualified statements – Para 4
▪ Where, in auditor’s report, statement regarding any of the items referred to in paragraph 3
above is unfavourable or qualified, the auditor’s report shall also state the reasons for such
unfavourable or qualified statement, as the case may be.
▪ Where the auditor is unable to express any opinion on any of the items referred to in
paragraph 3 above, his report shall indicate such fact together with reasons therefore.
(e) Obligation of auditor to submit exception report to the Bank – Para 5
Where, the statement regarding any of the items referred to in para 3, is unfavourable or to
qualified, or in the opinion of the auditor the company has not complied with:
1. the provisions of Chapter III-B of Reserve Bank of India Act, 1934; or
2. the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
3. NBFC-NSI-ND taking Company (Reserve Bank) Directions, 2016 and NBFC-SI-ND
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016,

13
 it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be, to
concerned Regional Office of the Department of Non-Banking Supervision of the Bank under
whose jurisdiction the registered office of the company is located.
NOTE
Duty of the Auditor to submit exception report shall be to report only the contraventions of the
provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not
contain any statement with respect to compliance of any of those provisions.

Compliance with CARO, 2020

(a) Para 3(iii)
Reporting Requirement
Whether during the year the company has made investments in, provided any Requirements
guarantee or security or granted any loans or advances in the nature of loans, Secured or
unsecured , to companies, firms, LLPs or any other parties, If so:
▪ whether the investments made, guarantees provided, security given and the terms and
conditions of the grant of all loans and advances in the nature of guarantees provided are
not prejudicial to the company’s interest,
▪ in respect of loans and advances in the nature of loans, whether the schedule of repayment
of principal and payment of interest has been stipulated and whether the repayments or
receipts are regular;
▪ if the amount is overdue, state the total amount overdue for more than ninety days, and
whether reasonable steps have been taken by the company recovery of the principal and
interest; for
▪ whether the company has granted any loans or advances in the loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the
aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans
granted to Promoters, related parties as defined in Sec. 2(76) of the Companies Act, 2013.
(b) Para 3(xvi)
(1) Reporting Requirement
▪ Whether the company is required to be registered under Section 45-1A of the RBI
Act, 1934 and if so, whether the registration has been obtained;
▪ Whether the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of
India as per the Reserve Bank of India Act, 1934;
▪ Whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the

14
 criteria of a CIC, and in case the company is an exempted or unregistered CIC,
whether it continues to fulfil such criteria;
▪ Whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICs which are part of the Group;
Meaning of Core Investment Company
A NBFC carrying on business of acquisition of shares and securities and which satisfies the
following conditions as on the date of the last audited balance sheet:
(i) holds not less than 90% of its net assets in form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
(ii) its investments in the equity shares in group companies and units of Infrastructure
Investment Trust only as sponsor constitute not less that 60% of its net assets;
(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
(iv) it does not carry on any other financial activity.
(2) Related Provisions
▪ Sec. 45-1A of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to
commence or carry on the business of a NBFC without obtaining a certificate of
registration from RBI.
▪ The registration is required where the financing activity is a principal business of the
company.
▪ Financial activity will be considered as principal business if company’s financial
assets constitute more than 50% of total assets and income from financial assets
constitute more than 50% of the gross income, A company which fulfils both criteria
is required to get itself registered as NBFC with RBI.
▪ This test is popularly known as 50-50 test and is applied to determine whether or not
a company is into financial business.
(3) Audit Procedure and Reporting
▪ Examine the transactions of the company with relation to the activities covered under
the RBI Act and directions to determine whether the company is engaged in financial
activity.
▪ Examine the financial statements to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.
▪ Ascertain whether the net owned funds of the company exceed such amount so as to
require the company to get itself registered as NBFC with RBL
▪ Ascertain whether the company has obtained the registration as NBFC, if not, the
reasons should be sought from the management and documented.
▪ Auditor’s Report under CARO, 2020 shall incorporate the following:

15
 1. Whether registration is required u/s 45-IA of the RBI Act, 1934.
2. If so, whether it has obtained the registration.
3. If the registration not obtained, reasons thereof.

IND AS and Schedule III

(a) Applicability of Ind AS on NBFCs
NBFCs are required to comply with Indian Accounting Standards (Ind AS) as under:
1. Accounting periods beginning 1 April 2018: Listed and unlisted NBFCs having a net
worth NBFCs of > ` 500 Cr. and holding, subsidiary, joint venture or associate
companies of such NBFCs;
2. Accounting periods beginning 1 April 2019: All other listed NBFCs, unlisted NBFCs
having a net worth of ≥ ` 250 Cr. or more but < ` 500 Cr. and holding, subsidiary, joint
venture or associate companies of such NBFCs.
(b) Schedule III
Schedule III to the Companies Act, 2013 has been divided into three divisions:
▪ Division I deal with F.S. for a company whose F.S. are required to comply with the
Companies (AS) Rules, 2006. (Normal co= AS)
▪ Division II deals with F.S. for a company whose F.S. are drawn up in compliance of the
Companies (Ind AS) Rules, 2015. (Normal co=Ind As)
▪ Division III deals with F.S. for a Non-Banking Financial Company (NBFC) whose F.S.
are drawn up in compliance of the Companies (Ind AS) Rules, 2015. (NBFC= Ind As)

(1) Parts of Division III

Division III has been divided as follows:
▪ Part I contains the form in which the Balance Sheet of a company required to comply
with Ind AS and states the general instructions as regard to preparation of Balance
Sheet.
▪ Part II contains the form and states the general instructions as regard to preparation of
Statement of Profit and Loss.
▪ Part III contains general instructions for preparation of Consolidated F.S.
(2) Differences between Division II & Division III
The presentation requirements under Division III for NBFCs are similar to Division II
(Non-NBFC) to a large extent except for the following:
(i) NBFCs have been allowed to present the items of the balance sheet in order of their
liquidity which is not allowed to companies required to follow Division II.
Additionally, NBFCs are required to classify items of the balance sheet into financial
and non-financial whereas other companies are required to classify the items into
current and non-current.

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 (ii) An NBFC is required to separately disclose by way of a note any item of ‘other
income’ or ‘other expenditure’ which exceeds 1% of the total income. Division II, on
the other hand, requires disclosure for any item of income or expenditure which
exceeds 1% of the revenue from operations or ` 10 lakhs, whichever is higher.
(iii) NBFCs are required to separately disclose under ‘receivables’, the debts due from any
Limited Liability Partnership (LLP) in which its director is a partner or member.
(iv) NBFCs are also required to disclose items comprising ‘revenue from operations’ and
‘other comprehensive income’ on the face of the Statement of profit and loss instead of
showing those only as part of the notes.
(v) Separate disclosure of trade receivable which have significant increase in credit risk &
credit impaired.
(vi) The conditions or restrictions for distribution attached to statutory reserves have to be
separately disclose in the notes as stipulated by the relevant statute.

Particulars Normal co (Division 2) NBFC (Division 3)

Present the items of the balance sheet Not allowed in order of their liquidity
classify items of the balance sheet current and non-current financial and non-financial
Disclose of ‘other income’ or ‘other exceeds (WEH) exceeds 1% of the total income
expenditure’ 1% of the revenue or
` 10 lakhs
disclose under ‘receivables’ Not to be done debts due from LLP
(director = partner or member)
Items comprising ‘revenue from Disclose them only as part Disclose them on the face of
operations’ ‘OCI’ of the notes. P&L
disclosure of TR which have Sig No Yes
increase in credit risk & credit
impaired
Disclosure of restrictions for No Yes
distribution of statutory reserves

17
Audit of Public Sector Undertakings
Basics of Audit of PSU
(a) Organisation of PSU
Public sector enterprises are organized through any of the following modes:
▪ Departmental undertakings which form part & parcel of Government activities, for
example Indian Railways, Postal Services;
▪ Government companies set up under the Companies Act, 2013 (ONGC, BHEL);
▪ Corporations set up under the specific Acts of legislature e.g., LIC of India, UTI, etc.
(b) Framework for Government Audit
In India, government audit is performed by an independent constitutional authority, i.e.
Comptroller and Auditor General i.e. CAG.
(1) Legal Framework of CAG
(i) Article 148
➢ C&AG shall be appointed by the President of India.
➢ C&AG can be removed only on the ground of proven misbehaviors or
incapacity by the President of India.
➢ Salary & other conditions of service to be determined by the Parliament.
(ii) Article 149
C&AG shall perform such duties & exercise such powers in relation to accounts of
Union and States as may be prescribed.
(iii) Article 150
Accounts of Union and States will be maintained as per description given by the
President on advice of C&AG.
(iv) Article 151
Report of C&AG relating to accounts of Union & State shall be submitted to the
President/Governor who shall cause them to be laid before the Parliament /State
Legislature.
NOTE
CAG shall hold office for 6 years or up to age of 65 years, whichever is earlier. He can
resign at any time through a resignation letter addressed to the President.
(2) Scrutiny of Audit Reports
Audit Reports and Annual Accounts will be referred to specialized committees
constituted by the Parliament & the State legislatures, i.e., Public Accounts Committee
and Committee on Public Undertakings.
(3) Functions of Public Accounts Committee (PAC)
Examine the following:
▪ that moneys were disbursed for purpose to which they were applied.
 ▪ that the expenditure incurred was authorised.
▪ that re-appropriation has been made in accordance with the provisions (budgets)
made (i.e. distribution of funds).
Note- It examines statement of accounts of autonomous & semi-autonomous
bodies over and above departmental undertakings & Statutory corporations,
provided audit of which is conducted by the C&AG.
(4) Functions of Committee on Public Undertakings
▪ To examine the reports and accounts of public undertakings.
▪ To examine the reports of the C&AG on public undertakings. (supplementary/test)
▪ To examine efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles.
▪ To exercise such other functions as may be allotted by the Speaker.
(5) Functions of Estimates Committee
▪ To report what economies, improvements in organisation, efficiency or
administrative reform, consistent with the policy underlying the estimates may be
affected;
▪ To suggest alternative policies in order to bring about efficiency and economy in
administration;
▪ To examine whether money is well laid out within the limits of the policy implied
in the estimates; and
▪ To suggest the form in which the estimates shall be presented to Parliament.
(6) C&AG Role in functioning of financial committees of Parliament & State
Legislature
C&AG plays a key role in functioning of financial committees of Parliament & State
Legislatures. He has come to be recognised as a ‘friend, philosopher and guide’ of the
Committees.
(i) Reports of CAG form the basis of Committees working, i.e., committees examine
the issues raised by C&AG Reports.
(ii) Committees requires assistance of C&AG for scrutinising the notes which
Ministries submit to the Committees insofar as to check the correctness of
submissions to the Committees and facts and figures in their draft reports;
(iii) Reports of Committees are being submitted to the Parliament/State Legislature
with their observations & recommendations. C&AG assists various committees in
suggesting the recommendations.
(iv) Audit Reports, which could not be discussed in detail by Committees, written
answers are obtained from Department/Ministry concerned. This ensures that
Audit Reports are not taken lightly by Government, even if the entire report is not
deliberated upon by the Committee.
(c) Objectives and Scope of Audit of PSU
(1) Objectives of Audit
(i) Objectives of Audit of PSU, in broader context, covers 2 main elements: (IMP)
➢ Fiscal Accountability: It includes audit of provision of funds, sanctions,
compliances(budget) and propriety.
➢ Managerial accountability: It includes audit of efficiency, economy and
effectiveness.
(ii) Another equally important objective of audit of PSU is to help the government
and enterprise management to improve their efficiency and effectiveness.
(iii) This is achieved by bringing out financial and operational deficiencies,
inadequacies or ineffectiveness of systems, shortfalls in performance etc. and by
analyzing the causes of shortfall from acceptable standards of performance.
(2) Scope of Audit
C&AG’s (Duties, Power and Conditions of Services) Act, 1971 specifies the entities that
come under audit purview of C&AG at Union and State level, however, scope and extent
of audit is determined by the C&AG itself.
Scope and extent of audit of PSU extends to:
➢ Financial audit,
➢ Compliance Audit,
➢ Comprehensive audit,
➢ Propriety Audit and
➢ Performance audit.
(d) Elements of Audit
(1) Parties Involved
▪ Auditor: Role of auditor is fulfilled by Supreme Audit Institution (SAI) of India
(CA&G) and by its personnel delegated with the task of conducting audits. Senior
functionaries of SAI representing the C&AG in the state are called Accountants
General.
▪ Responsible party: Relevant responsibilities are determined by constitutional or
legislative arrangement. Responsible parties are responsible for subject matter
information, for managing subject matter or addressing recommendations.
Generally, auditable entities and TCWG of auditable entities would be the
responsible parties.
▪ Intended users: Individuals, organizations or classes thereof for whom the auditor
prepares the audit report.
(2) Subject Matter, Criteria and Subject Matter Information
▪ Subject matter: refers to the information, condition or activity that is measured or
evaluated against certain criteria.
 ▪ Criteria: Benchmarks used to evaluate the subject matter.
▪ Subject matter information: Outcome of evaluating or measuring the subject
matter against the criteria. (Audit Report)
(3) Types of Engagement
▪ Attestation engagements:
✓ Responsible party measures the subject matter against the criteria and presents
the subject matter information,
✓ on which auditor then gathers sufficient and appropriate audit evidence to
provide a reasonable basis for expressing a conclusion.
▪ Direct reporting engagements: It is the auditor who measures the subject matter
against the criteria.
NOTE
Financial audits are always attestation engagements; Performance & compliance audits
are generally direct reporting engagements.
(e) Principles of PSU Auditing (time pass)
(1) General Principles
▪ Ethics & Independence
▪ Professional Judgment, due care and Skepticism
▪ Quality Control
▪ Audit Team Management & Skill
▪ Audit Risk
▪ Materiality
▪ Documentation
▪ Communication
(2) Principles relating to Auditing Process
(i) Planning an Audit
➢ Establish the terms of the audit.
➢ Obtain understanding of the entity.
➢ Conduct Risk assessment.
➢ Identify risks of fraud.
➢ Develop an audit plan.
(ii) Conducting an Audit
➢ Perform planned audit procedures.
➢ Evaluate audit evidence and draw conclusions.
(iii) Reporting & Follow-up
➢ Prepare a report based on the conclusions reached.
 ➢ Follow up on reported matter as relevant.

Audits conducted by C&AG

(a) Types of Audits conducted by CAG
(1) Financial Audit (true & fair view)
Financial audit is conducted to express an audit opinion on a set of financial statements.
(2) Compliance Audit (subject matter complies with relevant crietaria)
Compliance audit is carried out to determine whether specified compliance requirements
are met or not.
(3) Comprehensive Audit (FA + CA + PA)
Comprehensive Audit involves assessing overall efficiency and effectiveness of Public
Enterprises. This is done by reference to certain pre-determined standards, objectives and
criteria.
(4) Propriety audit (CPS)
Propriety Audit stands for verification of transactions on the tests of public interest,
commonly accepted customs and standards of conduct.
(5) Performance Audit (PAFO)
An objective and systematic examination of evidence for the purpose of providing an
independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accountability and
facilitate decision-making by parties with responsibility to oversee or initiate corrective
action.
(b) Parts of Audit Report of CAG (thoda thoda imp)
▪ Introduction containing a general review of the working results of Government
companies, deemed Government companies and corporations.
▪ Results of comprehensive appraisals of selected undertakings conducted by Audit Board.
▪ Resume of the company auditor’s reports submitted by them under the directions issued
by the CAG and that of comments on the accounts of the Government companies.
▪ Significant results of audit of the undertakings not taken up for appraisal by Audit Board.
For certain specified states, C&AG submits a separate audit report (commercial) to legislature,
while for other States/Union Territories with legislature, there is a commercial chapter in the
main audit report.

Financial Audit
(a) Scope of Financial Audit
Financial audit is primarily conducted to:
▪ express an audit opinion on the financial statements; and
▪ enhance the degree of confidence of intended users in the financial statements.
(b) Role of C&AG
 C&AG shall express an opinion as to:
▪ whether F.S. are prepared, in all material respects, in accordance with applicable FRF (in
case of Compliance framework);
▪ whether F.S. are presented fairly, in all material respects, or give a true and fair view, in
accordance with that framework (in case of Fair Presentation FRF).

Compliance Audit
(a) Meaning
(i) Independent assessment of whether a given subject matter is in compliance with
applicable criteria.
(ii) Compliance auditing is concerned with: (IMP)
➢ Regularity: adherence of subject matter to formal criteria emanating from
relevant laws, regulations and agreements applicable to the entity.
➢ Propriety: observance of general principles governing sound financial
management and the ethical conduct of public officials.

(b) Compliance Audit Process (full time pass)

(1) General principles & Annual Compliance Audit Plan
▪ Consider principles with ethical significance.
▪ Consider principles directly relating to compliance audit process.
▪ Determine Auditable entities, audit units and implementing units.
▪ Develop annual plan for compliance audits.
(2) Planning Compliance Audits
▪ Determine compliance audit objective and scope.
▪ Develop audit strategy and plan.
▪ Identify subject matter and criteria.
▪ Understand entity, its environment and internal control.
▪ Assess risk.
▪ Establish materiality for planning purpose.
▪ Plan audit procedures.
(3) Performing the Audit & Gathering Evidence
▪ Gather evidence through various means.
▪ Continually update planning and risk assessment.
▪ Consider non-compliance that may indicate suspected unlawful acts.
(4) Evaluating Evidence & Forming Conclusions
▪ Evaluate whether sufficient and appropriate evidence is obtained.
▪ Consider materiality for reporting purposes.
 ▪ Form conclusions.
▪ Ongoing documentation, communication and quality control.
(5) Reporting
▪ Prepare the report.
▪ Include responses from entity as appropriate.
▪ Follow-up previous reports as necessary.

Performance Audit
(a) Meaning
An objective and systematic examination for providing an independent assessment of the
performance of a government program, activity, function or organization (PAFO) in order to
provide information to improve public accountability and facilitate decision making by parties
with responsibility to oversee or initiate corrective action.
(b) Elements of Performance Audit
Performance audits include evaluation of economy, efficiency and effectiveness.
(1) Economy (low cost)
Minimising cost of resources used for an activity, having regard to appropriate quantity,
quality and at the best price.
Questions that may be asked in economy audit
(i) Have the best prices been obtained for consultancy services?
(ii) Is there potential for reducing the cost of sickness absences?
(iii) Are there procedures in place to ensure that transport costs of food aid are the
lowest available?
(iv) Has there been a waste of resources in achieving an output?
(2) Efficiency (less time) (economy weds efficiency)
(i) Measurement of input-output. It is said to be achieved when the output is
maximised at the minimum of inputs, or input is minimised for any given quantity
and quality of output.
(ii) Examining efficiency embraces aspects such as whether:
➢ procurement practices followed are sound;
➢ resources are properly protected and maintained;
➢ human, financial and other resources are efficiently used;
➢ optimum amount of resources (staff, equipment and facilities) are used in
producing or delivering the appropriate quantity and quality of goods or
services in a timely manner;
➢ efficient operating procedures are used; and
➢ objectives of public sector programmes are met cost-effectively.
 Questions that may be asked in efficiency audit
1. How does cost per job created by a training programme for unemployed compare
with similar costs per job elsewhere?
2. Could project X have been implemented differently that would have resulted in
improved timeliness and quality?
3. Are adequate procedures & criteria for prioritising and selecting transport
infrastructure projects to ensure maximum impact in place?
4. Are schools maximising use of their IT equipment?
(3) Effectiveness (Desired result achieved)
(i) Measurement of extent to which objectives are achieved & relationship between
intended impact and the actual impact of an activity.
(ii) Examining effectiveness will cover the following:
➢ assess whether objectives of & means provided (legal, financial, etc.) for a
new or ongoing public sector programme are proper, consistent, suitable or
relevant to the policy;
➢ determine the extent to which a program achieves a desired level of results;
➢ assess effectiveness of program and/or of individual program components;
➢ determine whether management has considered alternatives for carrying
out the program that might yield desired results more effectively or at a
lower cost;
➢ assess adequacy of management control system for measuring, monitoring
and reporting a programme’s effectiveness;
➢ ensure compliance with laws & regulations applicable to program; &
➢ identify ways of making programmes work more effectively.
Questions that may be asked in effectiveness audit
1. Have infrastructure projects contributed to increased traffic flow while improving
safety and reducing journey times?
2. Have suitable measures to monitor and mitigate the environmental impact in
sector X been set up and properly implemented?
3. Are departments or entities achieving their objectives for all sectors of the
community?
(c) Objectives of Performance Auditing
▪ Objectives of performance auditing are evaluation of economy, efficiency and
effectiveness of policy, programmes, organization & management.
▪ Performance auditing focuses on areas in which it can add value which have the greatest
potential for development and provides constructive incentives for the responsible parties
to take appropriate action.
 ▪ Regulations on Audit and Accounts issued by C&AG lay down that the responsibility for
the development of measurable objectives and performance indicators as also the systems
of measurement rests with the Government departments or Heads of entities.
(d) Factors to be considered while planning performance audit
(i) Significance and the needs of potential users of the audit report.
(ii) Obtaining an understanding of the program to be audited.
(iii) Legal and regulatory requirements.
(iv) Management controls.
(v) Identifying the criteria needed to evaluate matters subject to audit.
(vi) Identify significant findings and recommendations from previous audits that could
affect the current audit objectives.
(vii) Potential sources of data that could be used as audit evidence and consider the validity
and reliability of these data.
(viii) Consider whether the work of other auditors and experts may be used to satisfy some of
the auditors’ objectives.
(ix) Providing sufficient staff and other resources to do the audit.
(x) Preparing a written audit plan.

(e) Planning for Performance Audit

(1) Understanding the entity /programme
Obtain an understanding of the programme to be audited to help assess, among other
matters, the significance of possible audit objectives and the feasibility of achieving
them.
Sources for understanding the entity
1. Documents of the entity: Annual reports, budget documents, minutes of
meetings, internal audit reports, MIS reports etc.
2. Legislative documents: Legislation, parliamentary questions and debates, reports
of various committees.
3. Policy documents: Documents of Planning Commission, Ministry of Finance etc.
4. Academic or special research: Independent evaluations on the entity, academic
research and similar work done by other governments.
5. Past audits: Past financial and performance audits of the entity.
6. Media coverage: Print & electronic media documentation.
7. Special focus groups: Annual & special reports of World Bank, RBI etc.
(2) Defining Audit Objective
The audit objectives should be defined in a concise manner, as they will impact nature of
the audit, govern its conduct and affect audit conclusions.
(3) Scope of Audit
 Defining scope focuses the extent, timing and nature of the audit.
(4) Determining the audit Criteria
(i) Criteria are the standards used to determine whether a program meets or exceeds
expectations.
(ii) In selecting criteria, auditors have a responsibility to use criteria that are
reasonable, attainable, and relevant to the matters being audited
(iii) Audit criteria may be sought to be obtained from the following sources:
➢ procedure manuals of the entity.
➢ policies, standards, directives and guidelines.
➢ criteria used by the same entity or other entities in similar activities or
programmes.
➢ independent expert opinion and know how.
➢ new or established scientific knowledge & other reliable information.
➢ general management, subject matter literature and research papers.
(5) Deciding Audit Approach
No uniform audit approach can be prescribed that is applicable to all types of subjects of
performance audits. Selection of approach also determine methods and means used for
conducting the audit.
Some methods that can be used in conducting performance audits include:
1. Analysis of Procedures: Review of systems in place for planning, conducting,
checking and monitoring the activity.
2. Case Studies: Analysis of a particular issue within the context of the whole area
under review.
3. Use of Existing Data: Investigate the date held by the entity management and
other relevant sources.
4. Surveys: It is a method of collecting information from members of a population
to assess the incidence, distribution and interrelation of events and conditions.
5. Analysis of results: Analysis of input-output to determine the efficiency of
programme.
6. Quantitative analysis: Examination of available data relating to financials like
earnings, revenue, or data relating to programme implementation like details of
beneficiaries etc.
(6) Developing audit Questions
▪ Audit team should prepare a list of questions to which they would seek answers.
▪ Questions should be framed in comprehensive manner.
(7) Assess audit team skills and requirement of outside expertise
 ▪ Performance auditor must possess the range of skills and experience necessary for
effective discharge of audit mandate.
▪ Audit team needs to decide at the planning stage on which aspect expertise is
required.
(8) Audit design Matrix
▪ Audit Design matrix is a structured and highly focused approach to designing a
performance audit study, based around the audit objectives, associated sub-
objectives and lower level detailed questions.
▪ Specimen of Audit Design matrix is:
Audit Audit Audit Evidence Data Collection &
Objective Questions Criteria Analysis Method
(1) (2) (3) (4) (5)

(9) Establish the timetable and resources

▪ Selection of appropriate audit team is the most important component in planning an
audit.
▪ Considerations for selection of a particular team should be recorded in the planning
documents along with the proposed timelines for various activities to be
undertaken as part of the audit process.

(10) Intimation of Audit

Audited entities must be informed about the intention of taking up the planned
performance audit with scope and extent of audit well before the commencement of
Audit.

Comprehensive Audit of Public Enterprises

(a) Concept of Comprehensive Audit
▪ Comprehensive Audit involves assessing overall efficiency & effectiveness of Public
Enterprises, by reference to certain pre-determined standards, objectives and criteria.
▪ Areas covered in comprehensive audit vary from enterprise to enterprise depending on the
nature of the enterprise, its objectives and operations.
▪ Auditors combine aspects of Financial, Compliance and Performance audits.
(b) Areas to be covered
(i) How does overall capital cost of project compare with approved planned costs? Were
there any substantial increases &, if so, whether there is evidence of unnecessary
expenditure?
(ii) Have planned production or operational outputs been achieved? Has there been under-
utilisation of installed capacity and if so, what has caused it?
(iii) Has the planned rate of return been achieved?
 (iv) Are the systems of project formulation and execution sound? Are there inadequacies?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw
materials consumption, etc.?
(vi) Are the purchase policies adequate?
(vii) Does the enterprise have research and development programmes?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?

Propriety Audit
(less of an audit, more of an approach) (yeah ek soch hai) (righteousness) (Expenditure he main
hai Govt audit karne ke liye) (value for each penny spend)
(a) Meaning
Propriety Audit stands for verification of transactions on the tests of
▪ commonly accepted customs
▪ public interest, and
▪ standards of conduct.
(b) Emphasis/ Scope
▪ Instead of too much dependence on documents, vouchers and evidence, it shifts the
emphasis to substance of the transactions & looks into appropriateness thereof on a
consideration of financial prudence, public interest and prevention of wasteful
expenditure.
▪ In ‘propriety audit’, auditors try to bring out cases of improper, avoidable or infructuous
expenditure even though the expenditure has been incurred in conformity with the
existing rules and regulations.
(c) Principles
▪ Expenditure is not prima facie more than the occasion demands and that every official
exercise the same degree of vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money.
▪ Authority exercises its power of sanctioning expenditure to pass an order which will not
directly or indirectly accrue to its own advantage.
▪ Funds are not utilised for the benefit of a particular person or group of persons.
▪ Apart from the agreed remuneration or reward, no other avenue is kept open to indirectly
benefit the management personnel, employees and others.
(d) Functions of Auditor in context of Propriety Audit
▪ To see that all expenditure incurred are properly planned.
▪ To see that size & channels of expenditure are rightful.
 ▪ To appraise whether those expenditure are likely to give optimum result.
▪ To see that any substitute plan of action can bring about an improvement on current
operation.
▪ To examine the actions and decisions of the management to see that they are conductive
to public interests and that they meet the standards of conduct.
(e) Problems in Propriety Audit
(i) Propriety audit has an inherent element of subjectivity because it is very difficult to
establish standards of public interest, commonly accepted customs, standards for
conduct.
(ii) Element of subjectivity has caused proper discharge of duty very delicate, but wisdom
of taking commercial decisions must be evaluated with reference to the circumstances
in which these were taken and therefore, auditor in his field must reconstruct such
circumstances.
(iii) Judgment of the auditor must be objective as otherwise it would hamper the initiative of
management and others in taking commercial decisions and propriety audit would
prove itself to be counter productive.
(iv) To take care of this situation, the C&AG has developed the norms of propriety for
expenditure of funds in our country.
 CARO, 2020
CARO, 2020 shall apply to every company including a foreign company as defined in Sec. 2(42) of
the Companies Act, 2013, except:
(i) a banking company;
(ii) an insurance company;
(iii) a company licensed to operate u/s 8 of the Companies Act;
(iv) a One-Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company as
defined in Sec. 2(85) of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding of a public company,
▪ having a Paid-up capital & Reserves & Surplus not more than ` 1 Cr. as on the balance sheet
date, and
▪ which does not have total borrowings exceeding ` 1 Cr. from any bank or financial
institution at any point of time during the financial year, and
▪ which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding ` 10 Cr. during the financial
year as per the financial statements.
Order shall not apply to the auditor’s report on consolidated financial statements except
Para 3(xxi).
Points to remember
A company if covered under the definition of small company, it will remain exempted from the
applicability of the Order even if it falls under any of the criteria specified for private company.
Note: As per Sec. 2(85) of Companies Act, 2013 read with Rule 2(1)(t) of the Companies
(Specification of Definitions Details) Rules, 2014, small company means a company, other than a
public company:
(i) paid-up share capital of which does not exceed ` 4 crore; and
(ii) turnover of which as per its last profit and loss account for the immediately preceding financial
year does not exceed ` 40 cгоге.

7.9-MATTERS TO BE INCLUDED IN AUDITOR’S REPORT

Property, Plant and Equipment [Para 3(1)]
Adequacy of Records
▪ Whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of Property, Plant and Equipment.
▪ Whether the company is maintaining proper records showing full particulars of intangible
assets.
Physical verification
▪ Whether these Property, Plant and Equipment have been physically verified by the management
at reasonable intervals;
▪ whether any material discrepancies were noticed on such verification and if so,
▪ whether the same have been properly dealt with in the books of account.

Title Deeds

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 ▪ Whether the title deeds of all the immovable properties (Other than properties where the
company is the lessee and the lease agreements are duly executed in favour of the lessee)
disclosed in the financial statements are held in the name of the company.
▪ If not, provide details thereof in the below mentioned format:
Description Gross Held in Whether promoter, Period held- Reason for
of Property carrying name of director or their indicate range, not being
value relative or where held in name
employee appropriate of company

*also indicate if in dispute.

Revaluation of Property, Plant and Equipment
▪ Whether company has revalued its Property, Plant and Equipment (including Right of Use
assets) or intangible assets or both during the year and,
▪ if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the
amount of change, if change is 10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets;
Proceedings for holding Benami Property
▪ Whether any proceedings have been initiated or are pending against the company for holding
any benami property under the Benami Transactions (Prohibition) Act, 1988 and rules made
thereunder,
▪ if so, whether the company has appropriately disclosed the details in its financial statements.
Inventories [Para 3(ii)]
(a) whether physical verification of inventory has been conducted at reasonable intervals by the
management and whether, in the opinion of the auditor, the coverage and procedure of such
verification by the management is appropriate; whether any discrepancies of 10% or more in the
aggregate for each class of inventory were noticed and if so, whether they have been properly
dealt with in the books of account;
(b) whether during any point of time of the year, the company has been sanctioned working capital
limits in excess of ` 5 crores, in aggregate, from banks or financial institutions on the basis of
security of current assets; whether the quarterly returns or statements filed by the company with
such banks or financial institutions are in agreement with the books of account of the Company,
if not, give details.
Investments, Guarantee/Security, Loans or Advances [(Para 3(iii)]
Whether during year company has made investments in, provided any guarantee or security or
granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms,
Limited Liability Partnerships or any other parties, if so,
(a) whether during the year the company has provided loans or provided advances in the nature of
loans, or stood guarantee, or provided security to any other entity [not applicable to companies
whose principal business is to give loans], if so, indicate-
(A) the aggregate amount during the year, and balance date with respect to such loans or
advances and guarantees or security to subsidiaries, joint ventures and associates;

(B) the aggregate amount during the year, and balance outstanding at the balance sheet date with

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 respect to such loans or advances and guarantees or security to parties other than
subsidiaries, joint ventures and associates;
(b) whether the investments made, guarantees provided, security given and the terms and conditions
of the grant of all loans and advances in the nature of loans and guarantees provided are not
prejudicial to the company’s interest;
(c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of
principal and payment of interest has been stipulated and whether the repayments or receipts are
regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of the principal and interest;
(e) whether any loan or advance in the nature of loan granted which has fallen due during the year,
has been renewed or extended or fresh loans granted to settle the overdues of existing loans
given to the same parties, if so, specify the aggregate amount of such dues renewed or extended
or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the
nature of loans granted during the year [not applicable to companies whose principal business is
to give loans];
(f) whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in Sec. 2(76).
Compliance of provisions of Secs. 185 & 186 - Para 3(iv)
In respect of loans, investments, guarantees, and security whether provisions of sections 185 and 186
of the Companies Act, 2013 have been complied with. If not, provide details thereof.
Public Deposits [Para 3(v)]
▪ In respect of deposits accepted by the company or amounts which are deemed to be deposits,
whether the directives issued by the RBI and the provisions of sections 73 to 76 or any other
relevant provisions of the Companies Act and the rules framed thereunder, where applicable,
have been complied with. If not, the nature of such contraventions be stated;
▪ If an order has been passed by CLB or NCLT or RBI or any Court or any other Tribunal,
whether the same has been complied with or not?
Cost Records
Whether maintenance of cost records has been specified by the CG u/s 148(1) of the Companies Act,
2013 and whether such accounts and records have been so made and maintained.
Statutory Dues [Para 3(vii)]
(a) Whether company is regular in depositing undisputed statutory dues including Goods and
Services Tax, provident fund, employees’ state insurance, income-tax, sales-tax, service tax, duty
of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate
authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of
the financial year concerned for a period of more than 6 months from the date they became
payable, shall be indicated.
(b) Where statutory dues referred above have not been deposited on account of any dispute, then the
amounts involved and the forum where dispute is pending shall be mentioned.
(A mere representation to the concerned Department shall not be treated as a dispute).
Unrecorded Income Para 3(viii)

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 ▪ Whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax assessments under the Income-tax Act, 1961,
▪ if so, whether the previously unrecorded income has been properly recorded in the books of
account during the year;
Repayment of Dues- Para 3(ix)
(a) Whether the company has defaulted in repayment of loans or other borrowings or in the payment
of interest thereon to any lender, if yes, the period and amount of default to be reported as per the
format below:
Nature of Name of Amount Whether No. of days Remarks, if
borrowing. lender* not paid on principal delay or any
including debt due date or interest unpaid

*lender wise details to be provided in case of defaults to banks, financial institutions and
Government.
(b) whether the company is a declared wilful defaulter by any bank or financial institution or other
lender;
(c) whether term loans were applied for the purpose for which the loans were obtained; if not, the
amount of loan so diverted and the purpose for which it is used may be reported;
(d) whether funds raised on short-term basis have been utilised for long-term purposes, if yes, the
nature and amount to be indicated;
(e) whether the company has taken any funds from any entity or person on account of or to meet the
obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of
such transactions and the amount in each case;
(f) whether the company has raised loans during the year on the pledge of securities held in its
subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if
the company has defaulted in repayment of such loans raised.
Application of Money and preferential allotment - Para 3(x)
(a) Application of Money raised by public issue
Whether moneys raised by way of initial public offer or further public offer (including debt
instruments) during the year were applied for the purposes for which those are raised, if not, the
details together with delays or default and subsequent rectification, if any, as may be applicable,
be reported.
(b) Preferential allotment
whether company has made any preferential allotment or private placement of shares or
convertible debentures (fully, partially or optionally convertible) during the year and if so,
whether the requirements of Sec. 42 and Sec. 62 have been complied with and the funds raised
have been used for the purposes for which the funds were raised, if not, provide details in respect
of amount involved and nature of non-compliance.
Fraud [Para 3(xi)]
(a) Whether any fraud by the company or any fraud on the Company has been noticed or reported
during the year; If yes, the nature and the amount involved is to be indicated.

(b) Whether any report u/s 143(12) of the Companies Act has been filed by the auditors in Form

4
 ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the
Central Government;
(c) Whether auditor has considered whistle-blower complaints, if any, received during the year by
the company;
Nidhi Companies - Para 3(xii)
▪ Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of
1: 20 to meet out the liability.
▪ Whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in
the Nidhi Rules, 2014 to meet out the liability.
▪ Whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof.
Transactions with related Parties - Para 3(xiii)
▪ Whether all transactions with the related parties are in compliance with Secs. 177 and 188 of
Companies Act, 2013 where applicable and
▪ the details have been disclosed in the Financial Statements etc. as required by the applicable
accounting standards.
Internal Audit System - Para 3(xiv)
(a) whether the company has an internal audit system commensurate with the size and nature of its
business;
(b) whether reports of Internal Auditors were considered by the statutory auditor.
Non-cash transactions with directors - Para 3(xv)
▪ Whether company has entered into any non-cash transactions with directors or persons
connected with him and
▪ If so, whether provisions of Sec. 192 of Companies Act, 2013 have been complied with.
Registration with RBI - Para 3(xvi)
(a) Whether the company is required to be registered u/s 45-IA of the Reserve Bank of India Act,
1934 and if so, whether the registration has been obtained.
(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities
without a valid Certificate of Registration (CoR) from the RBI.
(c) Whether company is a Core Investment Company (CIC) as defined in the regulations made by
the RBI, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an
exempted or unregistered CIC, whether it continues to fulfil such criteria.
(d) Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of
CICs which are part of the Group.
Cash Losses - Para 3(xvii)
Whether the company has incurred cash losses in the financial year and in the immediately preceding
financial year, if so, state the amount of cash losses.
Resignation of Auditor - Para 3(xviii)
▪ Whether there has been any resignation of the statutory auditors during the year,
▪ if so, whether the auditor has taken into consideration the issues, objections or concerns raised
by the outgoing auditors.

Existence of Material uncertainty - Para 3(xix)

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On the basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the F.S., auditor’s knowledge of the
BOD and management plans, whether auditor is of opinion that no material uncertainty exists as on
date of the audit report that company is capable of meeting its liabilities existing at the date of B/S as
and when they fall due within a period of one year from the B/S date.
Transfer of unspent CSR amount - Para 3(xx)
(a) whether, in respect of other than ongoing projects, company has transferred unspent amount to a
Fund specified in Schedule VII to Companies Act within a period of 6 months of expiry of the
financial year in compliance with 2nd proviso to Sec. 135(5) of the said Act;
(b) whether any amount remaining unspent u/s 135(5) of the Companies Act, pursuant to any
ongoing project, has been transferred to special account in compliance with the provision of Sec.
135(6) of the said Act.
Qualifications or adverse remarks - Para 3(xxi)
▪ Whether there have been any qualifications or adverse remarks by the respective auditors in the
CARO reports of the companies included in the consolidated financial statements,
▪ if yes, indicate the details of the companies and the paragraph numbers of the CARO report
containing the qualifications or adverse remarks.
Reasons to be stated for Unfavourable or Qualified remarks
▪ Where, in the auditor’s report, the answer to any of the questions referred to in Para 3 is
unfavourable or qualified, the auditor’s report shall also state the basis for such unfavourable or
qualified answer, as the case may be.
▪ Where the auditor is unable to express any opinion on any specified matter, his report shall
indicate such fact together with the reasons as to why it is not possible for him to give his
opinion on the same.

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 Digital Auditing and Assurance

(Part-1) Auditing _____ Digitally __________

Concept of Auditing Digitally

▪ Auditing Digitally is using advancements in technology for conducting an effective and efficient
audit. With a rapidly growing IT environment it is essential to adapt technology in auditing,
practices.
▪ Auditing digitally involves conducting the audit through automation and innovation with the help
of new technologies to capture data, automate procedures, analyse information and focus on the
real risks of the client. (Thankyouu)
Expectations from an Auditor
▪ Audit teams need to involve the experts on different software applications and technologies.
▪ Having the right level of expertise of new technology (such as RPA, AI, blockchain technology)
allows auditors to provide the highest quality of audit.
▪ More focus to be put on developing and using tools to automate and enhance existing processes,
such as data analytics and collaboration and sharing tools, which help to drive quality in audits
today.

Key Features or Advantages of Auditing Digitally

(i) Improved Quality of Audits: Through automation, data analytics techniques, auditor can easily
move from sample auditing to full population of transactions being reviewed or re-performed.
(ii) Decreasing human dependency: Using technology minimizes the manual intervention which
ultimately results in reducing the risk of manual errors.
(iii) Increases Transparency: New ERPs and tools have audit trail feature available to trace the
transaction end to end.
(iv) Automation and Ease: Automating tasks like extracting data and sampling have improved the
quality of audit and reduced the manual error.
(v) Improved Efficiency: What used to take weeks to learn and program, is now easily available to
auditors after some simple training and digital upskilling which increases efficiency.
(vi) Better risk assessment: With usage of automation and technology in audit, auditor may focus on
the real challenges and assess the potential risk precisely. It gives time to auditors to focus on the
bigger picture rather than being involved with repetitive tasks.

Considerations in Auditing
(1) Identifying the problems to be solved
➢ Continuously evaluate the emerging technologies and latest tools to see what can
benefit the audit.
 ➢ Think about what would make the audit easier.
(2) Identifying the technology that help can auditor
➢ There are a number of tools available and many vendors and start-ups using data
acquisition, manipulation and visualization tools.
➢ Consider how comfortably these solutions will integrate into auditor current processes
and flag any potential implementation issues early on.
(3) How to upskill team members
Technology is only as good as the people using it. Training and development are critical to
ensure teams understand how and why they are using the technology. Reluctance to change
is obvious, however continuous training help them to get better.
(4) Range of automated solutions
There is a range of automation solutions, from low to high sophistication, which helps to
standardize the repeatable tasks and optimize the efforts resulting in doing better.
 (Part-2) Digital _____ Audit _________

Digital Audit
Placing assurance on effectiveness of IT systems implemented in an organization (Auditee)

Key Features of a Digital Audit (Client ke perspective se socho)

▪ Digital audit encourages auditee to use the latest technological advancements.
▪ It can help auditee to make informed decisions.
▪ Digital audit improves quality of opinion and leads to a more reliable audit report.
▪ Digital audit will help create a future for a digital strategy & paves way for adopting new
technologies such as AI and Robotic, usage of analytics and automation.
▪ Digital Audit allows to standardize processes.
▪ Digital audit helps organization in more comprehensive overview of end-to-end processes.
▪ Digital Audit leads to savings in time, cost and human effort which can be utilized towards more
productive tasks.

Advantages of Digital Audit

(i) Better Audit Quality: Technology can correctly evaluate massive volumes of data quickly. This
can assist auditors in determining the areas that require more testing.
(ii) Better Analytics: Improved analytics capabilities help management and auditors in seeing trends
and patterns that may be challenging to spot manually.
(iii) Improved Risk Assessment: Management and auditors put their testing efforts in areas with a
higher risk of material misstatement and make informed decisions.
(iv) Enhanced Effectiveness & Efficiency: With use of tools & automation techniques, processes
can be standardized and routine tasks can be automated e.g. automating a reconciliation process
increase efficiency and saves time & costs.
(v) Lower Costs: By automating processes that were previously done manually, technology can
assist with the cost of auditing. This may shorten the time needed to complete an audit, which
may lower the audit’s overall cost.

Challenges of Digital Audit

▪ Reluctance to change.
▪ Challenges with data security and governance.
▪ Choosing the right tool and automating the right process.
▪ Ensuring standardisation and correct configurations to avoid error and bias.
▪ Evaluating business benefits the organization wants to achieve with automation and
▪ Roadmap for digital strategy.

Consideration Of Digital Audit

Auditor is required to obtain an understanding of management’s implementation of new Audit
technologies and perform procedures to understand changes to company’s business, including any
changes to IT environment. Areas of focus could include understanding the following:
▪ New activities or changes to existing processes due to new technology (e.g., new revenue streams,
changes in the roles and responsibilities of entity personnel, automation of manual tasks etc.).
▪ Changes in the way the entity’s systems are developed and maintained and whether these changes
introduce new risks and require new controls to respond to those risks.
▪ Impact of new technology as to how the organization obtains and uses relevant, quality
information to support functioning of internal control

Understand the IT Environment

Understanding of Automated Environment

As required by SA 315, auditor is required to obtain understanding of entity & its environment.
In an automated environment, auditor is required to obtain an understating of the following:
▪ Applications being used by the entity;
▪ IT infrastructure components for each of the application;
▪ Organisation structure and governance;
▪ Policies, procedures and processes followed;
▪ Extent of IT Integration, use of service organisation;
▪ IT risks and controls.
Stages involved in understanding the IT Environment
1. Understand
2. Identify
3. Assess

Documenting the understanding

Auditor is required to document understanding of automated environment. Example given below
illustrates how auditor can document details of an automated environment:
Application Used for Database Operating Network Server and
System Storage
SAP ECC/ Integrated Oracle 19c HP-UX LAN WAN HP Server and
HANA application software NAS
REVS Front Desk, Guest MS-SQL Windows In-house HP Server
Reservations Server 2016 Server developed Internal HDD
2018
KOTS Restaurant and MS-SQL Windows In-house HP Server
Kitchen Orders Server 2016 Server developed Internal HDD
2018
BILLSYS Billing Oracle 12c Windows Packaged HP Server
2016 Server Software Internal HDD
Key Areas for an Auditor to Understand IT Environment
(1) Understand flow of transaction
Focus on identifying and understanding nature and number of specific IT applications and
other aspects of IT environment that are relevant to flows of transactions and processing of
information in information system.
(2) Identification of Significant Systems
Identify the IT applications and supporting IT infrastructure concurrently with understanding
of how information relating to significant classes of transactions, account balances and
disclosures flows into, through and out entity’s information system.
(3) Identification of Manual and Automated Controls
➢ Entity’s system of internal control contains manual & automated elements. An entity’s
mix of manual and automated elements varies with the nature & complexity of entity’s
use of IT.
➢ Characteristics of manual or automated elements are relevant to auditor’s identification
and assessment of the RMM.
(4) Identification of technologies used
➢ Understand emerging technologies implemented and the role they play in entity’s
information processing or other financial reporting activities and consider whether
there are risks arising from their use.
➢ There is increased likelihood that ET may decide to engage experts to help understand
whether and how the use of emerging technologies impacts the entity’s financial
reporting processes and may give rise to risks from the use of IT.
Examples of emerging technologies
(i) Blockchain, including cryptocurrency businesses (e.g., token issuers, custodial
services, exchanges, miners, investors)
(ii) Robotics
(iii) Artificial Intelligence
(iv) Internet of Things
(v) Biometrics
(vi) Drone

Assessing complexity of IT environment

Level of complexity differs across applications. Complexity is based on the following
factors:
(i) automation used in the organization, entity’s reliance on system generated reports,
(ii) customization in IT applications,
(iii) business model of the entity,
(iv) any significant changes done during the year and
 (v) implementation of emerging technologies.

Identifying the Risks arising from usage of IT

.

How to identify IT Risks

▪ In identifying risks arising from use of IT, auditor may consider nature of identified IT
application.
▪ Applicable risks arising from the use of IT may also be identified related to cyber security.
▪ It is more likely that there will be more risks arising from use of IT when volume or
complexity of automated application controls is higher, and management is placing greater
reliance on those controls for effective processing of transactions or the effective
maintenance of the integrity of underlying information.
.

Risks arising from use of IT

(i) Unauthorized access to data that may result in destruction of data or improper changes to
data, including recording of unauthorized or non-existent transactions, or inaccurate
recording of transactions.
(ii) Possibility of IT personnel gaining access privileges beyond those necessary to perform
their assigned duties thereby breaking down segregation of duties.
(iii) Unauthorized changes to data in master files.
(iv) Unauthorized changes to IT applications or other aspects of the IT environment.
(v) Failure to make necessary update IT applications or other aspects of the IT environment.
(vi) Inappropriate manual intervention.
(vii) Data loss or data corruption.
(viii) Risk of system downtime caused by hardware failures, faulty configurations, cyberattacks
or power outage.
(ix) Risks associated with system integration and compatibility.

(x) Risk of regulatory compliances. Any change in the law, order, guidelines or agreements
will impact the business, its related costs, investments etc.
.

IT dependencies
(1) Importance of Identification of IT Dependencies
(i) To identify the entity’s reliance upon IT,
(ii) To understand how IT is integrated into the entity’s business model
(iii) To identify potential risks arising from the use of IT,
(iv) To identify related IT General Controls and
 (v) To enable an effective and efficient audit approach.
(2) How IT dependencies arise
IT Dependencies are created when IT is used to initiate, authorize, record, process, or report
transactions or other financial data for inclusion in F.S.
(3) Types of IT dependencies
(i) Automated Controls
Automated controls are designed in IT environment to enforce business rules. For
example: Purchase order approval through -
➢ Format checks (e.g., only a particular date format is accepted),
➢ Existence checks (e.g., Duplicate customer number cannot exist), and/or
➢ Reasonableness checks (e.g., maximum payment amount)
(ii) Reports
System generated reports (e.g. Customer Ageing Report) are used for execution of
manual control, including business performance reviews, or may be the source of entity
information used by auditor while selecting items for testing, performing substantive
tests of details or a substantive analytical procedure.
(iii) Calculations
Accounting procedures performed by IT system instead of a person. For example,
calculation of depreciation, charging interest in delayed payments, etc.
(iv) Security
Security including segregation of duties is enabled by IT environment to restrict access
to information.
(v) Interfaces
Programmed logic that transfer data from one IT system to another. For example, an
interface may be programmed to transfer data from a payroll subledger to the general
ledger.

Understanding & responding to risks arising from IT dependencies

Auditors need to understand how management responds to the associated risks that may arise
from IT Dependencies. Management may implement General IT Controls to address risks related
to IT dependencies. General IT Controls maintain the integrity of information and security of
data and commonly include controls over the following:
(i) Access security.
(ii) Program change.
(iii) Data center and network operations.
Control Objectives and Controls for each area of General IT Controls
(1) Objectives & Activities of Access Security
Objective: To ensure that access to programs and data is authenticated and authorized to
meet financial reporting objectives.
 Activities:
➢ Access requests to application are properly reviewed and authorized by management
➢ Access of terminated user is removed on a timely basis.
➢ Access rights to applications are periodically monitored for appropriateness.
➢ Transactions of administrative and sensitive generic IDs are monitored.
➢ Security policies are procedures are maintained.
➢ Access to operating system and database is restricted.
(2) Objectives & Activities of Program Change
Objective: To ensure that modified systems continue to meet financial reporting objectives.
Activities:
➢ Change Management policy and procedures are maintained.
➢ Development, testing & production environments are segregated for changes to
application configurations.
➢ Changes are adequately tracked and recorded.
➢ Changes to application configurations are adequately tested and approved before being
migrated into production.
➢ Emergency changes are approved.
➢ Segregation of duties is maintained between developer and implementor.
(3) Objectives & Activities of Data Center & Network & operations
Objective: To ensure that production systems are processed to meet financial reporting
objectives.
Activities:
➢ Policies and procedures for data back and recovery is maintained.
➢ Data is appropriately backed up and recoverable.
➢ Restoration testing is performed.
➢ Monitoring and compliance of service level agreements.
➢ Batch job scheduled are monitored for failures and access is restricted.
Assessing Cyber Risks

Cyber Risk
▪ Risk of damage, steal, expose, alter, disable or destroy of data due to Cyber Attack is known
as Cyber Risk.
▪ Cyber-attack is an attempt to gain unauthorized access to a computing system or network
with intent to cause damage, steal, expose, alter, disable, or destroy data.
Types of Cyber Risk
(1) Malware
Any program that is created with the intent to do harm to a computer, network or server. Its
subsets are:
(i) Ransomware: An adversary encrypts a victim’s data and offers to provide a decryption
key in exchange for a payment.
(ii) Fileless Malware: A malicious activity that uses native, legitimate tools built into a
system to execute a cyber-attack. Fileless malware does not require to install any code
on a target’s system, making it hard to detect.
(iii) Trojan: A malware that appears to be legitimate software disguised as native operating
system programs or harmless files like free downloads.
(iv) Mobile Malware: Malware designed to target mobile devices. Mobile malware is
delivered through malicious downloads, operating system vulnerabilities and use of
unsecured Wi-Fi.
(2) Denial-of-Service (DoS) Attacks
➢ Targeted attack that floods a network with false requests in order to disrupt business
operations. Users are unable to perform routine & necessary tasks, such as accessing
email, websites or other resources that are operated by a compromised computer or
network.
➢ While most DoS attacks do not result in lost data & are typically resolves without
paying a ransom, they cost the organization time, money and other resources in order
to restore critical business operations.
(3) Phishing
Cyberattack that uses email, SMS, phone, social media, and social engineering techniques to
entice a victim to share sensitive information, such as passwords or account numbers or to
download a malicious file that will install viruses on their computer or phone. Its subsets are:
(i) Spear Phishing: Phishing attack that targets specific individuals typically through
malicious emails to steal sensitive information such as login credentials or infect the
targets’ device with malware.
(ii) Whaling: Social engineering attack specifically targeting senior or C level executive
employees to steal money or information or gaining access to person’s computer in
order to execute further cyberattacks.
(iii) SMiShing: Social engineering attack that uses fake mobile text messages to trick
people into downloading malware, sharing sensitive information. Or sending money to
cybercriminals.
(iv) Vishing: Voice phishing attack, is the fraudulent use of phone calls and voice messages
pretending to be from a reputable organization to convince individuals to reveal private
information such as bank details and passwords.
(4) Spoofing
 A technique through which a cybercriminal disguises themselves as a known or trusted
source. In so doing, adversary is able to engage with the target and access their systems or
devices with ultimate goal of stealing information. Extorting money or installing malware or
other harmful software on the device. Its subsets are:
(i) Domain Spoofing: Attacker impersonates a known business or person with fake
website or email domain to fool people into the trusting them. Typically, the domain
appears to be legitimate at first glance, but a closer look will reveal subtle differences.
(ii) Email Spoofing: Cyberattack that targets businesses by using emails with forged
sender addresses. Because the recipient trusts the alleged sender, they are more likely to
open the email and interact with its contents, such as a malicious link or attachment.
(5) Identity-based Attacks
Valid user’s credentials have been compromised and an adversary is pretend to be that user.
For e.g., people often use the same user ID and password across multiple accounts.
Therefore, possessing the credentials for one account may be able to grant access to other,
unrelated account.
(6) Insider Threats
It occurs when a current or former employee is having direct access to the company network,
sensitive data, and intellectual property (IP), as well as knowledge of business processes,
company policies or other information that would help carry out such an attack.
(7) Domain Name System (DNS) Tunneling
➢ Cyberattack that leverages DNS queries & responses to bypass traditional security
measures and transmit data and code within the network.
➢ This tunnel gives hacker a route to unleash malware and/or to extract data. IP or other
sensitive information by encoding it bit by bit in a series of DNS responses.
(8) loT-Based Attacks
Cyberattack that targets an Internet of Things (IoT) device or network. Once compromised,
the hacker can assume control of the device, steal data, or join a group of infected devices.

Stages of Cyber Risks

(1) Stage 1
Assessing the Cyber Risk
(i) Every organization should consider certain common threats like:
(ii) Ransomware disabling their organization (including their plants and manufacturing
facilities).
(iii) Common criminals using email phishing and hacks for fraud and theft.
(iv) Insiders committing malicious activities resulting in unintended discourse of
information theft and frauds.
(2) Stage 2
 Impact of Cyber Risk
Impact of attack vary from organization to organization and most importantly from an attack
to attack. Some of the indicative areas are:
➢ Regulatory costs.
➢ Business interruptions causing an operational challenge for an organization.
➢ Data loss, reputational loss and litigation.
➢ Ransomware – more common these days where entire systems are encrypted.
➢ IP theft which may not only take the competitive advantage, but may also result in any
impairment charge because of the loss of IP.
➢ Incident response cost which could be for investigations & remediations.
➢ Breach of Privacy, if personal data of a consumer is hacked it could have a significant
impact on the organization.
➢ Fines and penalties
(3) Stage 3
Managing the Cyber Risk
A strategic approach to cyber risk management can help an organization to:
(i) Gain a holistic understanding of cyber risks, threats facing their organization & other
financial institutions.
(ii) Assess existing IT and cybersecurity program and capabilities against the relevant
regulatory requirements.
(iii) Align cybersecurity & IT transformation initiatives with strategic objectives and critical
risks.
(iv) Understand accepted risks & documented compensating controls.

Cyber Security Framework

It includes how management is identifying the risk, protecting and safeguarding its assets from
the risk, management preparedness to detect the attacks, anomalies and responsiveness to the
adverse event.
Risk Management Process

(1) Step 1: Identify the Risk

(i) Risk Assessment & Management Strategy: Entity should conduct a periodic risk
assessment & develop a management strategy which identifies cybersecurity risks
around IT system.
 (ii) Asset Management: Entity should maintain and periodically reviews an inventory of
their information assets (e.g., intellectual property, patents, copyrighted material, trade
secrets and other intangibles).
(iii) Governance: Management should review how cybersecurity risks affect internal
controls over financial reporting.
(iv) Business Environment: To determine overall responsibility for cybersecurity, entity
should establish roles & responsibilities over cybersecurity (CISO, CIO).
(2) Step-2: Protect the Risk
(i) Unauthorised Access: Entity should monitor whether there has been unauthorized
access to electronic assets and any related impact on financial reporting.
(ii) Training: Formal training should be conducted to make the teams aware of the risk
associated with cyberattacks.
(iii) Data Security: Entity should implement effective controls for data security.
(3) Step-3: Detect the Risk
Entity should have controls and procedures that enable it to -
➢ identify cybersecurity risks and incidents
➢ to assess & analyse impact of such risks & incidents on entity’s business,
➢ evaluate the significance associated with such risks and incidents, and
➢ consider timely disclosures.
(4) Step 4: Respond to the Risk
(i) Response Planning: Entity should have a response planning in place to capture the
details of nature of incident.
(ii) Communication: Response Plan needs to be communicated with those who are
ultimately responsible for this framework and with TCWG.
(iii) Mitigation Process: Management should assess Litigation costs Regulatory
investigation costs and Remediation costs as a part of mitigation process.
(5) Step 5: Recover from Risk
(i) Recovery Plan: Once impact evaluated & communicated with regulators, recovery plan
needs to be implemented to overcome the impact.
(ii) Improvements: Necessary improvements like patch upgrades, better controls,
improved technology in terms of firewall, anti-virus, tools etc. needs to be implemented
to safeguard the entity.

Control considerations for Cyber Risks

(1) Controls around vendor setup and modifications
 ➢ Who is responsible for making changes to vendor master data? Is the process
centralized or decentralized?
➢ Are other communication channels, such as email, used to request changes to vendor
master data? (If yes, consider if multi-factor authentication is enabled for email).
➢ What systems and technologies are used to initiate, authorize and process requests
related to changes to vendor master data?
➢ Are authentication protocols defined to verify modifications to vendor master data
(e.g., call back procedures, multi-factor authentication)?
(2) Controls around electronic transfer of funds
➢ Are personnel responsible for wire transfers educated on relevant threats and
information related to common phishing scams associated with fraudulent requests for
wire transfers?
➢ Are authentication protocols defined to verify wire transfer requests (e.g., call back
procedures, dual-authentication procedures)?
➢ What systems and technologies are used to facilitate the request/initiation,
authorization and release of wire transfers?
(3) Controls around patch management
➢ Does the entity have a patch management program?
➢ Does the entity run periodic vulnerability scans to identify missing/unapplied patches?
➢ How is the entity notified of patches external vendors (e.g., Microsoft for Windows
patches)?

Remote Audit Meaning / Virtual Audit

(1) Meaning
➢ Using online or electronic means to conduct the audit. It may be partially or
completely virtual.
➢ Auditor uses technology to obtain audit evidence or to perform documentation review
with the participation of the auditee.
(2) Considerations
(i) Feasibility and Planning
▪ Planning involves agreeing on audit timelines, meeting platform (Zoom calls/
Microsoft Teams/Google Meet) to be used for audit sessions, data exchange
mechanisms, any access authorization requests.
▪ Ensure feasibility of use of technology, if auditors & auditees have competencies
and resources are available.
▪ Execution phases involve video/tele conferencing with auditees.
 ▪ Documentation for audit evidence should be transferred through a document
sharing platform.
(ii) Confidentiality, Security and Data Protection
▪ To ensure data security and confidentiality, access to document sharing platform
should be sufficiently restricted and secured by encrypting the data that is sent
across the network.
▪ Information, once reviewed & documented by auditor, is removed from the
platform, and stored according to applicable archiving standards and data
protection requirements.
▪ Auditors should take into consideration legislation and regulations.
▪ Any screenshots of documents or records or other kind of evidence should be
previously authorized by the audited organization.
▪ In case of accessing the auditee’s IT system, auditor should use VPN (Virtual
private network).
(iii) Risk assessment
▪ Risks for achieving audit objectives are identified, assessed and managed.
▪ Assessment whether remote audit would be sufficient to achieve audit objectives
should be done & documented.
(3) Advantages of Remote Audit
➢ Cost and time effective: No travel time and travel costs involved.
➢ Comfort and flexibility to audit team.
➢ Time required to gather evidence can spread over several weeks, instead of
concentrated into a small period.
➢ Auditor can get first-hand evidence directly from the IT system.
➢ Widens the selection of auditors from global network of experts.
(4) Disadvantages of Remote Audit
➢ Due to network issues, interviews and meetings can be interrupted.
➢ Limited or no ability to visualize facility culture of the organization, and the body
language of the auditees.
➢ Opportunity to present doctored documents and to omit relevant information is
increased.
➢ Remote access to sensitive IT systems may not be allowed.
➢ Cultural challenges for the auditor. Lack of knowledge for local laws and regulations
could impact audit.
➢ Audit procedures like physical verification of assets and stock taking cannot be
performed.
Emerging Technologies in Audit

Data Analytic Techniques

(1) Meaning and Concept
▪ Generating and preparing meaningful information from raw system data using
processes, tools, and techniques is known as Data Analytics
▪ It involves analyzing large sets of data to find actionable insights, trends, draw
conclusions and for informed decision making,
▪ Use of audit analytics enables greater efficiencies and more accurate findings from the
review process.
▪ It allows auditors to audit more effectively, large amounts of data held and processed in
IT systems.
NOTE
Data analytics methods used in an audit are known as Computer Assisted Auditing
Techniques or CAATs.
It involves use of multiple data analytical tool that help auditor to deep dive into the problem
statement & hence increase audit quality.
(2) Benefits
Audit analytics helps:
(i) To discover and analyze patterns.
(ii) Identifying anomalies.
(iii) Extract other useful information in data

Tools used as Part of CAATs

(1) Audit Command Language (ACL)
▪ ACL Analytics is a data extraction and analysis software used for fraud detection and
prevention and risk management.
▪ It samples large data sets to find irregularities or patterns in transactions that could
indicate control weaknesses or fraud.
▪ ACL (Audit Command Language) is used to analyse and check complete data sets to
perform Trial Balance reconciliations during the Audits. In such case scenarios, entity
provided the GL dump & system Trial Balance.
(2) Alteryx
▪ Alteryx is used to consolidate financial or operational data to assess controls.
▪ Example: Alteryx used for logistics organization to recompute revenue entries recorded
by system to match with the financials that showcased expected revenue turnover.
Due to Alteryx’s processing speed and ease to implement functions, auditors could
perform re-computation for all the transactions entry and noted that revenue was being
 understated as expected revenue was more than actual calculated. This was due to the
fact that addendum between logistic company and client was not revised in the system
and old versions of rates were used to compute the revenue. Alteryx helped in analysing
and recomputing the huge data set and to focus on actual risk.
(3) Power BI
➢ Power Bi is a business intelligence (BI) platform that provides nontechnical business
users with tools for aggregating, analyzing, visualizing and sharing data.
➢ From audit perspective, such visualization tools can be used to find the outliers in the
population.
➢ Example: Auditors were required to analyse the trends of sales during the year. With
use of Power BI, sales data provided by the client was further converted into dashboard
to analyse the trends and patterns as per the market standards.
(4) CaseWare
➢ CaseWare is a data analysis software & provide tools that helps in conducting audit
and assurance engagements quickly, accurately and consistently.
➢ It shares analytical insights which help in taking better informed decisions.
➢ Used by accounting firms, governments and corporations worldwide, this trusted
platform integrates everything, an auditor need to conduct assurance and reporting
engagements.
(a) Examples of Tests that can be performed with CAATs
1. Identify exceptions: Identify exceptional transactions based on set criteria. For example,
cash transactions above 10,000.
2. Identify errors: Identify data, which is inconsistent or erroneous. For e.g.: account number
which is not numeric.
3. Verify calculations: Re-perform various computations in audit software to confirm the
results from application software confirm with the audit software. For e.g.: TDS rate applied
as per criteria.
4. Existence of records: Identify fields, which have null values. For example: invoices which
do not have vendor name.
5. Data completeness: Identify whether all fields have valid data. For example: null values in
any key field such as date, invoice number or value or name.
6. Data consistency: Identify data, which are not consistent with the regular format. For
example: invoices which are not in the required sequence.
7. Duplicate payments: Establish relationship between two or more tables as required. For
example, duplicate payment for same invoice.
8. Accounts exceeding authorized limit: Identify data beyond specified limit. For example,
transactions entered by user beyond their authorized limit or payment to vendor beyond
amount due or overdraft allowed beyond limit.
Automated Tools in Audit

Internet of Things (IoT)

(1) Concept
(i) Connecting any device (cell phones, coffee makers, washing machines, and so on) to
the internet. Key components of IoT are data collection, analytics, connectivity, people
and process.
(ii) IoT not only changes business model, but also affects strategic objectives of the
organization.
(iii) Researchers uses loT devices to gather data about customer preferences and behavior,
though that can have serious implications for privacy and security.
(iv) Examples: Connected Cars, connected manufacturing equipment’s, smart home
security.
(2) Audit Implications
➢ Auditors not being able to rely only on manual controls. Auditor need to scope new
systems into the audit.
➢ Audit firms need to train & upskill auditors to evaluate the design & operating
effectiveness of automated controls.
➢ Consumer-facing tools that connect to business environments in new ways can impact
the flow of transactions & introduce new risks for management and auditors to
consider.
➢ Auditors need to consider volume of the transactions, processes and controls related to
it.
(3) Common Risk
(i) Device hijacking;
(ii) Data siphoning;
(iii) Denial of Service (DoS) attacks;
(iv) Data breaches; and
(v) Device theft.

Artificial Intelligence (AI)

(1) Concept
➢ AI refers to a system that can think and learn. Al systems utilize data analysis &
algorithms to make decisions based on predictive methods. Complex algorithms are
developed to propose decisions based on a pattern or behavior learned over time.
➢ Examples: Self-driving cars, manufacturing robots, smart assistants, marketing
chatbots, virtual travel booking agent.
 AI to predict when to book the lowest prices for flights, hotels, car and vacation home
rentals. Using historical flight and hotel data, Al will also recommend to user whether
booking has reached its lowest price point or if the user should hold out a bit longer for
the price to drop.
(2) Audit Implications
(i) Logical Flow of Process: Auditor must focus on the logical flow of processes. Auditors
should confirm their understanding of how the use of AI affects the entity’s flows of
transactions, including the generation of reports or analytics used by management.
(ii) Assessing Effectiveness of Algorithms: Auditors should assess effectiveness of
algorithms & whether their output is appropriately reviewed and approved.
(iii) AI Functionality: Auditors need to consider cybersecurity and search for possible bugs
and vulnerabilities that can be exploited to impact AI functionality.
(iv) Decision Making process: Auditors also should consider whether the AI is making
decisions or being utilized by management as part of the decision-making process.
(3) Common Risk
(i) Security: More data the system uses, from more sources; more entry points and
connections are formed and greater the potential risks.
(ii) Inappropriate configuration: AI may also be used to diagnose medical conditions. If
it is badly configured or malfunctions, it could harm people before the problem is
spotted.
(iii) Data Privacy: Data used and shared should have necessary explicit consent from data
providers.

Blockchain
(1) Concept
▪ Blockchain is based on a decentralized & distributed ledger that is secured through
encryption.
▪ Each transaction is validated by the blockchain participants, creating a block of
information that is replicated & distributed to all participants. All blocks are sequenced
so that any modification or deletion of a block disqualifies the information.
▪ Despite resistance, the benefits associated with blockchain technology are being
recognized across a variety of other industries.
▪ Examples: Bitcoin, Cryptocurrency transfer application – Blockchain in money
transfer, Blockchain smart contracts.
(2) Audit Implications
(i) Governance and Security: Auditors should consider appropriate governance &
security around the transactions. Although blockchain’s core security premise rests on
cryptography, there are risk factors associated with it.
 (ii) Insecure API, data confidentiality and Privacy: As blockchain interacts with systems
& business partners, concerns related to insecure application programming interfaces
(APIS), data confidentiality & privacy cannot be ignored. Weak blockchain API are
something auditors cannot overlook.
(iii) Data privacy laws and regulations: Auditors must be able to determine whether data
put on blockchain will expose enterprise to liability for noncompliance with applicable
laws and regulations.
(3) Common Risk
(i) Inability to reverse transactions: Inability to reverse transactions and to access data
without the required keys make the system secure, but also mean that organisations
need specific protocols and management processes to ensure that they are not locked
out and have clear contingency plans.
(ii) Security Concerns: Operating through network nodes could also expose the
organisation to cyber-attacks and data hacks, so security issues are important.
(iii) Regulatory landscape: Regulatory landscape is still evolving for blockchain, so audit
teams should check that compliance managers are following developments constantly
and adapting processes accordingly.

NFT (Non-Fungible Token)

(i) Meaning
▪ NFT means something is unique and cannot be replaced. Unlike physical money and
cryptocurrencies are fungible (means they can be traded or exchanged for one another) NFTs
are non-fungible tokens.
▪ NFTS contains digital signature which make them unique. NFTs are digital assets, e.g.,
photos, videos, artwork, sports collectibles etc.
▪ NFTs are tokens used to represent ownership of unique items. NFTs allow their creators to
tokenize things like art, collectibles, or even real estate. They are secured by the blockchain
and can only have one official owner at a time. No one can change the record of ownership or
copy/paste a new NFT into existence.
(ii) Key Features of NFT
▪ Digital Asset: NFT is a digital asset that represents Internet collectibles like art, music, and
games with an authentic certificate created by blockchain technology that underlies
Cryptocurrency.
▪ Unique: It cannot be forged or otherwise manipulated.
▪ Exchange: NFT exchanges take place with cryptocurrencies such as Bitcoin on specialist
sites.
(iii) Challenges of NFT
NFTS has its own challenges like ownership and copyright concerns, security risks, market is not
that wide, online frauds etc.
(iv) Audit Considerations
Includes comprehensive code review for verifying the safety of a token, valid contract, data
privacy and potential cyber threat.

Robotic Process Automation (RPA)

(1) Concept
➢ Automation of repetitive processes performed by users.
➢ It is a software technology that emulate humans’ actions interacting with digital
systems and software.
➢ Key Contributors to RPA: Process efficiency, customer experience and control
effectiveness.
➢ RPA software bots can interact with any application or system the same way people
do, except that RPA bots can operate around clock, nonstop, much faster & with 100%
reliability and precision.
(2) Audit Implications
(i) Understanding of the processes: To understand RPA processes, which include data
extraction, aggregation, sanitization and cleansing. Unless auditors understand these
processes, they will not be in a position to initiate an audit.
(ii) Review of Source Code: A comprehensive assurance process might demand review of
the source code.
(iii) Understanding of tools: To perform substantive testing, auditors must have an
understanding of the tools used to develop & maintain RPA. This will be helpful when
auditors review logs, configuration controls, privileged access controls and the like.
(iv) General IT controls are applicable as always.
(3) Common Risk
(i) Operational and execution risks: Robots are deployed without proper operating
model. Buying the wrong tool, making wrong assumptions, taking shortcuts, and
jeopardizing security and compliance.
(ii) Change management risks: Not following the change management implementation
lifecycle, improper & incomplete testing (not covering all scenarios) leads to inaccurate
results.
(iii) RPA Strategy Risk: Setting wrong expectations and unrealistic business goals creates
an environment of uncertainty.
(4) RPA to check IND AS, IFCoFR and Standards on Auditing
To ensure accurate financial reporting, effective internal controls, and reliable audit
procedures, following elements to be incorporated in audit practices:
➢ IND AS (Para-wise details: Para reference, Accounting policy, Relevant data to be
captured, Relevant calculation to be made, Presentation in F.S.)
 ➢ IFCoFR,
➢ Audit procedures as per Standards on auditing

Example (Ind-AS 16: PPE)

Para Ref. 6
Accounting policy Define PPE as tangible assets that are held for use in production
or supply of goods or services, for rental to others, or for
administrative purposes; and are expected to be used during
more than one period.
Relevant data to be Identify PPE items & their cost components.
captured
Relevant calculation Apply recognition criteria & measurement principles.
to be made
Presentation in F.S. Disclose PPE items & their carrying amounts, depreciation
methods and rates, useful lives, impairment losses, etc.
IFCoFR Establish internal controls over identification, recognition,
measurement, depreciation, impairment and disclosure of PPE.
Audit procedures as Verify existence, ownership, valuation and disclosure of PPE by
per SAs inspection, confirmation, vouching, analytical procedures, etc.

Control Considerations or Objectives of Auditing Digitally

Control Considerations to be Focused

(i) Holistic understanding of changes: Auditors should gain a holistic understanding of
changes in industry and IT environment to effectively evaluate management’s process for
initiating, processing, and recording transactions and then design appropriate auditing
procedures.
(ii) Considerations of Risks: Auditors should consider risks resulting from implementation of
new technologies & how they differ from those that arise from traditional systems.
(iii) Digital Upskilling: Auditors should consider whether digital upskilling or specialists are
necessary to determine the impact of new technologies and to assist in the risk assessment &
understanding of design, implementation & operating effectiveness of controls.

Technology Risks where Auditor should test the appropriate controls

▪ Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.
 ▪ Unauthorized access to data that might result in destruction of data or improper changes to
data, including the recording of unauthorized or non-existent transactions or inaccurate
recording of transactions.
▪ Possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties, thereby leading to insufficient segregation of duties.
▪ Unauthorized or erroneous changes to data in master files.
▪ Unauthorized changes to systems or programs.
▪ Failure to make necessary or appropriate changes to systems or programs.
▪ Inappropriate manual intervention.
▪ Potential loss of data or inability to access data as required.
▪ Risks introduced when using third-party service providers.
▪ Cybersecurity risks.

Key Steps for auditors in a Changing IT Environment

▪ Maintain sufficient professional skepticism when reviewing management’s risk assessment
for new systems.
▪ Understand the direct and indirect effects of new technology and determine how its use by
the entity impacts the auditor’s overall risk assessment.
▪ Understand how technologies impact the flow of transactions, assess the completeness of the
in-scope ICFR systems, and design a sufficient and appropriate audit response.
▪ Assess appropriateness of management processes to select, develop, operate & maintain
controls related to organization’s technology based on the extent technology is used.

Next Generation Audit

(a) Shift of Focus
Next Generation Audit is human-led, tech-powered and data-driven. It is based on combining
emerging technologies to redefine how audits are performed.
Next Generation Audit aims to the following:
From to
Sampling Populations Full Population Analysis
Multiple datasets One data set
Disconnected tools Integrated ecosystem services
Manual Risk Assessments Dynamic, data-driven risk assessment
Separated communication Embedded Communications
Repetitive Tasks High Value Work and Capacity for Growth
Manual Work Automation
Ad hoc Insights Insights from a broader audit
Technology forming part of Next Generation Audit
(1) Drone Technology
➢ Drones have great load capacity for carrying sensors & cameras, thus they can
photograph and physically examine count of large quantities of fixed assets and
inventory.
➢ Drone captured audit information can be combined with various alternative sources of
information such as QR code readers, manual counts etc. to consolidate audit
information & enhance execution speed while ensuring correctness and completeness
of data.

(2) Augmented Reality

It allows users to view the real-world environment with augmented (added) elements,
generated by digital devices. Example: Pokémon Go, a game for mobile devices in which
players chase imaginary digital creatures (visible on their mobile phones) around physical
locations.
(3) Virtual Reality (VR)
➢ VR goes a step forward and replaces the real world entirely with a simulated
environment, created through digitally generated images, sounds, and even touch and
smell.
➢ Using special equipment, such as a custom headset, the user can explore a simulated
world or simulate experiences such as flying or skydiving.
(4) Metaverse
➢ Metaverse is emerging 3-D digital space that uses virtual reality, augmented reality,
and other advanced internet technology to allow people to have lifelike personal and
business experiences online.
➢ It represents a convergence of digital technology to combine and extend the reach and
use of Cryptocurrency, Artificial Intelligence (AI), Augmented Reality (AR) and
Virtual Reality (VR).
Potential application of the metaverse in the financial domain
(i) Virtual Banking and Transactions: A forward-thinking financial institution,
establishes a presence in the metaverse to offer virtual banking services. Users can
create virtual bank accounts, access personalized financial dashboards, and perform
transactions using virtual currencies.
(ii) Digital Asset Management: A digital asset management company, recognizes the
growing popularity of virtual assets in the metaverse. They launch a virtual asset trading
platform within the metaverse, allowing users to buy, sell, and trade NFTS and other
digital assets.
 (iii) Virtual Financial Education and Training: A Financial Learning Academy aims to
enhance financial literacy using the metaverse. They create a virtual classroom
environment where participants can attend interactive financial education sessions.
(iv) Virtual Meetings and Conferences: For a leading industry even an organisation hosts
a virtual conference within metaverse. Participants from around the world can access
the conference through their virtual avatars.
(v) Data Visualization and Analytics: A company utilizes the metaverse to offer advanced
data visualization and analytics tools to financial professionals. Their virtual analytics
platform allows users to visualize complex financial data in interactive and immersive
3D environments.
(b) Common Risks Associated
▪ Public safety;
▪ Cybersecurity;
▪ Data Privacy;
▪ Data protection;
▪ Lack of standards;
▪ Technical challenges; and
▪ Concerns over taxation, jurisdiction, and customer protection.
 DUE DILIGENCE

Meaning and Nature

▪ Due Diligence is used to investigate and evaluate a business opportunity, verify agreements,
encumbrances on assets, title and ownership of assets, intellectual property rights, health, safety,
environment laws, etc.
▪ It is a process of investigation, performed by investors, into details of a potential investment such
as an examination of operations and management and the verification of material facts.
▪ Due diligence involves a careful study of the financial as well as non-financial possibilities for
successful implementation of restructuring plans.
▪ Due diligence is performed to check whether it is advisable to acquire, merge, invest etc.

Difference between Due Diligence and Audit

▪ Audit is an independent examination and evaluation of F.S. on an organization with a view to
express an opinion thereon. (general statement of audit)
▪ Due diligence refers to an examination of a potential investment to confirms all material facts of
prospective business opportunity. It involves review of financial and non-financial records as
deemed relevant and material.

Importance of Due Diligence

Due Diligence is carried out for many reasons including the following:
▪ To confirm that the business is what it appears to be;
▪ To identify potential ‘deal killer’ defects in the target and avoid a bad business transaction;
▪ To gain information that will be useful for valuing assets, defining representations and
warranties, and/or negotiating price concessions; and
▪ To verify that the transaction complies with investment or acquisition criteria.

Areas in which Due Diligence can take place

(a) Financial Due Diligence
▪ To analyse books of account and other information pertaining to financial matters of the
entity.
▪ Should be performed after completion of commercial due diligence.
(b) Commercial/ Operational due diligence
▪ Involves evaluation from commercial, strategic & operational perspectives.
▪ For example, whether proposed merger would create operational synergies.
(c) Tax Due diligence
To determine the tax effect of the merger or acquisition and generally included with Financial
Due Diligence.
(d) Information Systems due diligence
To ascertain whether information systems is providing reliable information in a timely manner.
(e) Legal due diligence
To review legal aspects w.r.t. functioning of the entity and compliance with applicable laws.
(f) Environmental due diligence
To study the entity’s environment, its flexibility and adaptiveness to the acquirer entity.

1
 (g) Personnel due diligence
To ascertain that the entity's personnel policies are appropriate and suit the requirements of the
restructuring.

Financial due Diligence (Scope)

(a) Studying the Business History
Accountant should make relevant enquiries about history of target’s business products,
markets, suppliers, expenses, operations. This could, inter alia, include the following:
▪ Nature of business, Location of production facilities warehouses offices., Employment,
Products or services and market, History of business with important suppliers of goods and
services, Inventories, Franchises, licenses, patents, Important expense categories, Research
and development, Foreign currency assets, liabilities and transaction, Legislation and
regulation that significantly affect the entity, Information systems.

(b) Significant Accounting Policies

▪ Study accounting policies followed and ascertain whether any accounting policy is
inappropriate.
▪ See the effects of the recent changes in the accounting policies.
▪ Look at any material effect of accounting policies on overall profitability.
▪ Areas in which accounting policies followed by the company are different from those
adopted by acquiring enterprise and effect of such differences.

(c) Review of Financial Statements

▪ Examine whether F.S. of target company have been prepared in accordance with the
Statute governing the target company, Framework for PPFS and the relevant ASs.
▪ Review operating results (P&L) of the target company in great detail.
▪ Consider presence of an extraordinary item of income or expense that might have affected
the operating results of the target company.
▪ Compare trading results for the past four to five years and trend of normal operating profit
arrived at. (MCQ)
(1) Areas of Hidden Liabilities
In order to investigate hidden liabilities, auditor should pay his attention to the following
areas:
▪ Any SCN, which have not matured into demands but may be material and
important.
▪ Guarantees given are not shown in books.
▪ Company may have sold some subsidiaries/businesses and may have agreed to take
over and indemnify all liabilities and contingent liabilities of the same prior to the
date of transfer.
▪ Product and warranty liabilities, product returns & discounts, liquidated damages,
etc.
▪ Tax liability under direct and indirect taxes.
▪ Long pending sales tax assessment.

2
 ▪ Cases of custom duty where only provisional assessment has been made and final
assessment is yet to completed.
▪ Agreement to buy back shares at a stated price.
▪ Future lease liabilities.
▪ Claims against the company including third party claims.
▪ Unfunded retirement benefit of employees.
▪ Labour claims under negotiations.
(2) Areas of Overvalued assets
The auditor shall have to specifically examine the following areas:
▪ Uncollectable receivables.
▪ Obsolete inventories valued above NRV , if any.
▪ Deteriorate plant and machinery and their spares.
▪ Assets value which have impaired due to sudden fall in market value.
▪ Assets shown in books above market value due to capitalization of expenditure
▪ Assets under litigation.
▪ Investment shown at cost whose market value is much lower.
▪ Investment carrying very low rate of return.
▪ Unfruitful project expenditure.
▪ Intangibles of no value.
(d) Taxation
▪ Check whether business is regular in payment of taxes to Government.
▪ Also look at the tax effects of the merger or acquisition.
(e) Cash Flow
▪ Review historical cash flows and their pattern to determine cash generating abilities.
▪ Check whether the company is able to honour its commitments to its trade payables, to
the banks, to government and other stakeholders;
▪ Examine how well company is able to turn its trade receivables and inventories;
▪ Examine how well does the company deploy its funds; Determine whether any funds are
lying idle.
▪ Examine investment pattern of the company and are they easily realisable.
(f) Financial Projections
▪ Evaluate projections for the next five years with detailed assumptions and workings and
the appropriateness of assumption used in the preparation and presentation of financial
projections.
▪ If assumption used by the company appears to be are unrealistic, consider its impact on
the overall valuation of the company.
(g) Management and Employees
▪ Examine the status of work force, staff and employees and their retention.
▪ Match the job profile of the administrative and managerial staff with the requirements of
the new incumbents.
▪ Check the payment of all employee benefits like PF, Gratuity, ESI and superannuation.
▪ Review of pay packages of the key employees.
(h) Statutory Compliance
▪ Make a list of laws that are applicable to the entity as well as to make a checklist of
compliance required from the company under those laws.

3
 ▪ If the company has not been regular in its legal compliance, it could lead to punitive
charges under the law.
▪ The impact on such violations be quantified and assessed in respect of entity; financial
status and even on its going concern status.

Work Approach due diligence (Thoda thoda aacha hai)

To Essential requirement of due diligence process is to assess the fair value of business under
consideration. Fair value of business is ascertained following the steps mentioned below:
▪ Reviewing and reporting on the financials submitted by the target company.
▪ Assessing the business by a site visit (if applicable).
▪ Working through the due diligence process with the investor by defining the key areas.
▪ Prepare an offer based on completion of due diligence.

Conducting due diligence

▪ Due diligence to be started with an open mind. Do not assume that anything wrong will be found
and look for it.
▪ Get the best team of people. If required, due diligence experts may be hired from outside the
firm. While hiring such professionals, their experience record needs to be taken care of.
▪ Get help in all areas like finance, tax accounting, legal, marketing, technology, and any others
relevant to the assignment so that you get a 360-degree view of the acquisition candidate.
▪ Talk to customers, suppliers, business partners, and employees are great resources.
▪ Take a risk management approach. So, while you want to do your research, you also want to
make sure that you do not antagonise the team of people of the target company by bogging them
down with loads of questions.
▪ Prepare a comprehensive report detailing the compliances and substantive risks/issues.

Contents of a Due Diligence (only recommendatory format)

▪ Executive summary.
▪ Introduction.
▪ Objective of due diligence.
▪ Terms of reference and scope of verification.
▪ Brief history of the company.
▪ Summary on capital structure and group structure of company.
▪ Shareholding pattern.
▪ Observations on the review.
▪ Assessment of Management structure.
▪ Assessment of financial liabilities.
▪ Assessment of valuation of assets.
▪ Assessment of operating results.
▪ Assessment of taxation and statutory liabilities.
▪ Assessment of possible liabilities on account of litigation.
▪ Assessment of net worth.
▪ Any liabilities not provided for in the books.
▪ SWOT analysis comments on future projections.

4
▪ Status on charges, liens, mortgages and assets of the company. Ways and means to cover
unforeseen contingent liabilities.
▪ Aspects to be taken care of before/after merger.
▪ Interlocking investments and financial amounts receivable subject to litigation. Obligations with
group/associate companies.

5
 Professional Ethics and Liabilities of Auditors
First Schedule( Part I - Professional Misconduct in relation to Members in Practice)
(a) Clause 1
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Allows any person to practice in his name as a Chartered Accountant,
 Unless such person is also a Chartered Accountant in practice, and
 Is in partnership with, or employed by himself.
(b) Clause 2
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Pays or allows or agrees to pay or allow,
 Directly or indirectly,
 Any share, commission or brokerage in
(1) Fees or profits of his professional business to any person other than
(2) A member of the Institute, or
(3) Partner, or
(4) Retired partner, or
(5) Legal representative of deceased partner, or
(6) Member of any other professional bodies, or
(7) With such other persons having prescribed qualifications.
 For the purpose of rendering such professional services from time to time in or outside India.
NOTE:
 Sharing of profits by Widow or legal representative of deceased partner: Widow or legal
representative of deceased partner can continue to receive a share of profits in the firm
provided the partnership agreement provides the same.
 Sale of Goodwill: In case of sole proprietorship, the Council of ICAI has resolved that the
sale / transfer of goodwill shall be permitted in respect of cases where the death of the
proprietor occurred on or after 30/08/1998 provided:
(1) ICAI’s permission to practice in the deceased’s firm name is sought within a year of
death. (In such a case, name of the firm is kept in abeyance till one year from the date of
death).
(2) In case there exist a dispute as to the legal heir of the deceased proprietor, information
as to the existence of the dispute is received by the Institute within a year of the death.
(In such a case, name of the firm is kept in abeyance till one year from the date of
settlement of dispute).’

NOTE 1:
Consideration towards sale of goodwill should be determined in lump sum amount, though
payment may be made in parts. Consideration determined as a percentage of future
realisations is not permitted. ’

01
Professional Ethics and Liabilities of Auditors

NOTE 2:
In case of a partnership firm when all the partners die at the same time, the above council
decision would also be applicable.
 Other professional Bodies (Regulation 53A): ICSI, ICWAI, Bar Council of India,
Indian Institute of Architects, Institute of Actuaries of India.
 Persons with prescribed qualifications (Regulation 53A): CS, Cost Accountant,
Actuary, B.E. Bachelor in Technology, Bachelor in Architecture, Bachelor in Law and
MBA.
 Accepting the assignments wherein a percentage of professional fee is deducted by the
Government to meet the administrative and other expenditure will not amount to
professional misconduct.

(c) Clause 3
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 accepts or agrees to accept
 any part of the profits of the professional work
 of a person who is not a member of the Institute.
However, such a restriction does not apply in respect of following:
 Member of any other professional bodies (as specified in Clause 2), or
 With such other persons having prescribed qualifications (as specified in Clause 2).
NOTE:
Referral fees amongst members: It is not prohibited for a member in practice to charge
Referral Fees, being the fees obtained by a member in practice from another member in
practice in relation to referring a client to him.
’

(d) Clause 4
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Enters into partnership in or outside India
 With any person other than the following:
(1) C.A. in practice, or
(2) Member of any other professional body having prescribed qualifications, or
(3) A person, who but for his residence abroad would be entitled to be registered as member under
Clause (v) of Sec. 4(1), or
(4) A person whose qualifications are recognised by CG or Council for the purpose of permitting
such partnerships.

NOTE:
 Persons Qualified in India for purpose of Membership (Regulation 53A): CS, Cost
Accountant, Actuary, B.E., B. Tech, B. Arch, LLB or MBA (from recognised Universities or
Institutes).

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 Professional Ethics and Liabilities of Auditors

 Permitted memberships for Partnership (Regulation 53B): Members of ICSI, ICWAI,

Bar Council of India, Institution of Engineers, Indian Institute of Architects, Institute of
Actuaries of India & Professional Bodies or Institutions outside India recognised by the
Council.

(e) Clause 5
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Secures any professional business
 Through the services of a person who is not an employee or not his partner or
 By means which are not open to a CA.
NOTE:
 Nothing contained in Clause 5 shall be construed as prohibiting any arrangement permitted in
clauses (2), (3) and (4).
 The acts of partners and employees of the Firm towards securing professional work are subject
to provisions of Clauses (6) and (7) of Part-1 of First Schedule.

(f) Clause 6
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Solicits clients or professional work
 Either directly or indirectly,
 By circular, advertisement, personal communication or interview or by any other means.
However, solicitation is relaxed in following cases:
 Securing professional work from another CA in practice.
 Responding to tenders or enquiries issued by various users of professional services.
.

Council Guidelines W.R.T. Permitted and Prohibited forms of Solicitation

(1) Advertisement & note in press
(i) As a general rule a member can’t advertise.
.

(ii) However, a member may advertise change in partnership, address of practice and telephone
numbers provided it contains a bare statement of facts and area of distribution and number
of insertions in newspaper should be limited.
.

(iii) A Member is permitted to give classified advertisements in journal/newsletter of institute for

sharing professional work or seeking partnership or salaried employment of accountancy
nature provided it contains only CA’s name, address, tel. No., fax or e-mail address and
address of social Networking sites.
.

(iv) Mere factual position of experience and area of specialisation, relevant to seek response to
the advertisement, are permissible.
.

(2) Empanelment for allotment of professional

(i) In respect of organisations, where a panel of CA’s exists, a member is free to request to place
his name on the panel.
.

(ii) Roving enquiries for existence of such panel is not permitted.

3
Professional Ethics and Liabilities of Auditors
.

(iii) It is permissible to quote fees on enquiries being received from such organisations, which
maintains such panel.
.

(iv) Printed or Xerox copies of scale of fees in reply to enquiries is not permitted.
.

(3) Responding to Tenders

(i) It is not prohibited to the members to respond to tenders and requests made by users of
professional work.
.

(ii) This is however subject to conditions that may be issued by the Council.
.

(iii) ICAI issue following guidelines for compliance by the members:

 A member in practice shall not respond to any tender in areas of services which are
exclusively reserved for CAs, such as audit and attestation.
 However, such restriction shall not be applicable where minimum fee of assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the CAs.
 “Minimum fee” for this purpose should be such that it commensurate with size, value,
volume, manpower requirement and nature of work.
.

(iv) EMD / Security Deposit: Council is of the view that while interference with the practices
prevailing for requirement of EMD / Deposit is not required. However, on having received
complaint / instance of exorbitant EMD / Deposit, the Ethical Standards Board may look into
the matter on case-to-case basis.
.

(4) Publications of Books

 It is not permissible for a member to mention in a book or an article published by him, or a
presentation made by him, any professional attainment(s), whether of the member or the firm
with which he is associated.
 However, he may designation “Chartered Accountant” as well as name of firm.
.

(5) Issue of Greeting Cards Or Invitations

Member is permitted to use designation “Chartered Accountant” as well as name of firm in:
 Greeting cards,
 Invitations for marriages and religious ceremonies and any invitation for opening or
inauguration of office, or
 Letters regarding change in office premises or telephone numbers
Provided these are sent only to clients, relatives and friends of the members concerned.
.

(6) Advertisement for Celebrations

 To advertise the events organised by a Firm of CAs is not permitted.
 However, considering need of interpersonal socialisation/relationship of the members through
such get together occasions, advertisement for Silver, Golden, Diamond, Platinum or
Centenary celebrations of the CA Firms may be published in newspaper or newsletter.
.

(7) Sponsoring Activities

(i) Member in practice or a Firm of CAs is not permitted to sponsor an event. However, such
member or Firm may sponsor an event conducted by a Programme Organising Unit (PoU)

4
 Professional Ethics and Liabilities of Auditors

of the ICAI, provided such event has prior approval of Continuing Professional Education
(CPE) Directorate of the ICAI.
.

(ii) Members sponsoring activities relating to Corporate Social Responsibility may mention their
individual name with the prefix “CA”. However, the mention of Firm name or CA Logo is
not permitted.
(8) Advertisement of Teaching activities
(i) An advertisement of Coaching / teaching activities by a member in practice may amount to
indirect solicitation, as well as solicitation by any may therefore be violative of the provisions
of Clause (6).
.

(ii) Hence, members are advised to abstain from advertising their association with Coaching /
teaching activities through hoardings, posters, banners and by any other means, failing which
they may be liable for disciplinary action.
.

(iii) Subject to the above prohibition, such members may put, outside their Coaching / teaching
premises, sign board mentioning the name of Coaching/teaching Institute, contact details and
subjects taught therein only.
.

(9) Sharing Firm Profile

It is not permitted to share Firm profile with a prospective Client unless it is in response to a
proposed client’s specific query, and otherwise not prohibited to be used by the client.
.

(10) Television or Movie Credits

While sharing name of the member or Firm of CAs for inclusion in Television or Movie Credits,
it must be taken care of that exhibition of name is not made differently as compared to other
entries in the credits.
.

(11) Roving enquiries

It is not permissible for a member to address letters, e-mails or circulars specifically to persons
who are likely to require services of a CA since it would tantamount to advertisement.
.

(12) Seeking work from Professional Colleagues

Issue of an advertisement or a circular by a CA, seeking work from professional colleagues on
any basis whatsoever except as provided above would be in violation of this clause.
.

(13) Scope of representation u/s 140(4) of Companies Act, 2013

 Representation should not be used to secure needless publicity and soliciting for his
continuance as an auditor.
 However, it may set out in a dignified manner how he has been acting independently through
his term of office and his willingness to continue as an auditor if reappointed by shareholders.
.

(14) Acceptance of Original professional Work

 Acceptance of original work emanating from a client introduced by another member is not
permitted.
 However, if any professional work of such client comes to him directly, it should be his duty
to ask the client that he should come through the other member dealing generally with his
original work.
.

5
Professional Ethics and Liabilities of Auditors

(15) Public Interviews

 While giving any interview or otherwise furnishing details about themselves or their firms in
public interviews or to the press or at any forum, the members should ensure that, it should
not result in publicity.
 Due care should be taken to ensure that such interviews or details about the members or their
firms are not given in a manner highlighting their professional attainments.
 Any detail which is given must, in addition to meeting the above requirements, be given only
as a response to a specific question, and of factual nature only.
.

(16) Advertisements Under Box Numbers

Members / Firms are prohibited from inserting advertisements for soliciting clients or professional
work under box numbers in the newspapers.
.

(17) Educational Videos

While videos of educational nature may be uploaded on the internet by members, no reference
should be made to the CA Firm wherein member is a partner / proprietor. Further, it should not
contain any contact details or website address.
 Guidelines for Website
CAs and/or CAs Firms would be free to create their own website, subject to following
requirements:
 No standard format of the Website is being given, to provide independence to the Members.
 Ensure that websites run on a “pull” model and not a “push” model of the technology.
 Ensure that none of the information contained in Website be circulated on their own or through
E-mail or by any other mode or technique except on a specific “pull” request.
 Soliciting people to visit the website by means of any circular or any other advertisement or
any other material of any kind whatsoever is not permitted. However, website address may be
mentioned on the professional stationery and e-mail.
 The following information may be displayed on the Firms/Members’ Websites:
(i) Member / Trade / Firm name.
(ii) Year of establishment.
(iii) Member/Firm’s address (both H.O. and Branches), tel. No.(s), fax No.(s) & e-mail
ID(s).
(iv) Nature of services rendered (to be displayable only on specific “pull” request)
(v) Partners details like name, year of qualification, other qualification(s), tel. No.(s),
address, e-mail, area of Experience (to be displayable only on specific “pull” request).
(vi) Details of employees like name, designation, area of experience (to be displayable only
on specific “pull” request)
(vii) Job vacancies for the CA / firm of Chartered Accountants (including articleship).
(viii) No. of articled assistants. (to be displayable only on specific “pull” request).
(ix) Nature of assignments handled (to be displayable only on specific “pull” request).
(x) Name of clients and fee charged cannot be given.

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 Professional Ethics and Liabilities of Auditors

NOTE:
Disclosure of names of clients and/or fees charged, on website is permissible only where it
is required by a regulator, provided that such disclosure is only to the extent of requirement
of the regulator and is made only till such period that the member works under the purview
of such Regulator. Ensure that below such disclosure it is mentioned in italics, that “This
disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in
[name of the country / area where such regulator has jurisdiction] vide [Rule / Directive etc.
under which the disclosure is required by the Regulator].
 Display of Passport style photograph is permitted.
 Members may include articles, professional information, bulletin boards, professional
updation and other matters of larger importance or of professional interest on the website.
 Educational videos on topics of professional relevance are permissible.
 Chat rooms can be provided which permit chatting amongst members of the ICAI and
between Firms and its clients. The confidentiality protocol would have to be observed.
 Firms can provide document management facility with distinct log in and password
facility to the clients to access copies of their documents on the Firm website.
 Firm can provide link of its page on Social Networking site. However, the members
should not solicit people to visit or like their respective page(s) on such social
Networking site.
 The members / firms can provide on line advice to their clients who specifically request
for the advice whether free of charge or on payment.
 The details in the Website should be so designed that it does not amount to soliciting
client or professional work.
 Website should ensure adequate secrecy of the matters of the clients handled through
Website.
 No Advertisement in the nature of banner or any other nature will be permitted.
 Website should be befitting the profession of Chartered Accountants and should not
contain any information or material which is unbecoming of a Chartered Accountant.
 Website may provide a link to the Website of ICAI, its Regional Councils and Branches
and also the Website of Govt. / Govt. Departments / Regulatory authorities / other
Professional Bodies.
 Website address should be as near as possible to individual name/trade name, firm name
of the CA in practice or firm of CAs in practice. But it should not amount to soliciting
clients or professional work or advertisement of attainments or services.
 Website should mention the information which is not at material variance from the
information as per the ICAI’s records.

(g) Clause 7
A CA In Practice shall be deemed to be guilty of professional Misconduct if he:
 Advertises his professional attainments or services,
OR

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Professional Ethics and Liabilities of Auditors

 Uses any designation or expressions other than the Chartered Accountant on professional
documents, visiting cards, letter heads or sign boards.
However, recognised degree of university or title indicating membership of ICAI or other recognised
institution may be used.
 Guidelines for Advertisement:
(1) Advertisement through write-up: is allowed subject to guidelines issued by the Council.
Guidelines for Write-up
(A) Meaning of Write-up
“Write-up” means writing of particulars according to information given in the Guidelines
setting out services rendered by the Members or firms.
(B) Conditions to be Complied with
The write-up shall comply with the following conditions:
 It shall be honest and truthful.
 There shall be no exaggerated claims for the services offered by the member or the Firm.
 It must not make any unsubstantiated comparisons to the work of others.
 It should not be of a nature that may bring the profession into disrepute.
 It should not contain testimonials or endorsements or the fees charged.
 It should not contain any information about achievements / awards (except the awards
given by the C.G. or S.G. or Regulatory bodies) or any other position held, or
accreditation(s) granted by any organisation.
 Monogram of any kind or use of any kind of catch words is not permissible.
 Membership No. / FRN is mandatory to be mentioned in the write-up.
 It should not be of font size exceeding 14.
 It must not be violative of any provisions of CA Act, 1949, CA Regulations, 1988, Code
of Ethics, 2020 or any Guideline of the Council.
(C) Information to be Contained in Write-ups
(I) For Members
 CA………….. Name
 Membership No. with Institute
 Age
 Date of becoming ACA
 Date of becoming FCA
 Date from which COP held
 Recognised qualifications
 Languages known
 Telephone / Mobile / Fax No.
 Professional Address

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 Professional Ethics and Liabilities of Auditors

 Website
 E-mail
 CA Logo
 Passport style photograph
 Details of Employees (Nos.:)
A. Chartered Accountants -
B. Other Professionals -
C. Articles / Audit Assistants
D. Other Employees
 Names of the employees and their particulars on the lines allowed for a member as
stated above.
 Services provided
 Position held as Director or Managing Director in a Management Consultancy
Company registered with the Institute.
(II) For Firms
 Name of the Firm..............................Chartered Accountants
 Firm Registration No. with Institute
 Year of establishment.
 Professional Address(s) registered with the Institute (both Head Office and Branches)
 Working Hours
 Tel. No.(s)/Mobile No./Fax No.(s)
 E-mail
 No. of partners
 Name of the proprietor / partners and their particulars on the lines allowed for a
member as stated above including passport style photograph.
 CA Logo
 Details of Employees (Nos. -)
A. Chartered Accountants -
B. Other professionals -
C. Articles/Audit Assistants
D. Other employees
 Names of the employees of the firm and their particulars on the lines allowed for a
member as stated above.
 Services provided
 Affiliation with a Network registered with the Institute
NOTE:
The write-up may have the Signature, Name of the Member / Name of the
Partner signing on behalf of the firm, Place and Date.

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Professional Ethics and Liabilities of Auditors

(2) Other Designations:

 Use of words like Income-tax Consultant, Corporate Lawyer, Cost Consultant or
Management Consultant is not allowed.
 Use of designation like ‘Member of Parliament’, in addition to that of CA is not
permissible.
 Member empanelled as Insolvency Professional or Registered Valuer can mention
“Insolvency Professional” or “Registered Valuer” respectively on his visiting card.
(3) Permission to mention qualifications of certain Institutions: Members are permitted to
indicate membership of a recognised foreign Institute of Accountancy on visiting cards, e.g.
South African Institute of Chartered Accountants (SAICA), Institute of Certified Public
Accountants (CPA Ireland) and ICAEW.
(4) Date of Setting up of practice: Date of setting up of practice or date of establishment of the
firm on the letter heads and other professional documents etc. should not be mentioned.
(5) Practice as Advocate: Persons eligible otherwise, subject to permission may practice as
advocates but can’t use designation “Chartered Accountant” and “Advocate” simultaneously.
(6) Practice as Company Secretary / Cost Management Accountant: Members of the Institute
in practice who are otherwise eligible may also practice as CS and/or Cost Accountants.
Such members shall, however, not use designation of the aforesaid Institute/s simultaneously
with the designation “Chartered Accountant”.
It is clarified that in event of the permission being granted to a member in practice to also
hold COP of sister Institute (s) / Bar Council, such member be treated as a member in full-
time practice.
(7) Mention of Firm name except on Professional Documents: It is not proper to use
designation ‘Chartered Accountant’ except on professional documents, visiting cards, letter
heads or sign boards.
(8) Notice in the Press relating to the Success in an Examination: Notice in press relating to
success in an examination of an individual candidate, should not contain any element of
undesirable publicity either in relation to the articled/audit assistant or an employee or the
member or the firm with whom he was served.
(9) Reports and Certificates: Ensure that extent & manner of publication of certificates are
limited to what is necessary to enable the report or certificate to serve its proper purpose.
Members should use letterhead of their Firm for issuing reports and certificates.
(10) Appearance of Chartered Accountants on Electronic Media (including Internet):
Members may appear on television, films and Internet and agree to broadcast in the Radio or
give lectures at forums and may give their names and describe themselves as Chartered
Accountants.
Special qualifications or specialised knowledge directly relevant to the subject matter of the
programme may also be given. Firm name may also be mentioned, however, any exaggerated
claim or any kind of comparison is not permissible.

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 Professional Ethics and Liabilities of Auditors

(11) Important Appointments or views of Public Importance: Publicity is permitted for

appointments to positions of local or national importance or for the views of members on
matters of similar importance. Mention of the membership of the Institute is desirable in such
cases. However, reference to the professional firm of the member should not be given.
(12) Organising Training Courses, Seminars etc. for his staff: A CA in practice holding training
courses, seminars etc. for his staff may also invite the staff of other CAs and clients to attend
the same. However, undue prominence should not be given to the name of the CA in any
booklet or document issued in connection therewith.
(13) Writing Articles or Letters to the Press: Members writing articles or letters on subjects
connected with profession may give their names & use description Chartered Accountants.
(14) Size of Sign Board: Members should exercise their own discretion and good taste while
keeping in mind the appropriate visibility and illumination of Sign Board. However, use of
glow signs or lights on large-sized boards as is used by traders or shop-keepers is not
permissible.
Member can have a name board at the place of his residence with the designation of a
Chartered Accountant, provided it is a name plate or name board of an individual member and
not of firm.
(15) Public Announcements with details of Directors: Name of CA acting as director in the
company is permissible to appear in the prospectus of the company, however descriptions
regarding his expertise, specialisation and knowledge in any particular field is not permitted.
It is advisable for a member that as soon as he is appointed as a director on Board of a
Company, he should specifically invite the attention of the management of the Company to
the aforesaid provisions and should request that before any such prospectus or public
announcements or public communication mentioning the name of the member concerned, is
issued, the material pertaining to the member concerned should, as far as practicable be got
approved by him.
(16) Network Firms and Networking Guidelines: Refer topic 19.19.
(i) Definitions
(A) Network
 A larger structure that is aimed at:
 Co-operation; and
 Profit / cost sharing or shares common ownership, control or management,
common quality control policies & procedures, common business strategy, use
of a common brand name, or a significant part of professional resources.
(B) Network Firm
Means a firm or Entity that belongs to a Network.
(ii) Concept of Network
 A larger structure aimed only at facilitating referral of work, will not be considered
as network.

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Professional Ethics and Liabilities of Auditors

 Judgment as to whether the larger structure is a network shall be made in light of

whether a reasonable and informed third party would be likely to conclude that
entities are associated in such a way that a network exists.
 Where larger structure is aimed at co-operation and it is clearly aimed at profit or cost
sharing among the entities within the structure, it is deemed to be a network.
However, sharing of immaterial costs does not in itself create a network.
 Where the larger structure is aimed at cooperation and the entities within the structure
share common ownership, control or management, it is deemed to be a network.
 Where the larger structure is aimed at co-operation and the entities within the
structure share common quality control policies and procedures, it is deemed to be a
network.
 Where the larger structure is aimed at co-operation and the entities within the
structure share a common business strategy, it is deemed to be a network.
.

 Where the larger structure is aimed at co-operation and the entities within the
structure share the use of a common brand name, it is deemed to be a network.
.

 Where the larger structure is aimed at co-operation and entities within the structure
share a significant part of professional resources, it is deemed to be a network.
Professional resources include:
- Common systems that enable firms to exchange information such as client data,
billing and time records;
- Partners and staff;
- Technical departments that consult on technical or industry specific issues,
transactions or events for assurance engagements;
- Audit methodology or audit manuals; and
- Training courses and facilities.
.

 Determination of whether professional resources shared are significant shall be made

based on the relevant facts and circumstances. Where the shared resources are limited
to common audit methodology or audit manuals, with no exchange of personnel or
client or market information, it is unlikely that the shared resources would be
significant.
(iii) Forms of the Network
 A network can be constituted as a mutual entity which will act as a facilitator for the
constituents of the Network. In such a case the Network itself will not carry out any
professional practice.
 A network can be constituted as a partnership firm subject to condition that total
number of partners does not exceed 20.
 A network can be constituted as a LLP subject to the provision of the CA Act and
Rules.
 A network can be constituted as company subject to the guidelines prescribed by
ICAI for corporate form of practice.

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 Professional Ethics and Liabilities of Auditors

 Network Firms shall consist of sole Practitioner/proprietor, partnership or any such

entity of professional accountants as may be permitted by the Act.
 A firm is allowed to join only one network.
 Firms having common partners shall join only one Network.

(iv) Approval of Name of Network amongst firms registered with Institute

 Network may have distinct name which should be approved by the Institute. To
distinguish a “Network” from a “firm” of Chartered Accountants, the words “&
Affiliates” shall be used after the name of the network and the words “& Co.” / “&
Associates” shall not be used.
 Provisions of Regulation 190 of the CA Regulations, 1988 shall be applicable to the
name of Network. However, even if a name is approved and subsequently it is found
that the same is undesirable then, the said name may be withdrawn at any time by the
Institute.
 Institute shall approve or reject the name and intimate the same to Network within a
period which shall not be later than 30 days from the date of receipt of the said Form.
 Mere approval of the name of the Network shall not entitle the Network to carry on
practice in its own name.
(v) Registration of Network with entities in India
 After the name is approved, Institute shall reserve such name for a period of three (3)
months from the date of approval.
 Network shall get itself registered with the Institute within the period of 3 months,
failing which the name assigned shall stand cancelled on the expiry of the said period.
 Registration of Network with Institute is mandatory.
 If different Indian firms are networked with a common Multinational Accounting
Firm, they shall be considered as a part of network.

(vi) Listing of Network with entities outside India

 Duly authorised representative(s) of Indian Member firm (s) / Member constituting
Network with entities outside India shall file a declaration with the Institute for
Listing of such Network within 30 days from the date of entering into the Network
arrangement.
 Proprietary / individual members, partnership firms as well as members in LLP or
any such other entity of members as may be permitted by the Act, shall be permitted
to join such network with entities outside India provided that they are allowed to join
only one network and firms having common partners shall join only one such
network.
(vii) Change in Constitution of Registered Network
In case of change in the constitution of registered Network on account of any entry into
or exit constitution of from the Network, the network shall communicate the same to the
Institute within a period of thirty (30) days from the date of change in the constitution.

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Professional Ethics and Liabilities of Auditors

(viii) Ethical Compliance

Once relationship of network arises, it will be necessary to comply with all applicable
ethical requirements prescribed by Institute in general and the following requirements in
particular:
 If one firm of the network is the statutory auditor of an entity then the associate or
the said firm directly / indirectly shall not accept the internal audit or book-keeping
or such other professional assignments which are prohibited for the statutory auditor
firm.
 The guidelines of ceiling on Non-audit fees is applicable in relation to a Network as
follows:
- For a Network firm who is doing statutory audit, it shall be the same as mentioned
in the said notification; and
- For other firms of the same Network collectively, it shall be 3 times of the fee
payable for carrying out the statutory audit of the same undertaking / company.
 In cases where rotation of firms is prescribed, no member firm of the network can
accept appointment as an auditor in place of any member firm of the network which
is retiring.
 Network may advertise to the extent permitted by the Advertisement Guidelines
issued by Institute.
 Firms constituting the network are permitted to use the words “Network Firms” on
their professional stationary.
(ix) Consent of Client
Effect of registration of network with Institute will be deemed to be a public notice of the
network and therefore consent of client will be deemed to be obtained.
(x) Framework of Internal Byelaws of Network
Network shall formulate operational bye-laws. Bye-laws may contain the following
clauses on which the affiliates of the network may enter into a written agreement among
themselves:
 Appointment of a Managing Committee, from among the managing partners of
member firms of network and terms and conditions under which it should function.
The minimum and maximum number of members of Managing Committee shall also
be agreed upon.
 Administration of the network.
 Contribution of membership fees to meet cost of the administration.
 Identifying a partner of any of the member firms of the network to be responsible for
the assignment (engagement partner).
 Dispute settlement procedures through arbitration and conciliation.
 Development of training materials for members of the network.
 Issue of News-letters for staff and clients.

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 Professional Ethics and Liabilities of Auditors

 Development of software for different types of assignments.

 Development and maintenance of data bases relevant for different types of
assignments.
 Library.
 Appointment of a technical director to whom references can be made.
 Determining the methodology for drawing resources from each member firm.
 Determining compensation to member firms for resources to be drawn from them.
 Peer review of the member firms.
(17) Use of logo: Use of logo / monogram of any kind / form / style / design / colour etc.
whatsoever on any display material or media e.g. paper stationery, documents, visiting cards,
magnetic devices, internet, sign board, be prohibited.
(18) Common CA Logo: Common logo is prescribed by ICAI. Any other logo is not permissible.
Use of CA logo in the stamp is permissible, subject to CA logo guidelines.
(h) Clause 8
A member in practice shall be deemed to be guilty of professional misconduct if he
 accept a position as Auditor
 previously held by another chartered accountant or certified auditor without
 first communicating with him in writing.
NOTE:
 Professional reasons for not accepting Audit:
(i) Non-compliance of provisions of Secs. 139 and 140 of Companies Act, 2013.
(ii) Non-payment of undisputed audit fee (except sick unit). Provision for Audit fees in
accounts signed by auditor and the client shall be considered as undisputed.)
(iii) Issuance of a qualified Report.
In first two cases, acceptance of audit amounts to professional misconduct. In (iii) case,
member may accept audit if he thinks that attitude of retiring auditor wasn’t proper and
justified. But if report was qualified for good & valid reasons, non-acceptance would be
a healthy practice.
 Fees pending due to non-availability of Previous Auditor: Where the Previous Auditor
is not available for accepting payment of undisputed audit fees, and it is not otherwise
possible to transfer the payment to him electronically, the Incoming Auditor may advise
the client to purchase DD Draft of the amount equivalent to undisputed Audit Fees of
retiring auditor, and may accept the Audit assignment after verifying the same.
 Course of action in case of change of Auditorship: Object of the incoming auditor, in
communicating with the retiring auditor is to ascertain from him whether there are any
circumstances which warrant him not to accept the appointment.
 Duty of Retiring Auditor: On the request of the Incoming Auditor to the retiring auditor
for providing known information regarding any facts or other information of which, in the

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Professional Ethics and Liabilities of Auditors

opinion of the retiring auditor, the Incoming auditor needs to be aware before deciding
whether to accept the engagement, the retiring auditor shall provide the information
diligently.
 Positive Evidence of Delivery required: Members should communicate with a retiring
auditor in such a manner as to retain in their hands positive evidence of the delivery of the
communication to the addressee.
In opinion of the Council, the following would in the normal course provide such evidence:
(i) Communication by a letter sent through “Registered Acknowledgement due”, or
(ii) By hand against a written acknowledgement, or
(iii) Acknowledgement of the communication from retiring auditor’s vide e-mail
address registered with the Institute or his last known official e-mail address, or
(iv) Unique Document Identification Number (UDIN) generated on UDIN portal
(subject to separate guidelines to be issued by the Council in this regard)
 Certificate of Posting not a conclusive proof of communication: Mere posting of a letter
under certificate of posting is not sufficient to establish communication.
 Premises found Locked: The communication received back by the Incoming Auditor
with “Office found Locked” written on the Acknowledgement Due shall be deemed as
having been delivered to the retiring auditor.

 Firm not found at the given Registered address: If the Communication sent by the
Incoming auditor is received back with remarks “No such office exists at this address”,
and the address of communication is the same as registered with the Institute on the date
of dispatch, the letter will be deemed to be delivered, unless the retiring auditor proves that
it was not really served and that he was not responsible for such non-service.
 Special Audit under Income-tax Act, 1961: It would be a healthy practice if a Tax
Auditor appointed for conducting special audit under the Income-tax Act, 1961
communicates with the member who has conducted the Statutory Audit.
 Communication required for all kinds of audit: The requirement for communicating
with the previous auditor being a Chartered Accountant in practice would apply to all types
of Audit vis., Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit or
any other kind of audit.
 Communication in case of Assignments done by other professionals: A
Communication is mandatorily required for all types of Audit/Report where the previous
auditor is a Chartered Accountant. In case of assignments done by other professionals not
being Chartered Accountants, it would also be a healthy practice to communicate.
 Lack of time in acceptance of Government Audits: In case of audit of government
Companies, banks or their branches, if appointment is made well in time to enable the
obligation cast under this clause to be fulfilled, such obligation must be complied with
before accepting the audit.

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 Professional Ethics and Liabilities of Auditors

However, in case the time schedule given for the assignment is such that there is no time
to wait for the reply from the outgoing auditor, incoming auditor may give a conditional
acceptance of the appointment and commence the work which needs to be attended to
immediately after he has sent the communication to the previous auditor in accordance
with this clause.
In his acceptance letter, he should make clear to the client that his acceptance is subject to
professional objections, if any, from the previous auditors and that he will decide about his
final acceptance after taking into account the information received from the previous auditor.

(i) Clause 9
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 accepts an appointment as auditor of a company,
 without ascertaining whether requirements of Sec. 225 of Companies Act, 1956 (Secs. 139 & 140
of Companies Act, 2013 read with Sec. 141),
 in respect of such appointment have been duly complied with.
Aspects to be verified by Incoming Auditor to ascertain whether Company has complied with
the provisions of Sec. 140 of the Companies Act
 Whether a member of the Company has given special notice of the resolution as required u/s 140(4)
of the Companies Act, 2013. The notice shall be sent by members to the company not earlier than
3 months but at least 14 days before the date of the meeting at which the resolution is to be moved,
exclusive of the day on which the notice is given and the day of the meeting. A true copy of this
notice should be obtained by the incoming auditor.
 Whether special notice has been sent to all the members of the Company as required u/s 115 of
Companies Act, 2013 at least 7 days before the date of the General Meeting.
 Whether special notice has been sent to the retiring auditor as required u/s 140(4).
 Whether representation received from the retiring auditor has been sent to the members of the
Company as required u/s 140(4).
 Whether representation received from retiring auditor has been considered at general meeting and
resolution proposed by the special notice has been properly passed at the general meeting.

(j) Clause 10
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 charges or offers to charge,
 accepts or offers to accept
 in respect of any professional employment,
 fee which is based on a % age of profits or
 which are contingent upon findings, or results of such employment,
Except as permitted under regulations.
NOTE:
 Fees will not be treated as contingent if fixed by a court or other public authority.

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Professional Ethics and Liabilities of Auditors

 Regulation 192 (Restriction on Fees): In respect of below mentioned cases fees may be
fixed as specified below:
(i) In the case of receiver or liquidator: On the basis of percentage of realisation or
disbursement of assets.
(ii) In the case of co-operative society: On the basis of percentage of paid-up capital or
working capital or gross/net income or profits.
(iii) In the case of valuer for purposes of direct taxes and duties: On the basis of
percentage of value of property valued.
(iv) In the case of management consultancy services: on the basis of percentage which
may be contingent upon the findings, or results of such work;
(v) In the case of certain fund-raising services: On the basis of a percentage of the fund
raised;
(vi) In the case of debt recovery services: On the basis of percentage of the debt recovered.
(vii) In the case of services related to cost optimisation: On the basis of percentage of
benefit derived; and
(viii) Any other service or audit: Following activities decided by Council for this clause:
 Acting as Insolvency Professional
 Non-Assurance Services to Non-Audit Clients

(k) Clause 11
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 engages in any Business or occupation
 other than the profession of chartered accountant
 unless permitted by Council so to engage.
NOTE:
However, a member may become director (not being M.D. or Whole-time director) in a
company provided he or any of his partner is not interested in such company as an auditor.

NOTE:
(i) Regulation 190A: A CA in practice is not entitled to engage in any other business or
occupation other than the profession of accountancy except with the permission of the
Council.
Accordingly, the various occupations have been specified for which general permission is
granted and the occupations for which specific and prior approval of council is required.
.

Occupations for which permission has been granted generally:

 Employment under C.A. in practice or firms of such CAs.
 Private tutorship.
 Authorship of Books /Articles.
 Holding of Life Insurance Agency license for limited purpose of Renewal
Commission.

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 Professional Ethics and Liabilities of Auditors

 Attending class and appearing for any exams.

 Holding of public elective offices such as MP or MLA.
 Honorary office of charitable - educational or other non-commercial institute.
 Notary public, Justice of peace, Special Executive Magistrate and like.
 Part time tutorship under coaching organisation of institute.
 Valuation of paper, acting as paper setter, head-examiner or moderator for any exam.
 Editorship of professional journal.
 Acting as Surveyor / Loss Assessor under Insurance Act.
 Acting as Recovery Consultant in the Banking Sector.
 Owning agricultural land and carrying out agricultural activity.

Occupations for which specific and Prior approval is required:

 Full time / Part time employment in Business concerns provided he/his relative do
not hold substantial interest in such concerns. The Term relative means Husband,
wife, brother or sister or any lineal ascendant or descendent.
 Full time / Part time employment in non-business concern.
 Office of Managing Director / Whole-time Director of a body corporate provided that
the member and/or any of his relatives do not hold substantial interest in such
concern.
 Interest in family business concerns.
 Interest in any educational institute.
 Part time / Full time lectureship for courses other than ICAI Examinations.
 Part time / Full time tutorship under any educational institution other than coaching
organisation of institute.
 Editorship of journals other than professional journals.
 Any other Business / Occupation for which Executive Committee considers that
permission may be granted.
(ii) Acquiring interest in family business: A member of the Institute can acquire interest in
family business in any of the following manner:
 as a proprietary firm
 as a partnership firm
 in the name and style of Hindu Undivided Family as its Karta or a member.
It would be necessary for the members to provide evidence that interest in the family
business concern devolved on him as a result of inheritance / succession / partition of the
family business.
It is also necessary for the member to show that he was not actively engaged in carrying
on the said business and that the family business concern in question was not created by
himself.

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Professional Ethics and Liabilities of Auditors

(iii) General permission (for private tutorship, and part-time tutorship under Coaching
organisation of the Institute) and specific permission (for part-time or full-time
tutorship under any educational institution other than Coaching organisation of the
Institute) is subject to the condition that the direct teaching hours devoted to such activities
taken together should not exceed 25 hours in a week in order to be able to undertake attest
functions.

(l) Clause 12
A CA in practice shall be deemed to be guilty of professional misconduct if he allows:
 a person not being a member of the institute in practice or
 a member not being his partner
 to sign on his behalf or on behalf of his firm,
 any Balance Sheet, P&L A/C, Report or Financial Statements

NOTE:
 The Financial Statements and the Reports referred to in this clause means the financial
statements and reports as ultimately finalised and submitted to the outside authorities.
 Council has clarified that power to sign routine documents on which a professional opinion
or authentication is not required to be expressed may be delegated and such delegation will
not attract provisions of this clause. Examples of such instances are:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations / financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or
recording the results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Sec. 288 of
Income-tax Act.
(x) Any other matter incidental to the office administration and routine work involved.
(xi)

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 Professional Ethics and Liabilities of Auditors

First Schedule (Part II - Professional Misconduct in relation to Members in Service)

(a) Clause 1
A CA in service is guilty of professional misconduct if he:
 Pays or allows or agrees to pay
 Directly or indirectly to any person
 Any share in the emoluments of the employment undertaken by him.
(b) Clause 2
A CA in service is guilty of professional misconduct if he: Accepts or agrees to accept
 Any part of fees, profits or gains from
 A lawyer, a CA or broker engaged by such company, firm or person or
 Agent or customer of such company, firm or person
 By way of commission or gratification.

First Schedule (Part III - Professional Misconduct in relation to Members Generally)

(a) Clause 1
A CA is deemed to be guilty of professional misconduct if he not being a fellow of the Institute but
acts as a fellow of the Institute.
(b) Clause 2
A CA is deemed to be guilty of professional misconduct if he:
 does not supply the information called for, or
 does not comply with the requirements asked for by
 The Institute, Council or any of its committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the appellate authority.
(c) Clause 3
A CA is deemed to be guilty of professional misconduct if he:
 while inviting professional work from another chartered accountant or
 while responding to tenders or enquiries
 while advertising through a write up or anything as provided for in clauses (6) and (7) of Part
I of this schedule,
 gives information knowing it to be false.

First Schedule (Part IV - Other Misconduct in relation to Members Generally)

(a) Clause 1
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he is held guilty of any civil or criminal court for an offence which is punishable with imprisonment
for a term not exceeding six months.
(b) Clause 2
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he in the opinion of the Council, brings disrepute to the profession or the Institute as a result of his
action whether or not related to his professional work.

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Professional Ethics and Liabilities of Auditors

Second Schedule (Part I - Professional Misconduct in relation to Members in Practice)

(a) Clause 1
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 discloses the information
 acquired in the course of his professional engagement
 to any person other than his client so engaging him
 without the consent of his client or
 otherwise than as required by any law for the time being in force.
.

NOTE:
Access to Working Papers:
 An auditor is not required to provide the client or other auditors of the same enterprise or its
related enterprise such as a parent or a subsidiary, access to his audit working papers.
 The Principal Auditor of an enterprise do not have right of access to the audit working papers
of the branch auditors.
 An auditor can rely on the work of another auditor, without having any right of access to the
audit working papers of the other auditor.
 There is a difference between sharing of working papers and sharing of information. So
far as the information is concerned, member can provide the same to the client or to a
Regulatory body after obtaining the consent of the client.

(b) Clause 2
A CA In practice shall be deemed to be guilty of professional misconduct if he :
 certifies or submits in his name or in the name of his firm
 a report of an examination of financial statements
 unless the examination of such statements and the related records has been made by
(i) him or
(ii) by a partner or
(iii) an employee in his firm or
(iv) by another CA in practice.
(c) Clause 3
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 permits his name or the name of his firm
 to be used in connection with an estimate of earnings
 contingent upon future transactions
in manner which may lead to the belief that he vouches for the accuracy of the forecast.
NOTE:
Participation in preparation of forecasts & their review: SAE 3400 “The Examination of
Prospective Financial Information” allows to a member to review the prospective financial
information subject to following conditions:
 He indicates the source of information.

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 Professional Ethics and Liabilities of Auditors

 He indicates the basis of forecasts.

 He gives in his report the major assumptions made in arriving at the forecasts.
 He does not vouch for the accuracy of the forecasts.

(d) Clause 4
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 expresses his opinion
 on financial statements of any business or enterprise
 in which he, his firm or a partner in his firm has a substantial interest.
NOTE:
(i) The words “Financial Statements” used in this clause would cover both reports and
certificates usually given after an examination of the accounts or the F.S. or any attest
function under any statutory enactment or for purposes of income-tax assessments. This
would not, however, apply to cases where such statements are prepared by members in
employment purely for the information of their respective employers in the normal course
of their duties and not meant to be submitted to any outside authority.
(ii) Member must take care to see that they do not land themselves in situations where there
could be conflict of interest and duty.
(iii) Council has decided not to permit a CA in employment to certify the F.S. of the concern in
which he is employed, or of a concern under the same management as the concern in which
he is employed, even though he holds COP and that such certification can be done by any
CA in practice. Council has also decided that a CA should not by himself or in his firm name:
 Accept the Auditorship of a college, if he is working as a part-time lecturer in the college.
 Accept the Auditorship of a Trust where his partner is either an employee or a trustee of
the Trust.
(iv) Requirements of Clause (4) are equally applicable while performing all types of attest
functions by the members.
(v) Sec. 141 of Companies Act, 2013 also prohibits a member from auditing the accounts of a
company in various situations.
(vi) A member of the Institute cannot express the opinion in the following cases:
 Where the member himself is owner / partner of concerned business.
 Where partner / relative of member has substantial interest in concerned business.
 Where the member himself or his partner or relative is a director or in the employment of
an officer or an employee of the company.
(vii) Members are not permitted to write books of account of their auditee clients.
(viii) A statutory auditor cannot be the internal auditor of the same entity.
(ix) An internal auditor cannot be the tax auditor / GST Auditor of the same entity.
(x) A member shall not accept the assignment of audit of a Company for a period of 2 years
from the date of completion of his tenure as Director, or resignation as Director of the said
Company.
(xi)

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Professional Ethics and Liabilities of Auditors

(e) Clause 5
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 fails to disclose a material fact
 known to him
 which is not disclosed in a financial statement,
 but disclosure of which is necessary
 in making such financial statement not misleading
 where he is concerned with that financial statement in a professional capacity.
(f) Clause 6
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 fails to report a material misstatement
 known to him
 to appear in a financial statement
 with which he is concerned in a professional capacity.
(g) Clause 7
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 does not exercise due diligence, or
 is grossly negligent
 in the conduct of his professional duties.
NOTE:
(i) Due Diligence: It implies that work should be performed with skill, care and caution.
(ii) Gross Negligence: It implies negligence of high degree, either arising out of reckless or
deliberate failure to act honestly and reasonably on a material matter.
(iii) Examples of Gross negligence:
 Failure to check the bank balances with the pass books of the banks and to obtain
certificates of balances from the bankers in respect of those balances.
 Issuing clean reports on the balance sheets whereas the reports on the special audit
conducted subsequently revealed certain irregularities which amounted to failure to
examine the pass book and to verify the cash balance.
 Not completing his work relating to the audit and non-submission of audit report in due
time to enable the company to comply with the statutory requirement in this regard.
 Issuing wrong consumption certificate in respect of raw material and components
without examination of stock register and other relevant matters.
 Accepting arbitrary valuation of closing stock without any verification.
(h) Clause 8
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 fails to obtain sufficient information
 which is necessary for expression of an opinion or
 its exceptions are sufficiently material to negate the expression of an opinion.
(i) Clause 9
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 fails to invite attention to any material departure

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 Professional Ethics and Liabilities of Auditors

 from the generally accepted procedure of audit applicable to the circumstances.

NOTE:
(i) If the auditor fails to perform the audit as per generally accepted procedures and standards,
his report should draw attention to the material departure from such procedures.
(ii) Failure to perform certain statutory functions and duties is not excused merely by giving a
qualification or reservation in auditor’s report. On failure he should clearly indicate reasons
for failure to perform audit as per generally accepted procedures and standards.
(iii) What constitutes “generally accepted audit procedure” would depend upon the facts and
circumstances of each case, but guidance is available from the various pronouncements of
the Institute issued from time to time by way of Engagement and Quality Control Standards,
Statements, General Clarifications, Guidance Notes Technical Guides, Practice Manuals,
Studies and Other Papers.
(iv) Audit of Listed Companies: Pursuant to SEBI Notification, Statutory Audit of Listed
Companies under the Companies Act, 2013 shall be done by only those auditors who have
subjected themselves to the Peer Review process of the Institute, and hold a valid certificate
issued by the Peer Review Board of the ICAI.
(v) FRN and Membership No.: Members are required to mention the Membership number and
Firm registration number to all reports issued pursuant to any attestation engagements,
including certificates, issued by them as proprietor of / partner in the said firm.
(vi) Unique Document Identification Number (UDIN): Member in practice shall generate
Unique Document Identification Number (UDIN) for all kinds of the certification, GST and
Tax Audit Reports and other Audit, Assurance and Attestation functions undertaken / signed
by him.

(j) Clause 10
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 fails to keep moneys of his client
 other than fees or remuneration or money meant to be expended,
 in a separate banking account or
 to use such moneys for purposes for which they are intended within a reasonable time.

NOTE:
In connection with compliance of Clause 10, Council has considered some practical difficulties
of the members and the following suggestions have been made to remove these difficulties:
(i) An advance received by a Chartered Accountant against services to be rendered does not
fall under Clause (10) of Part I of the Second Schedule.
(ii) Moneys received for expenses to be incurred, for example, payment of prescribed statutory
fees, purchase of stamp paper etc., which are intended to be spent within a reasonably short
time need not be put in a separate bank account. For this purpose, the expression
reasonably short time, would depend upon the circumstances of each case.
(iii) Moneys received for expenses to be incurred which are not intended to be spent within a
reasonably short time as aforesaid, should be put in a separate bank account immediately.
(iv) Moneys received by a Chartered Accountant, in his capacity as trustee, executor,
liquidator, etc. must be put in a separate bank account immediately.

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Professional Ethics and Liabilities of Auditors

Second Schedule (Part II - Professional Misconduct in relation to Members Generally)

(a) Clause 1
A member of the Institute shall be deemed to be guilty of professional misconduct if he contravenes
any of:
 the provisions of this Act or
 the Regulations made there under or
 the Guidelines issued by the Council.
NOTE 1:
The Regulations under which cases of contravention have generally come to the notice of the
Council are the following:
Regulation 47 Premium from Articled Clerks - prohibited
Regulation 48 Stipend to Articled Clerks-stipend to be paid on monthly basis.
Regulation 190A Chartered Accountants not to engage in any other business or occupation
(Refer Clause 11, Part I of First Schedule)
Regulation 192 Restriction on fees (Refer Clause 10 of Part I of First Schedule)

NOTE 2:
 Entering into an agreement to pay the articles clerk on annual basis, results into violation of
Regulation 48.
 Accepting a loan from an article in case of engagement of the article results into violation of
Regulation 47.
(b) Clause 2
A member of the Institute shall be deemed to be guilty of professional misconduct if he :
 being an employee of any company, firm or person,
 discloses confidential information acquired in the course of his employment
 except as and when required by any law or except as permitted by the employer.

(c) Clause 3
A member of the Institute shall be deemed to be guilty of professional misconduct if he :
 includes in any information, statement, return or form to be submitted to
 the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate Authority,
 any particulars knowing them to be false.

(d) Clause 4
A member of the Institute shall be deemed to be guilty of professional misconduct if he defalcates or
embezzles money received in his professional capacity.

Second Schedule (Part III - Other Misconduct in relation to Members Generally)

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if
he is guilty by any civil or criminal court for an offence which is punishable for a term exceeding 6 months.

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 Professional Ethics and Liabilities of Auditors

Council General Guidelines, 2008

I. Preliminary
These guidelines shall be applicable to all Members of Institute whether in practice or not.
II. Conduct of a Member being an Employee
A member of the Institute who is an employee shall exercise due diligence and shall not be grossly
negligent in the conduct of his duties.
III. Maintenance of books of account
A member of the Institute in practice or the firm of CAs of which he is a partner, shall maintain and
keep in respect of his / its professional practice, proper books of account including the following:
 a Cash Book; and
 a Ledger.
IV. Tax Audit assignments u/s 44 AB of the Income-tax Act 1961
 A Practicing CA shall not accept, in a financial year, more than the “specified number of tax audit
assignments” u/s 44AB of the Income-tax Act, 1961.
 In case of a firm of CAS in practice, the “specified number of tax audit assignments” shall be
construed as specified number for every partner of the firm.
 Where any partner of the firm is also a partner of any other firm, number of tax audit assignments
which may be taken for all the firms together in relation to such partner shall not exceed the
“specified number” in the aggregate.
 Where any partner of a firm of CAs accepts one or more tax audit assignments in his individual
capacity, total number of such assignments which may be accepted by him shall not exceed the
“specified number” in the aggregate.
 Audits conducted u/ss 44AD, 44ADA and 44AE of the Income-tax Act, 1961 shall not be taken
into account for the purpose of reckoning the “specified number”.
 “The specified number of tax audit assignments” means:
 In case of a CA in practice or proprietary firm of CA, 60 tax audit assignments, in a financial year,
whether in respect of corporate or non-corporate assessees,
 In case of firm of CAs in practice, 60 tax audit assignments per partner in firm, in a financial year,
whether in respect of corporate or non-corporate assessees.
 In computing the “specified number” each year’s audit would be taken as a separate assignment.
 Audit of head office & branch office of a concern shall be regarded as one assignment.
 Audit of one or more branches of same concern by one CA in practice shall be construed as only
one assignment.
 A CA being a part time practicing partner of a firm shall not be taken into account for the purpose
of reckoning the tax audit assignments of the firm
 A CA in practice shall maintain a record of the tax audit assignments accepted by him in each
assessment year in the format as may be prescribed by the Council.

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Professional Ethics and Liabilities of Auditors

NOTE:
(i) Tax Audit Report accepted by the firm of Chartered Accountants can be signed by any
partner on the behalf of the firm.
(ii) For example, if there are 10 partners in a firm of CAs in practice, then all the partners of
the firm can collectively sign 600 tax audit reports. This maximum limit of 600 tax audit
assignments may be distributed between the partners in any manner whatsoever. For
instance, 1 partner can individually sign 600 tax audit reports in case remaining 9 partners
are not signing any tax audit report.

V. Appointment of an Auditor in case of non-payment of Undisputed fees

 A member of the Institute in practice shall not accept appointment as auditor of an entity in case
undisputed audit fee of another CA for carrying out the statutory audit under the Companies Act,
2013 or various other statutes has not been paid.
 In the case of sick unit, the above prohibition of acceptance shall not apply.
 Provision for audit fee in accounts signed by both - the auditee and the auditor along with other
expenses, if any, incurred by the auditor in connection with the audit, shall be considered as
“undisputed” audit fee.
 “Sick unit” shall mean a unit registered for not less than 5 years, which has at the end of any
financial year accumulated losses equal to or exceeding its entire net worth.

VI. Specified number of audit assignments

 A Practicing CA shall not hold at any time appointment of more than the “specified number of
audit assignments” of Companies u/s 141 of the Companies Act, 2013.
 In case of a firm of CAs in practice, the “specified number” shall be construed as the specific
number for every partner of the firm.
 Where any partner of firm of CAs in practice is also a partner of any other firm or firms of CAs in
practice, the number of audit assignments which may be taken for all the firms together in relation
to such partner shall not exceed the “specified number” in the aggregate.
 Where any partner of a firm or firms of CAs in practice accepts one or more audit of Companies
in his individual capacity, or in the name of his proprietary firm, total number of such assignments
which may be accepted by all firms in relation to such CA and by him shall not exceed the
“specified number” in the aggregate.
 For this purpose, the “specified number of audit assignments” means:
(i) In the case of a CA in practice or a proprietary firm of CA, 30 audit assignments whether in
respect of private Companies or other Companies, with the exception of OPC and dormant
companies.
(ii) In the case of firm of CAs in practice, 30 audit assignments per partner in the firm, whether in
respect of private Companies or other Companies, with the exception of OPC and dormant
companies.
 In computing “specified number” number of audit of such Companies, which he or any partner of
his firm has accepted whether singly or in combination with any other CA in practice or firm of
such CAs, shall be taken into account.

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 Professional Ethics and Liabilities of Auditors

 Audit of the head office and branch offices of a Company by one CA or firm of such CAs in
practice shall be regarded as one audit assignment.
 Audit of one or more branches of the same Company by one CA in practice or by firm of CAs in
practice in which he is a partner shall be construed as one assignment only.
 Number of partners of a firm on date of acceptance of audit shall be considered.
 A CA in practice, whether in full-time or part-time employment elsewhere, shall not be counted
for purpose of determination of “specified number”.
 A CA being a part time practicing partner of a firm shall not be taken into account for the purpose
of reckoning the audit assignments of the firm.
 A CA in practice as well as firm of CAs in practice shall maintain a record of the audit assignments
accepted by him or by the firm, or by any of the partners of the firm in his individual name or as a
partner of any other firm.

VII. Appointment as Statutory auditor

 A Practicing CA shall not accept appointment as statutory auditor of PSU/Govt.
Company/Listed Company & other Public Companies having turnover of 50 Crores or more
in a year where he accepts any other work or assignment or service in regard to the same
undertaking/company on a remuneration which in total exceeds the fee payable for carrying
out the statutory audit of the same undertaking/company.
 This restriction shall apply in respect of fees for other work/service or assignment payable to
the statutory auditors and their associate concern(s) put together.
 For this purpose, term “other work” or “service” or “assignment shall include Management
Consultancy and all other professional services permitted by the Council pursuant to Sec.
2(2)(iv) of the CA Act, 1949 but shall not include :
(i) Audit under any other statute;
(ii) Certification work required to be done by the statutory auditors, and
(iii) Any representation before an authority.
NOTE:
Applicability of these guidelines seems to be redundant in case of companies as Sec. 144 of
Companies Act, 2013 prohibits an auditor of the company from rendering certain services
including management services directly or indirectly to the Company or its holding company
or its subsidiary company.

VIII. Appointment of an auditor when he is indebted to a concern

A Practicing member or a partner of a firm in practice or a firm or a relative of such member or partner
shall not accept appointment as auditor of a concern while indebted to the concern or given any
guarantee or provided any security in connection with the indebtedness of any third person to the
concern,
 for limits fixed in the statute and
 in other cases, for amount exceeding 1,00,000.

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Professional Ethics and Liabilities of Auditors

IX. Directions in case of unjustified removal of auditors

A Practicing member shall follow the direction given, by the Council or an appropriate Committee or
on behalf of any of them, to him being the incoming auditor not to accept the appointment as auditor,
in the case of unjustified removal of the earlier auditor.
X. Minimum Fees
Repealed by Council
XI. Guidelines on Tenders
 A Practicing member shall not respond to any tender issued by an organisation or user of
professional services in areas of services which are exclusively reserved for CAs, such as audit
and attestation services.
 However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals along
with the CAs.
XII. UDIN Guidelines
A member of the Institute in practice shall generate Unique Document Identification Number (UDIN)
for all kinds of the certification, GST and Tax Audit Reports and other Audit, Assurance and
Attestation functions undertaken/signed by him which made mandatory from the following dates
through announcements published on the website of the ICAI www.icai.org at the relevant time:
 For all Certificates w.e.f. 1st February, 2019.
 For all GST and Tax Audit Reports w.e.f. 1st April, 2019.
 For all other Audit, Assurance and Attestation functions w.e.f. 1 st July, 2019.
XIII. Logo Guidelines
 Logo consists of letter 'CA' with a tick mark inside a rounded rectangle with white background.
 Letters CA have been put in blue, the corporate colour which not only stands out on the background
but also denotes creativity, innovativeness, knowledge, integrity, trust, truth, stability and depth.
 Upside down tick mark typically used by CAs, has been used to symbolise the wisdom and value
of the professional.
 Green colour in the tick mark signifies growth, prosperity, harmony and freshness.
 Members are encouraged to use the new logo, as published in the guidelines. Do not change the
design and colours, including the white background. Refrain from rotating or tilting the logo.
XIV. Guidelines for Corporate Form of Practice
Members in practice can render Management Consultancy and Other Services in Corporate form,
subject to the guidelines.
Members in practice may hold the office of MD, WTD or Manager of a body corporate within the
meaning of Companies Act provided that body corporate is engaged exclusively in rendering
Management Consultancy and Other Services permitted by the Council in pursuant to Sec. 2(2)(iv) of
the CA Act, 1949 and complies with the following conditions:
(a) Name
Management Consultancy Company (MCC) shall have a distinct name which shall be approved
the Institute.

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 Professional Ethics and Liabilities of Auditors

(b) Registration
After approval of the name, company is required to be registered with the Institute.
(c) Ethical Compliance
 Once MCC is Registered with the Institute as per the Guidelines, it will be necessary to comply
with the following requirements:
(i) If the individual practitioner / sole proprietorship firm / partnership firm is statutory
auditor of an entity then the MCC should not accept the internal audit or book-keeping
or such other professional assignments, which are prohibited for the statutory auditor
firm.
(ii) Ceiling on non-audit fees is applicable in relation to an MCC.
(iii) MCC shall comply with clauses (6) & (7) of Part I of the First Schedule to the CA Act,
1949 and other directives as issued by the Institute.
 MCC shall give an undertaking that it shall comply with clauses (6) & (7) of Part-1 of the First
Schedule to the CA Act, 1949 and other directives as issued by the Institute.
(d) Object of MCC
MCC shall engage itself only in Management Consultancy & Other Services. MCC shall give an
undertaking that it shall render only Management Consultancy & Other Services prescribed by
Council pursuant to powers u/s 2(2)(iv) of the CA Act, 1949.

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Professional Ethics and Liabilities of Auditors

Council Guidelines for Advertisement, 2008

(a) Online Third Party Platforms
 A CA may provide advisory services on taxation and other areas through websites of others. No
other service, can be rendered through such websites.
 This is subject to the condition that on the Website, contact address of the CA is not provided nor
such Website will contain any material which advertises professional achievements or status of
such CA except making a statement that they are CAs.
 The name of CA firm with suffix “Chartered Accountants” would not be permitted.
(b) Publication of Name or Firm Name in the Telephone or other Directories
CAs and CA Firms may have entries made in a Telephone Directory (in printed and electronic form)
either by making a special request or by means of an additional payment, subject to following
restrictions:
(i) Entry should not appear in any other section/category except that of CAs.
(ii) Member / firm should belong to town/city in respect of which directory is being published.
(iii) Order of the entries should not be in any manner other than alphabetical.
(iv) Entry should not be made in a differential or prominent manner giving the impression of publicity
/ advertisement.
(v) Entries should not be restricted and should be open to all the CAs/firms of CAs in the particular
city/town in respect whereof the directory is published.
(vi) Members can also include their names in trade/social directories.
(c) Application based Service provider Aggregators
It is not permissible for members to list themselves with online Application based service provider
Aggregators, wherein other categories like businessmen, technicians, maintenance workers, event
organisers etc. are also listed.
(d) Specialised Directories for Limited Circulation
 Name, description and address of member (or firm) may appear in any directory or list of members
of a particular body in which the names are listed alphabetically.
 For a specialised directory or a publication such as a “Who’s Who” (including those compiled on
purely local basis), a member should use his discretion in supplying information, bearing in mind
the nature and purpose of the publications.
 In addition to his name, description and address and those of his firm, a member may give where
appropriate, directorships held and reasonable personal details and may state his outside interests.
He should not, however, give the names of any of his clients.
(e) Exemptions
 A special exemption has been made as regards publication of name and address of a member or
that of his firm, with the description CAs, in an advertisement appearing in press in following
circumstances, provided that advertisement is not displayed more prominently or name of member

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or firm with the designation CAs appears in type not bolder than the substance of the
advertisement:
(i) Advertisement for recruiting staff in the member’s own office.
(ii) Advertisement inserted on behalf of clients requiring staff or wishing to acquire or dispose
of business or property.
(iii) Advertisement for the sale of a business or property by a member acting in a professional
capacity as trustee, liquidator or receiver.
 When advertising for staff, it is desirable that members should avoid the expression such as “a
well-known firm”, since this would savour of advertisement.

Self-Regulatory Measures
(a) Branch Audits
 The Branch audits of a company should not be conducted by its statutory auditors consisting of ≥
10 members, but should be conducted by local firms consisting of < 10 members.
 This should not be understood to mean any restriction on the right of the statutory auditors to have
access over branch accounts conferred under the Companies Act, 2013.
 This restriction may not apply in the following cases.
(i) Where accounting records of branches are maintained at the H.O., and
(ii) Where significant operations of an undertaking or a company are carried out at its branch
office.

(b) Joint Audit

 In case of large companies, the practice of associating a practicing firm with < 5 members as Joint
auditors should be encouraged.
 Where a client desires to appoint such a firm as joint auditor, senior firm should not object.

(c) Ratio Between Qualified and Unqualified Staff

A practicing firm of CAs engaged in audit work should have at least one member for every five non-
qualified members of the staff, excluding articled and audit assistants, typists, peons and other persons
not engaged directly in such professional work.

(d) Disclosure of Interest by Auditors in other Firms

Council has decided that as a good and healthy practice, auditors should make a disclosure of the
payments received by them for other services through the medium of a different firm or firms in which
the said auditor may be either a partner or proprietor.

(e) Recommended Minimum Scale of Fees

 Institute has issued revised Minimum scale of Fees for the professional assignments of the
members of ICAI.
 Recommended scale of Fees is to be charged as per the work performed for various professional
assignments.
.

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Professional Ethics and Liabilities of Auditors

Requirements as to Disclosure of Fees to ICAI:

(1) Disclosure requirements
(i) For non-public Interest Entities: Disclosure is required where for 2 consecutive years, gross
annual professional fees from an audit client represents > 40% of the total fees of the firm.
(ii) For Public Interest Entities (PIE): Disclosure is required where for 2 consecutive years, gross
annual professional fees from an audit client represents > 20% of the total fees of the firm.
NOTE:
Here Public Interest Entity means Listed Entities, Banks and Insurance Companies.
(2) Exemptions from Disclosure
(i) If total Fees received by Firm does ≥ 20 lakh.
(ii) Audit of Government Companies, public undertakings, nationalised banks, PFI or regulators.
(iii) Appointments of auditors made by Government.

Recent Decisions of Ethical Standard Board

1. A Practicing CA can become a member of ‘Board of Management in Primary (Urban) Co-operative
Banks as there is no involvement in day-to-day functioning and only sitting fees for services rendered
are provided.
2. Member in practice cannot act as Trademark or Patent Attorney. However, Professional advice in
relation to IPR is a routine professional work and hence permissible.
3. A member in practice cannot accept statutory audit of a society wherein immediate family member
i.e., spouse or dependent, hold honorary position in managing committee of the institutes governed by
the society.
4. Provision relating to limit of indebtedness under Chapter X of Council General Guidelines, 2008 shall
apply only to statutory audits.
5. A CA Firm may register itself on Udyog Aadhar, a web portal of Ministry of MSME.

6. There is no prohibition for internal auditor to acquire/purchase shares of Company.

7. It is not permissible for a member to use Messaging Applications to send messages to make people
aware about his practice, and mention the services provided therein.
8. A Practicing CA being Director Simplicitor in a Company cannot sign ROC Forms of Company as it
is a direct conflict of role.
9. A Practicing CA can act as Authorized Representative of a Foreign Company, provided he is not the
auditor of the said Company.
10. It is permissible for two or more CAs in practice collectively to have joint training session for their
clients on GST, and share the fees collected from the clients thereof.
11. A Practicing CA can provide services through kiosk only if services provided are professional
activities, permitted under the Act.

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 Professional Ethics and Liabilities of Auditors

12. A CA in service is allowed to take e-return registration if it does not conflict with employment
obligation. However, he cannot certify the return.
13. If a Practicing CA is a non-executive director in a company, he or his Firm, should not accept
appointment as a statutory auditor of a Company which is a joint venture of original Company, as it
would impact independence.
14. A Practicing CA may be an equity research adviser, but he cannot publish retail report, as it would
amount to other business or occupation.
15. There is no conflict of interest if a CA, who is a member of a Trust, is also the auditor of the said trust,
provided there is no such prohibition under the statute or otherwise where there is conflict of Interest
as per provisions of Code of Ethics.
16. A Practicing CA may engage himself as Registration Authority (RA) for obtaining digital signatures
for clients.
17. A CA can hold credit card of a bank when he is also the auditor, provided outstanding balance on the
said card does not exceed 1,00,000 beyond the prescribed credit period limit on credit card.
18. A Practicing CA can act as mediator in Court, as it would be deemed to be covered within meaning of
“arbitrator”; which is permitted as per Regulation 191.
19. A Practicing CA is not permitted to accept audit assignment of a bank in case he has taken loan against
a Fixed Deposit held by him in that bank.
20. Statutory auditor/tax auditor cannot be the valuer of unquoted equity shares of the same entity, if
prohibited under statute; but where there is no specific restriction under any law, said eventuality will
be permissible, subject to compliance of independence provisions, as contained in the Code of Ethics.
21. A member who has been Director of a Company, upon resignation from the Company may be
appointed as auditor of the said Company after cooling period of 2 years.
22. A Practicing CA cannot become Financial Advisors and receive fees/commission from Financial
Institutions such as Mutual Funds, Insurance Companies, NBFCs etc.
23. A CA cannot exercise lien over the client documents/records for non-payment of his fees.
24. It is not permissible for CA Firm to print its vision and values behind the visiting cards, as it would
result in solicitation and therefore would be violative of Clause (6), Part-1 of First Schedule.
25. It is not permissible for chartered accountants in practice to take agencies of UTI, GIC or NSDL.
26. It is permissible for a member in practice to be a settlor of a trust
27. A member in practice cannot hold Customs Brokers Licence u/s 146 of Customs Act, 1962 read with
Customs Brokers Licensing Regulations, 2013 in terms of the provisions of Code of Ethics.
28. A CA in service may appear as tax representative before tax authorities on behalf of his employer, but
not on behalf of other employees of the employer.

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Professional Ethics and Liabilities of Auditors

29. A CA who is statutory auditor of a bank cannot for same financial year accept stock audit of the same
branch of the bank or any of the branches of the same bank or sister concern of the bank, for the same
financial year
30. A CA Firm which has been appointed as the internal auditor of a PF Trust by a Government Company
cannot be appointed as its Statutory Auditor.
31. Concurrent auditor of bank ‘X’ cannot be appointed as statutory auditor of bank ‘Y’, which is
sponsored by ‘X’.
32. A CA / CA Firm can act as the internal auditor of a company & statutory auditor of its employees PF
Fund.
33. Resident Director u/s 149(3) of the Companies Act, 2013 would be within scope of Director
Simplicitor, if he is non-executive director, required in the Board Meetings only, and not paid any
remuneration except for attending such Board Meetings.

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 FORENSIC ACCOUNTING

Forensic Professional Accountant

(a) Forensic Accountant engaged by
Forensic Accountant can be engaged in public practice or employed by
▪ Banks,
▪ Police forces,
▪ Lawyers
▪ Insurance companies,
▪ Government agencies
▪ Other organizations.
(b) Importance of Forensic Accountants
Forensic Accountants can resolve the matters by combining accounting knowledge &
experience with respect to:
▪ Fraud Prevention
▪ Fraud Detection
▪ Risk Management
(c) Services rendered by Forensic Accountants
▪ Fund diversions/Asset tracing
▪ Valuations/Estimations of loss/damage
▪ Anti-Money laundering
▪ Tax Evasion/Dues/License Fees
▪ Related party transactions
▪ Financial Statement manipulations
▪ Suspicious transactions under IBC
(d) Skills to be possessed by Forensic Accountant
In order to properly perform the services a Forensic Accountant Professional must be
▪ familiar with legal concepts and procedures;
▪ have expertise in use of IT tools and techniques that facilitate data recovery and analysis;
▪ able to identify substance over form when dealing with an issue.

Process of Forensic Accounting

(a) Step 1 – Initialisation (time pass)
▪ Meeting with the client and accepting the engagement: In order to understand
important facts, players and issues etc., the investigator must meet the client.
▪ Performing conflict check: In order to achieve objectivity, a conflict of interest check
should be carried out as soon as the relevant parties are established.
 ▪ Performing initial investigation: It is often useful to carry out a preliminary
investigation (site visit, inquiry) prior to the development of a detailed plan of action. This
will allow subsequent planning to be based upon a more complete understanding of the
issues.
(b) Step 2 – Planning (time pass)
▪ This is to be developed based on the meeting with the client and carrying out the initial
investigation.
▪ Plan will set out the objectives to be achieved and the methodologies to be adopted.
(c) Step 3 – Collection of Evidences (time pass)
▪ It involves obtaining relevant documents, economic information, tracing different
assets/persons/unaccounted records, meeting with other experts, statutory and internal
auditors of the client.
▪ The evidences gathered should be sufficient to ultimately identify and prove the fraudster
and the mechanism adopted for such frauds.
(d) Step 4 – Performing Analysis (IMP)
The actual analysis to be performed will solely depend upon the nature of the assignment and
may include:
▪ Calculating economic damages;
▪ Summarizing a large number of transactions;
▪ Performing present value calculations utilizing appropriate discount rates;
▪ Performing a regression or sensitivity analysis;
▪ Performing a tracing of assets;
▪ Utilizing a computerized application such as a spread sheet, data base or computer model;
▪ Utilizing charts and graphics to explain the analysis.
(e) Step 5 – Reporting
▪ Issuing a report is the final step. Information detailing the fraudulent activity, if any has
been found need to be reported in the report. The client will expect a report containing the
findings of the investigation, including a summary of evidence, a conclusion as to the
amount of loss suffered as a result of the fraud and to identify those involved in fraud.
▪ The report may include sections on the nature of the assignment, scope of the
investigation, approach utilized, limitations of scope and findings and/or opinions. The
report will include schedules and graphics necessary to properly support and explain the
findings.
▪ The report will also discuss how the fraudster set up the fraud scheme, and which controls,
if any, were circumvented. It is also likely that the investigative team will recommend
improvements to controls within the organization to prevent any similar frauds occurring
in the future.
(f) Step 6 – Court Proceedings
 ▪ Investigation is likely to lead to legal proceedings against the suspect.
▪ Evidence gathered will need to be presented at court, and team members may be called to
court to describe the evidence they have gathered and to explain how the suspect was
identified.

Concept Of Forensic Accounting

▪ ‘Forensic’ means suitable for use in a court of law.
▪ Definition of Forensic Accounting keeps on changing in response to the growing needs of
corporations. Forensic Accounting may be defined as follows:
✓ Integration of accounting, auditing and investigative skills yields the specialty known as
Forensic Accounting. It is the study and interpretation of accounting evidence. It is
application of accounting methods to tracking and collection of forensic evidence, usually
for investigation and prosecution of criminal acts such as embezzlement or fraud.
▪ Red Flag: Indicators of any impending (futuristic/potential) danger or inappropriate
behavior. Red flag does not necessarily indicate existence of fraud however are indicators that
caution needs to be exercised while investigating the situations. Red flags are classified in
categories such as financial performance red flag, accounting system red flags, operational red
flags and behavioral red flags. (Like - Fraud Risk Factors of audit SA-240)

Forensic Accounting vs. Financial Audits

BASIS FORENSIC ACCOUNTING FINANCIAL AUDIT
Meaning Examination of evidence regarding an Examination of Financial
assertion to determine its Information so as to express an
correspondence with established opinion on true and fair view of
criteria carried out in a manner state of affairs and financial
suitable to the court. results.
Objective To determine whether fraud has taken To express an opinion on true and
place. fair view.
Frequency No specific period. Generally carried out for a
financial year.
Techniques Investigative and substantive. Risk based with help of
compliance & substantive
procedures. (toc & tod)
Extent In-depth checking. Test checking based.
Verification of Verification of suspected/selected All assets and liabilities are
Asset and items is done where misappropriation verified with the help of audit
Liabilities is suspected. procedures or management
certificate/representation.
Off balance Regulatory and propriety of these Used to vouch the arithmetic
sheet items (like transactions/contracts are examined. accuracy and compliance with
contracts, etc.) procedures.
Adverse findings Legal determination of fraud impact Modified opinion (Qualified or
if any and identification of perpetrators Adverse) expressed with/without
depending on scope. quantification.
Areas of Forensic Accounting
Forensic accounting is generally involved in the below mentioned area of work:
(a) Expert Testimony
Area of Expert testimony comprises of Assisting in legal proceedings, Testifying in court as a
expert witness, Preparing visual aids to support trial evidence.
(b) Fraud Detection
Area of fraud detection comprises of Investigating and analyzing financial evidence, detecting
financial fraud, tracing misappropriated funds.
(c) Fraud Prevention
Area of fraud prevention comprises of reviewing internal controls to verify their adequacy,
providing consultation in the development and implementation of an internal control
framework aligned to an organisation's risk profile.
(d) Computer Forensics
Area of computer forensics comprises of developing computerized applications to assist in the
recovery, analysis and presentation of financial evidence.

Forensic Accounting and Investigation Report

▪ Forensic Accounting & Investigation Standard 510 deals with responsibility of Professional to
issue a written report to the stakeholders at the conclusion of the assignment.
▪ Reporting results and findings, is concluding part of the assignment. Since one engagement may
include multiple assignments, multiple reports may have to be issued.

(a) Written Report

▪ Written report shofauld convey the results, clearly and accurately.
▪ Findings reported shall be based on reliable and relevant evidences.
▪ Report should be precise and unambiguous.
(b) Report Addressee and Distribution
Report shall be addressed to Primary Stakeholders and shared with other stakeholder(s) if
required or otherwise permissible.
(c) Format or Content of Report
▪ No fixed form or content of the report is mandated.
▪ Report shall include certain key elements to enable the recipient to
(1) Understand the purpose of the assignment,
(2) The extent and scope of work performed by the Professional,
(3) Any limitations, assumptions or disclaimers,
(4) The facts and evidence gathered and
(5) The conclusions drawn.
 ▪ Where form and content of report is mandated by the stakeholders, or specified by
statutory or regulatory requirements, Professional shall report in line with those
requirements.
Key Elements of the Report
▪ Title, addressee and distribution list (if any).
▪ Scope and objectives of the assignment.
▪ Approach and broad work procedures undertaken.
▪ An Executive Summary of the results, covering all important aspects and the essence of
the findings.
▪ Reference to use of an expert, where applicable.
▪ The fact that the assignment has been conducted in accordance with FAIS, or any material
departures therefrom List of findings supported by key evidences, sources of evidences,
and other relevant matter; Assumptions, limitations and disclaimers of the assignment
▪ Conclusions (if any) drawn from the assessment undertaken.
(d) Discussion of Draft report
Where mandate of engagement requires a discussion of the findings with the subject party prior
to finalisation, a summary of responses received from them shall be included in the report.
(e) Assumptions And Limitations
▪ Professional shall list any relevant assumptions made during the assignment having a
significant bearing on the subject matter.
▪ Limitations, if any, imposed by management, should be covered in the report as a key
element of the report.
▪ The report can, at best, highlight the circumstances and facts that may aid a stakeholder
decision or further a civil or criminal investigation.
(f) Reporting Timelines
▪ Report shall be issued within reasonable time frame as per the engagement terms.
▪ Professional may be required to provide interim reports as per the engagement terms
which can be given to the extent practicable without compromising the progress of the
investigation.

Forensic Accounting and Investigation Standards (FAIS)

▪ FAIS are issued to ensure that members of ICAI deliver high quality output in the area of
Forensic Accounting and Investigations.
▪ FAIS at a broad level seek to provide:
(1) Professionals with the minimum standards for undertaking FAI assignments;
(2) Users of FAI services with an indication of the quality of service that can be expected from
such engagements;
 (3) Regulators and Governmental agencies with an appreciation of what can be expected from
FAI services; and
(4) Everyone, guidance on matters of implementation and related practical issues.
▪ Standards are intended to be principle-based, rather than rule based, thereby providing ample
room for professional judgment when applying such principles to unique situations and under
specific circumstances.
▪ If, for any reason, a member is unable to comply with any of requirements of FAIS, or if there is
a conflict between Standards and other mandates, such as a statutory or regulatory requirement,
the FAI report (or such similar communication) should draw attention to the material departures
therefrom along with appropriate explanation.

Framework Governing Forensic Accounting and Investigations

▪ It aims to preserve and enhance the quality of practice of a member of ICAI performing forensic
accounting & investigation services.
▪ This Framework needs to be read in conjunction with the Preface to the Forensic Accounting
and Investigation Standards (FAIS).
▪ The main objectives of the Framework are to:
(1) Provide an overall understanding of Forensic Accounting and Investigations and its key
components;
(2) Outline the manner in which these components come together in an inter-related cohesive
manner when providing such services;
(3) Maintain and improve the quality of forensic accounting and investigation services.
▪ It comprises of four components inherent to the process of forensic accounting and
investigations. These components implicitly form part of the FAIS, even though they may not be
mentioned explicitly in the particular Standards. The four key components (forming the pillars)
of the Framework are:
(i) Basic Principles of Forensic Accounting and Investigations.
(ii) Key Concepts.
(iii) Standards on Forensic Accounting and Investigations.
(iv) Guidance.
 Professional Ethics and Liabilities of Auditors
Fundamental Principles
(a) Fundamental Principles – Sec. 100
(1) Integrity:
A professional accountant should be straightforward & honest in all professional and business
relationships.
(2) Objectivity:
A professional accountant should not compromise professional or business judgments because
of bias, conflict of interest or undue influence of others.
(3) Professional Competence and Due Care:
A professional accountant
 Has a continuing duty to attain and maintain professional knowledge and skill required to
ensure that client receives competent professional service;
 Should act diligently & in accordance with applicable technical & professional standards.
(4) Confidentiality:
A professional accountant should respect confidentiality of information acquired as a result of
professional and business relationships.
(5) Professional Behaviour:
A professional accountant should
 Comply with relevant laws and regulations and
 Avoid any conduct that might discredit the profession.

(b) Compliance With the Fundamental Principles - Sec. 110

A professional accountant might face a situation in which complying with one fundamental principal
conflict with complying with one or more other fundamental principles. In such a situation, the
accountant might consider consulting, with:
(1) Others within the firm or employing organisation.
(2) Those charged with governance.
(3) Institute
(4) Legal counsel.
However, such consultation does not relieve the accountant from the responsibility to exercise
professional judgment to resolve the conflict.

(c) Integrity - Sec. 111

 A professional accountant shall comply with principle of integrity, which requires an accountant
to be straightforward and honest in all professional and business relationships.
 Integrity implies fair dealing and truthfulness.
 A professional accountant shall not knowingly be associated with reports, returns,
communications or other information where the accountant believes that the information:

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Professional Ethics and Liabilities of Auditors

(1) Contains a materially false or misleading statement;

(2) Contains statements or information provided negligently; or
(3) Omits or obscures required information where such omission or obscurity would be
misleading.
If a professional accountant provides a modified report, he will not be considered to be in breach
of matters referred above.
 When a professional accountant becomes aware of having been associated with information
described above, the accountant shall take steps to be disassociated from that information.

(d) Objectivity - Sec. 112

 A professional accountant shall comply with principle of objectivity, which requires an
accountant not to compromise professional or business judgment because of bias, conflict of
interest or undue influence of others.
 A professional accountant shall not undertake a professional activity if a circumstance or
relationship unduly influences the accountant‟s professional judgment regarding that activity.
(e) Professional Competence and Due Care - Sec. 113
 A professional accountant shall comply with the principle of professional competence and due
care, which requires an accountant to:
(1) Attain and maintain professional knowledge and skill at the level required to ensure that a
client or employing organisation receives competent professional service, based on current
technical and professional standards and relevant legislation; and
(2) Act diligently and in accordance with applicable technical and professional standards.
(f) Confidentiality - Sec. 114
A professional accountant shall comply with the principle of confidentiality, which requires an
accountant to respect the confidentiality of information acquired as a result of professional and
employment relationships. An accountant shall:
 Be alert to the possibility of inadvertent disclosure, including in a social environment, and
particularly to a close business associate or an immediate or a close family member;
 Maintain confidentiality of information within the firm or employing organisation;
 Maintain confidentiality of information disclosed by a prospective client or employing
organisation;
 Not disclose confidential information acquired as a result of professional and employment
relationships outside the firm or employing organisation without proper and specific authority,
unless there is a legal or professional duty or right to disclose;
 Not use confidential information acquired as a result of professional and employment
relationships for the personal advantage or for advantage of a third party;
 Not use or disclose any confidential information, either acquired or received as a result of a
professional or employment relationship, after that relationship has ended; and
 Take reasonable steps to ensure that personnel under his control, and individuals from whom
advice and assistance are obtained, respect confidentiality.

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 Professional Ethics and Liabilities of Auditors

(g) Professional Behaviour - Sec. 115

 A professional accountant shall comply with the principle of professional behaviour, which
requires an accountant to comply with relevant laws and regulations and avoid any conduct that
the accountant knows or should know might discredit the profession.
 A professional accountant shall not knowingly engage in any employment, occupation or activity
that impairs or might impair the integrity, objectivity or good reputation of the profession, and as
a result would be incompatible with the fundamental principles.
 Conduct that might discredit the profession includes conduct that a reasonable and informed
third party would be likely to conclude adversely affects the good reputation of the profession.
 When promoting himself and his work, a professional accountant shall not bring the profession
into disrepute. A professional Accountant is required to conduct his affairs in a manner that he
remains outside the boundaries of professional and other misconduct.
 A professional accountant shall be honest and truthful and shall not make:
(1) Exaggerated claims for the services offered by, or the qualifications or experience of, the
accountant; or
(2) Disparaging references or unsubstantiated comparisons to the work of others.
(3) Any direct or indirect measures to advertise any professional/other facts which are in
violation of Advertisement Guidelines issued by the Council of the Institute from time to
time.
 Professional accountant should ensure that the contents of an advertisement are true to the best of
his knowledge and belief, and are in conformity with the Advertisement Guidelines, and be
aware that the Institute does not own any responsibility, whatsoever, for such contents or claims
by him.

Threats, Evaluation of Threats and Safeguards

(a) Threats Involved
(1) Self-interest Threats:
The threat that a financial or other interest will inappropriately influence a professional
accountant‟s judgment or behaviour.
(2) Self-review threats:
The threat that a professional accountant will not appropriately evaluate the results of a previous
judgment made; or an activity performed by the accountant, or by another individual within the
accountant‟s firm or employing organisation, on which the accountant will rely when forming a
judgment as part of performing a current activity.
(3) Advocacy threats:
The threat that a professional accountant will promote a client‟s or employing organisation‟s
position to the point that the accountant‟s objectivity is compromised.
(4) Familiarity threats:
The threat that due to a long or close relationship with a client, or employing organisation, a
professional accountant will be too sympathetic to their interests or too accepting of their work.

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Professional Ethics and Liabilities of Auditors

(5) Intimidation threats:

The threat that a professional accountant will be deterred from acting objectively because of
actual or perceived pressures, including attempts to exercise undue influence over the
accountant.
(b) Safeguards
Safeguards are actions, individually or in combination, that professional accountant takes that
effectively reduce threats to compliance with the fundamental principles to an acceptable level.
Examples of Safeguards
 Safeguards vary depending on the facts and circumstances. Examples include:
 Assigning additional time and qualified personnel to required tasks when an engagement has
been accepted might address a self-interest threat.
 Having an appropriate reviewer who was not a member of the team, review the work performed
or advise as necessary might address a self-review threat.
 Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
 Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
 Separating teams when dealing with matters of a confidential nature might address a self-interest
threat.

Non-compliance with Laws and Regulations(NOCLAR)

(a) Meaning of NOCLAR

NOCLAR comprises of acts of omission or commission, intentional or unintentional, which are
contrary to the prevailing laws or regulations committed by:
 A client / professional accountant‟s employing organisation;
 TCWG / Management of a client or employing organisation;
 Other individuals working for or under the direction of a client / employing organisation.
(b) Examples of laws and Regulations
 Fraud, corruption and bribery.
 Money laundering, terrorist financing and proceeds of crime.
 Securities markets and trading
 Banking and other financial products and services.
 Data protection.
 Tax and pension liabilities and payments.
 Environmental protection.
 Public health and safety.
(c) Applicability of NOCLAR
Applicability of NOCLAR has been restricted to:

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 Professional Ethics and Liabilities of Auditors

 Audits assignment of entities listed in India having NW ≥ 250 Cr. (In case of members in
practice) and
 Senior Professional Accountants (KMP), being employees of listed entities:
Senior Professional Accountants in service are directors, officers or senior employees able to
exert significant influence over, and make decisions regarding, the acquisition, deployment and
control of the employing organization‟s human, financial, technological, physical and intangible
resources.
NOTE:
 NOCLAR will be applicable if a professional accountant is made aware of noncompliance
or suspected non-compliance in the course of providing a professional service to a client.
He is not required to investigate, nor responsible for ensuring complete compliance.
 A professional accountant is expected to apply knowledge and expertise, and exercise
professional judgment. However, he is not expected to have a level of knowledge of laws
and regulations greater than that which is required to undertake the engagement.
 Matters that are clearly inconsequential, or relating to personal misconduct pertaining to
business activities of the client not covered.
 Disclosure of the matter would be precluded if contrary to law or regulation.

(d) Responsibility of the senior professional accountants in service relating to NOCLAR

Senior Professional Accountants in service are directors, officers or senior employees able to exert
significant influence over, and make decisions regarding, the acquisition, deployment and control of
the employing organization‟s human, financial, technological, physical and intangible resources.
Steps to be taken in responding:
(1) Obtaining an Understanding of the Matter: If, during the course of carrying out professional
activities, a senior professional accountant becomes aware of any information relating to
NOCLAR or suspected NOCLAR, he / she should obtain an understanding of the relevant
matter.
(2) Addressing the Matter: If the senior Chartered Accountant identifies or suspects that non-
compliance has occurred or might occur, he shall, discuss the matter with the immediate
superior, if any.
(3) Determining whether further action is needed: Senior Chartered Accountant shall assess
appropriateness of the response of the accountant‟s superiors, if any, and TCWG.
Further action that the senior professional accountant might take includes:
 Informing the management of the parent entity of the matter, if the employing organisation
is a member of a group,
 Disclosing matter to an appropriate authority as specified under respective law, or
 Resigning from the employing organisation.
(4) Seeking Advice: Senior Chartered Accountant might consider consulting internally; Obtaining
legal advice to understand the accountant‟s options and the professional or legal implications of
taking any particular course of action; or consulting on a confidential basis with the Institute.

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Professional Ethics and Liabilities of Auditors

(5) Determining Whether to Disclose the Matter to an Appropriate Authority: Disclosure of

the matter to an appropriate authority would be precluded if doing so would be contrary to law
or regulation.
(e) Documentation Requirements in NOCLAR
Revised Code requires professional accountants to document the following:
 How management / TCWG have responded to the matter.
 Course of action the accountant considered, the judgments made and decisions that were taken,
having regard to the reasonable and informed third party test.
 How accountant is satisfied that responsibility of public interest has been fulfilled.

NOCLAR V/S SA 250

BASIS NOCLAR SA 250

Applicability NOCLAR is applicable on professional SA 250 is applicable only on Audit
accountants in service and in practice. engagements
Scope SA 250 deals with auditor‟s
responsibilities for:
(a) Laws having direct effect on
determination of material amounts and
disclosures in the F.S. and
(b) Laws & regulations that do not have
direct effect on determination of the
amounts and disclosures in the F.S.,
but compliance with which may be
fundamental to the operating aspects of
the business.
Coverage SA 250 does not define stakeholders. NOCLAR is related to effect of
noncompliance on investors, creditors,
employees as also the general public.

Membership of the Institute

(a) Types of members - Sec. 5
(1) Associate Member:
Any person, whose name has been entered in the Register of members, shall be deemed to have
become an Associate of the Institute and shall also be entitled to use the letters A.C.A. after his
name.
(2) Fellow Member:
 An associate member who has been in continuous practice in India for at least 5 years,

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 Professional Ethics and Liabilities of Auditors

 A member who has been an associate for a continuous period of not less than 5 years and
has experience equivalent to the experience normally acquired as a result of continuous
practice for a period of 5 years as a Chartered Accountant.
Such members shall be entitled to use letters F.C.A. after his name.

(b) Particulars to Be entered into Register of Members - Sec. 19

 Full name, date of birth, domicile, residential and professional address;
 Date of entry of name in the Register:
 Qualifications;
 Whether the member holds a COP; and
 Any other prescribed particulars.
(c) Disabilities - Sec. 8
A person shall not be entitled to have his name entered in or borne on the Register if he :
 has not attained the age of 21 Years at the time of his application; or
 is of unsound mind and stands so adjudged by a competent Court; or
 is an undischarged insolvent; or
 being a discharged insolvent, has not obtained from the Court a certificate stating that his
insolvency was caused by misfortune without any misconduct on his part; or
 has been convicted by a competent Court, of an offence involving moral turpitude and
punishable with imprisonment or of an offence, not of a technical nature, committed by him in
his professional capacity unless he has been granted a pardon or, on an application made by him
in this behalf, the Central Government has, by an order in writing, removed the disability; or
 has been removed from membership of the Institute being found guilty of professional or other
misconduct:
Provided that a person who has been removed from membership for a specified period, shall not be
entitled to have his name entered in the Register until the expiry of such period.

(d) Removal of name from Register of Member - Sec. 20

 The Council may remove from the Register the name of any member of the Institute -
(1) who is dead; or
(2) From whom a request has been received to that effect; or
(3) who has not paid any prescribed fee required to be paid by him; or
(4) Who is found to have been subject at the time when his name was entered in the Register, or
who at any time thereafter has become subject, to any of the disabilities mentioned in Sec. 8,
or who for any other reason has ceased to be entitled to have his name borne on the Register.
 The Council shall remove from the Register the name of any member in respect of whom an
order has been passed under this Act removing him from membership of the Institute.
 If the name of any member has been removed from the Register due to non-payment of
prescribed fees, then, on receipt of an application, his name may be entered again in the Register
on payment of the arrears of annual fee and entrance fee along with such additional fee, as
determined, by the Council.

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Professional Ethics and Liabilities of Auditors

 Restoration to Membership - Reg. 19

 Council may, on an application in the appropriate Form, received from a member whose name has
been removed from the Register for non-payment of fees, restore his name, if he is othewise eligible
to such membership, on his paying the arrears of annual membership fee, entrance fee and additional
fee determined by the Council under the Act.
 Restoration shall be with effect from the date on which the application and fee are received.
Provided that if application for restoration and requisite fees is received within same year of removal,
Council may restore with effect from date on which it was removed from Register.
Provided further that the restoration of a member‟s name which was removed under the orders of
the Board of Discipline or the Disciplinary Committee or the Appellate Authority or the High Court
shall be affected only in accordance with such orders.

(e) Penalty for falsely claiming to be a member - Sec. 24

(1) Circumstances imposing penalty:
Any person who:
(i) Not being Member of ICAI represents that
 He is a member of Institute, or
 Uses the designation Chartered Accountant, or
(ii) Being member of ICAI but not having COP represents that
 He is in practice, or
 Practices as CA.
(2) Amount of Penalty:
For First Conviction Fine upto `1,000.
For subsequent conviction Fine upto `5,000 or imprisonment upto 6 Months or both.

Chartered Accountants in Practice

(a) Certificate of Practice - Sec. 6
No member of the Institute shall be entitled to practice (whether in India or elsewhere) unless he has
obtained from the Council a certificate of practice.
NOTE:
 Once a person becomes a member of ICAI, he is bound by the provisions of CA Act and its
regulations.
 If he appears before the Income Tax Tribunal as an Income tax representative after becoming
a member he could appear so only in his capacity as a CA and a member of ICAI.
 A member of ICAI can have no other capacity in which he can take up such practice,
separable from his capacity to practice as a member of the Institute.
 A Chartered Accountant, whose name has been removed from the membership for
professional and/or other misconduct, during such period of removal, will not appear before
the various tax authorities or other bodies before whom he could have appeared in his
capacity as a member of this Institute.

8
 Professional Ethics and Liabilities of Auditors

(b) Cancellation of CoP - Regulation 10

Certificate Practice (CoP) shall be liable for cancellation, if:
 The name of the holder of the certificate is removed from the Register; or
 The Council is satisfied, after giving an opportunity of being heard to the person concerned, that
such certificate was issued on the basis of incorrect, misleading or false information, or by
mistake or inadvertence; or
 A member has ceased to practice; or
 A member has not paid annual fee for CoP till 30th day of September of the relevant year.
Where a CoP is cancelled, the holder shall surrender the same to the Secretary

(c) Restoration of CoP - Regulation 11

Council may restore CoP, on an application made in the approved Form and on payment of
prescribed fee, w.e.f. the date on which it was cancelled, to a member whose certificate has been
cancelled due to non-payment of the annual fee for the CoP and whose application, complete in all
respects, together with the fee, is received by the Secretary before the expiry of the relevant year.

(d) Members Deemed to Practice - Sec. 2(2)

A member of the Institute shall be deemed “to be in practice” when individually or in be in
partnership with Chartered Accountants in practice, or in partnership with members of such other
recognised professions as may be prescribed, he, in consideration of remuneration received or to be
received
 Engages himself in the practice of accountancy; or
 Offers to perform or performs service involving the auditing or verification of financial
transactions, books, accounts or records, or the preparation, verification or certification of
financial accounting and related statements or holds himself out to the public as an accountant; or
 Renders professional services or assistance in or about matters of principle or detail relating to
accounting procedure or the recording, presentation or certification of financial facts or data; or
 Renders such other services as, in the opinion of the Council, are or may be rendered by a
Chartered Accountant in practice.
 Management Consultancy and Other Services
Pursuant to Section 2(2)(iv), the Council has passed a resolution permitting a CA in practice to
render entire range of “Management Consultancy and other Services”.
Accordingly, “Management Consultancy and other Services” shall not include the function of
statutory or periodical audit, tax representation or tax advice or acting as liquidator, trustee, executor,
administrator, arbitrator or receiver, but shall include the following:
 Financial management planning and financial policy determination.
 Capital structure planning and advice regarding raising finance.
 Working capital management.
 Preparing project reports and feasibility studies.
 Preparing cash budget, cash flow statements, profitability statements, statements of sources and
application of funds etc.
 Budgeting including capital budgets and revenue budgets.

9
Professional Ethics and Liabilities of Auditors

 Inventory management, material handling and storage.

 Market research and demand studies.
 Price-fixation and other management decision making.
 Management accounting systems, cost control and value analysis.
 Control methods and management information and reporting.
 Personnel recruitment and selection.
 Setting up executive incentive plans, wage incentive plans etc.
 Management and operational audits.
 Valuation of shares and business and advice regarding amalgamation, merger and acquisition;
Acting as Registered Valuer under Companies Act, 2013 read with The Companies (Registered
Valuers and Valuation) Rules, 2017.
 Business Policy, corporate planning, etc.
 Organisation structure and behaviour.
 Systems analysis and services relating to EDP.
 Acting as advisor or consultant to an issue, including such matters as:
(1) Drafting of prospectus and listing agreement and completing formalities with Stock
Exchanges, ROC and SEBI.
(2) Preparation of publicity budget.
(3) Advice regarding selection of various agencies connected with issue.
(4) Advice on the post issue activities.
Explanation- For removal of doubts, it is hereby clarified that the activities of broking,
underwriting and portfolio management are not permitted.
 Investment counselling in respect of securities.
 Acting as registrar to an issue and for transfer of shares/other securities.
 Quality Audit.
 Environment Audit.
 Energy Audit.
 Acting as Recovery Consultant in the Banking Sector.
 Insurance Financial Advisory Services including Insurance Brokerage.
 Acting as Insolvency Professional in terms of IBC, 2016.
 Administrative Services.
 Administrative services involve assisting clients with their routine or mechanical tasks within the
normal course of operations. Such services require little to no professional judgment and are
clerical in nature.
Examples of administrative services include:
(1) Word processing services.
(2) Preparing administrative or statutory forms for client approval.
(3) Submitting such forms as instructed by the client.
(4) Monitoring statutory filing dates, and advising an audit client of those dates.
For example, the functions of a GST practitioner as specified under Rule 83(8) of Central Goods
and Services Tax Rules, 2017:

10
 Professional Ethics and Liabilities of Auditors

(1) Furnish the details of outward and inward supplies;

(2) Furnish monthly, quarterly, annual or final return;
(3) Make deposit for credit into the electronic cash ledger;
(4) File a claim for refund;
(5) File an application for amendment or cancellation of registration;
(6) Furnish information for generation of e-way bill;
(7) Furnish details of challan in form GST ITC-04;
(8) File an application for amendment or cancellation of enrolment under rule 58; and
(9) File an intimation to pay tax under the composition scheme or withdraw from the said
scheme.
NOTE:
 It is necessary to note that a person is deemed to be in practice not only when he is
actually engaged in the practice of accountancy but also when he offers to render
accounting services whether or not he infact does so. In other words, the act of setting
up of an establishment offering to perform accounting services would tantamount to
being in practice even though no client has been served.
 Services so specified above need to be correlated with the provisions of Sec. 144 of the
Companies Act, 2013 which prohibits an auditor of the company from rendering certain
services directly or indirectly to the company or its holding company or its subsidiary
company.
 Services prohibited u/s 144:
(1) Accounting and book-keeping services;
(2) Internal audit;
(3) Design and implementation of any financial information system;
(4) Actuarial services;
(5) Investment advisory services;
(6) Investment banking services;
(7) Rendering of outsourced financial services;
(8) Management services; and
(9) Any other kind of services as may be prescribed.

11
Professional Ethics and Liabilities of Auditors

(e) Companies not to engage in accountancy - Sec. 25

 No company, whether incorporated in India or elsewhere, shall practise as chartered accountants.
 If any company contravenes this provision, then, without prejudice to any other proceedings
which may be taken against the company, every director, manager, secretary and any other
officer thereof who is knowingly a party to such contravention shall be punishable with fine
which may extend on first conviction to `1,000 and on any subsequent conviction to ` 5,000.
NOTE:
 The term “company” shall include any LLP which has company as its partner for the purpose
of this section. Hence, LLPs having company as its partner cannot be engaged into practice
as per the Chartered Accountants Act, 1949.
 LLPs not having any company as its partner, can be engaged into practicing and thus take
audit assignments.

(f) Members to be known as Chartered Accountants - Sec. 7

(1) Using designation of “Chartered Accountants"
(i) Every member of the Institute in practice shall, and any other member may, use the
designation of a “Chartered Accountant”.
(ii) No member using such designation shall use any other description, whether in addition
thereto or in substitution thereof.
(iii) In case a member has more than one certificate of practice, (subject to permission), for
matters involving practice as Chartered Accountant, they should use designation “Chartered
Accountant”.
(2) Use of other description
Members are entitled to indicate membership of such other Institute of accountancy, whether in
India or elsewhere, as may be recognised in this behalf by the Council, or any other
qualification that he may possess.
(3) Use of Prefix “CA”
All members of the Institute are permitted to use the word „CA‟ as prefix before their name
irrespective of the fact that they are in practice or not.
NOTE:
Merchant Banker / Advisor to an issue:
The members may apply for and obtain registration as category IV Merchant Banker under
the SEBI‟s rules and regulations and act as Advisor or Consultant to an issue. In client
Companies‟ offer documents and advertisements regarding capital issue, name and address
of the Chartered Accountant or firm of Chartered Accountants acting as Advisor or
Consultant to the Issue could be indicated under the caption “Advisor/Consultant to the
Issue”. However, the name and address of such Chartered Accountant/firm of Chartered
Accountants should not appear prominently.

12
 Professional Ethics and Liabilities of Auditors

(4) Maintenance of Branch office - Sec. 27

(1) Office
A Place where a name board is fixed or where such place is mentioned in the letterhead or
any other documents as a place of business.
(2) Use of Name Board at residence
Name board can be put in place of residence of member provided it is a name board of
individual member and not of firm.
(3) Requirement of Separate In - Charge
(i) If a CA in practice or a firm of CA has more than one office in India, each one of such
offices should be in the separate charge of a member of the institute, who may be
either partner / employee.
(ii) The requirement of Sec. 27 In regard as to a member being in-charge of an office of a
CA or a firm of such CAs shall be satisfied only if the member is actively associated
with such office.
(iii) Such association shall be deemed to exist if member resides in place where office is
situated for a period of not less than 182 days in a year or if he attends the office for a
period of not less than 182 days in a year.
 Exemption from Separate In-charge
(i) Members practicing in Hilly area
Members practicing in hilly areas may open a temporary office in plains subject to
following conditions:
 Temporary office in plains may be opened for a period not exceeding 3 Months in
winter season.
 Name board of firm to be displayed at temporary office only during these 3
months.
 Temporary office should not be mentioned as place of Business on office
documents.
 Regular office need not be closed and all correspondence may continue at
permanent office.
 Before commencement of every winter and at the close of such temporary office, it
shall be obligatory on member to inform ICAI.
(ii) Second office
If it is situated in:
 same premises in which first office is situated, or
 in the same city, or
 within 50 kms. from the municipal limits of city in which first office is situated.
NOTE:
Regulation 189 requires that a CA in practice or a firm of such CAs shall inform
the Council within one month of the opening or closing of a branch office.

13
Professional Ethics and Liabilities of Auditors

(g) KYC Norms for CA in Practice

 The financial services industry globally is required to obtain information of their clients and
comply with KYC norms.
 Keeping in mind highest standards of CA profession in India, Council of ICAI recommended
such norms to be observed by the members of the profession who are in practice.
 Norms to be observed by Member in Practice
(1) Individual Client:
(i) General Information
 Name of the Individual
 PAN No. or Aadhaar Card No. of the Individual
 Business Description
 Copy of last Audited Financial Statement
(ii) Engagement Information
Type of Engagement
(2) Corporate Entity:
(i) General Information:
 Name and Address of the Entity
 Business Description
 Name of the Parent Company in case of Subsidiary
 Copy of last Audited Financial Statement
(ii) Engagement Information:
Type of Engagement
(iii) Regulatory Information:
 Company PAN No.
 Company Identification No.
 Directors‟ Names & Addresses
 Directors‟ Identification No.
(3) Non- Corporate Entity:
(i) General Information :
 Name and Address of the Entity
 Copy of PAN No.
 Business Description
 Partner‟s Names and Addresses (with their PAN / Aadhaar Card / DIN No.)
 Copy of last Audited Financial Statement
(ii) Engagement Information:
Type of Engagement

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 Professional Ethics and Liabilities of Auditors

Disciplinary Procedures
(a) Disciplinary Mechanism - Sec. 21
Flow Chart of Discipline Procedure Mechanism
Complaint against member of ICAI of allege misconduct along with prescribed fee.

Disciplinary Directorate

The Director (Discipline) shall arrive at a prima facie opinion on the occurrence of alleged misconduct
and decide whether he is guilty of professional or other misconduct falling in

First Schedule Second schedule or Both

Schedule
Place the matter before Place the matter before

Board of Discipline Disciplinary Committee

If found guilty, it can If found guilty, it can

(i) Reprimand the member (i) Reprimand the member
(ii) Remove name of the member upto 3 (ii) Remove the name of member
months permanent or for any duration
(iii) Impose fine upto `1,00,000 (iii) Impose fine upto `5,00,000

Any member aggrieved by order of Board of Discipline / Disciplinary Committee can prefer an Appeal
within 90 days before

Appellate Authority

(i) Confirm, modify or set aside the order;

(ii) Impose, set aside, reduce or enhance penalty;
(b(iii)
) Remit case to the Board of Discipline or Disciplinary Committee for reconsideration; or
(c)(iv) Pass such order as the Authority thinks fit.

(d) Professional and Other Misconduct - Sec. 22

For the purposes of this Act, the expression “professional or other misconduct” shall be deemed to
include any act or omission, as mentioned in any of the Schedules, but nothing in this section shall
be construed to limit or abridge in any way the power conferred or duty cast on the Director
(Discipline) u/s 21 to inquire into the conduct of any member or firm, under any other Misconduct
circumstances.

15
 “Group Audit”
Concept of Consolidated Financial Statement (Part-1)
Meaning & Contents of Consolidated Financial Statements (CFS)
▪ CFS are F.S. of a group in which assets, liabilities, equity, income, expenses and cash flows of
parent and its subsidiaries are presented as those of a single economic entity.
▪ CFS is presented, to the extent possible, in same format as adopted by parent for its separate F.S.
AS-21 & Ind AS-110 lays down principles & procedures for preparation & presentation.
▪ CFS includes:
Consolidated
Balance
Sheet

Consolidated Explanatory
Statement of notes
Profit & Loss

Consolidated
Consolidated
Statement of
Cash Flow
Changes in
Statement
Equity

Statutory requirement w.r.t. consolidation - Sec. 129(3) of Companies Act,2013

▪ Where a company has one or more subsidiaries, JV, Asso, in addition to F.S. provided u/s
129(2), prepare CFS of company and of all subsidiaries in same form and manner as that of
its own which shall also be laid before AGM along with the laying of its F.S. u/s 129(2).
▪ Company shall also attach along with its F.S., a separate statement containing salient features of
its subsidiaries in Form AOC 1. (time pass)
▪ C.G. may provide the manner for consolidation of accounts of companies. (time pass)
Manner of consolidation of accounts - Rule 6 of Companies (Accounts) Rules, 2014
Consolidation shall be made in accordance with Schedule III and the applicable AS.
Note- Here, AS does not only mean AS

Rachit’s Special
Subsidiary Line by line consolidation
Associate Equity method of consolidation
Joint Venture Proportionate method of consolidation

First Proviso
If a company covered u/s 129(3) which is not required to prepare CFS under applicable ASs, it shall
be sufficient if company complies with provisions on CFS as provided in Schedule III. (matlab karna
toh padega he)
Note- Here, AS does not only mean AS
Second Proviso (Exception as per Co’s ACT Sec-129/ Sch-3)
Requirements related to preparation of CFS shall not apply to a company if it meets the following
conditions:
(i) It is a wholly-owned or a partially-owned subsidiary of another company (IHC)

1
(ii) Its ultimate or any intermediate holding company files CFS with the Registrar which are in
compliance with the applicable ASs. (parent filing cfs)
(iii) All its other members, do not object to co not presenting CFS (Minority interest does not have
interest)
(iv) It is a company whose securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India; (not much public involved)
Exception as per AS 21 (for CFS)
A subsidiary should be excluded from consolidation when:
(a) Control is intended to be temporary because the subsidiary is acquired exclusively with a view to
its subsequent disposal in the near future (12M); (temporary holding/Speculative motive)
(b) It operates under severe long-term restrictions which significantly impair its ability transfer funds
to the parent. (restriction on future cash inflow)
Reasons for not consolidating a subsidiary should be disclosed in the CFS.

Points NOT to remember

There is no such exemption for 'temporary control', or “for operation under severe long term
funds transfer restrictions” in Ind AS 110 and consolidation is mandatory.
Exception to consolidation as per Ind AS 110
▪ Para 31: Investment entity shall not consolidate its subsidiaries. Instead, an investment entity
shall measure an investment in a subsidiary at fair value through profit or lost (FVTPL) in
accordance with Ind AS 109 (Financial Instruments).
▪ Para 33: Parent of an investment entity shall consolidate all entities that it controls, including
those controlled through an investment entity subsidiary, unless the parent itself is an investment
entity.
Points NOT to remember
Meaning of Investment Company: An entity that: (dhyaan se socho, NBFC ki yaad aayegi)
(a) Obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;
(b) Commits to its investor(s) that its business purpose is to invest funds solely for returns
from capital appreciation, investment income, or both; and
(c) Measures and evaluates the performance of substantially all of its investments on a fair
value basis.

2
 Responsibility of Parent (Part-2)
Management of Parent is responsible for preparation & presentation of CFS and such responsibility
included:
(a) Identifying components, and including financial information of the components to be included in
the CFS;
(b) Where appropriate, identifying reportable segments for segmental reporting; transactions for
reporting;
(c) Identifying related party transactions by components for reporting;
(d) Obtaining accurate and complete financial information from components;
(e) Making appropriate consolidation adjustments;
(f) Harmonization of accounting policies and accounting framework; and
(g) GAAP conversion, where applicable.

Besides, parent ordinarily issues instructions to management of the component specifying its
requirements relating to financial information of components to be included in CFS Instructions
ordinarily cover:- (time pass)
✓ the accounting policies to be applied,
✓ statutory & other disclosure requirements applicable to parent,
✓ including identification of & reporting on reportable segments and
✓ related parties & related party transactions and
✓ a reporting timetable.
Steps involved in Preparation of CFS (halka phulka gyan- load nahi lena hai isme)
In accordance with the Companies (AS) Rules, 2006
▪ F.S. of parent and subsidiaries are combined on a line by line basis by adding together like items
of assets, liabilities, income, expenses & and cash flows and then certain calculations like
determination of goodwill or capital reserve, minorities interest and adjustments like elimination
of intra group transactions, balances & unrealised profits etc. are made in accordance with AS
21, “CFS”.
▪ Investments in associates are accounted for using Equity Method as prescribed in AS 23,
“Accounting for Investments in Associates in CFS”.
▪ A parent that has an interest in a jointly controlled entity, reports its interest in CFS using
proportionate consolidation method as per AS 27. (in case of JV)
In accordance with the Companies (Indian AS) Rules, 2015
▪ F.S. of parent and its subsidiaries are combined as per Ind AS 110, “Consolidated Financial
Statements” on a line by line basis by adding together like items of assets, liabilities, income,
expenses & cash flows. (same)
▪ Related goodwill/capital reserve and non-controlling interest is determined as per Ind AS 103.
▪ Business combinations involving entities or businesses under common control shall be accounted
for using pooling of interest method in accordance with Ind AS 103.
▪ Adjustments like elimination of intra group transactions, balances, unrealised profits and
deferred tax etc. are made in accordance with the requirements of Ind AS 110.
▪ Investments in associates and joint ventures are accounted for using Equity Method as prescribed
in Ind AS 28, “Investments in Associates and Joint Ventures”.
▪ Interests in assets, liabilities, revenues and expenses in a joint operation are accounted for as part
of separate financial statements of the entity in accordance with Ind AS 111, “Joint

3
 Arrangements”.
▪ In a business combination achieved in stages, acquirer shall remeasure its previously held equity
interest in acquire at its acquisition date fair value & recognise resulting gain or loss, if any, in
profit or loss or OCI, as appropriate in accordance with Ind AS 103.
Information to be disclosed in CFS (in notes to accounts)
Following information is required to be disclosed in the CFS separately for the parent and each of its
components:
(a) Amount of net assets and net assets as a percentage of consolidated net assets;
(b) Amount of share in profit or loss and the percentage share in profit or loss as a percentage of
consolidated profit or loss;
(c) Amount in OCI and the percentage of OCI as a percentage of Consolidated OCI.
Information need not to be included in CFS (in notes to accounts) (V V V V NOT IMP) (self)
In case of companies, certain information given in the notes to the separate F.S. of the parent and/or
the subsidiary, need not be included in the CFS:
(i) Source from which bonus shares are issued
(ii) Disclosure of all unutilised monies out of the issue indicating the form in which such unutilised
funds have been invested.
(iii) Disclosure required under MSME Development Act, 2006.
(iv) A statement of investments separately classifying trade investments & other investments,
showing names of the bodies corporate in whose shares or debentures, investments have been
made & nature and extent of the investment so made in each such body corporate.
(v) Value of imports calculated on C.I.F. basis by the company during FY in respect of:
(a) Raw materials;
(b) Components and spare parts;
(c) Capital goods.
(vi) Expenditure in foreign currency on account of royalty, know-how, professional and consultation
fees, interest, and other matters.
(vii) Value of all imported raw materials, spare parts and components consumed and value of all
indigenous raw materials, spare parts and components similarly consumed and the %age of each
to the total consumption.
(viii) Amount remitted in foreign currencies on account of dividends, with a specific mention of
number of non-resident shareholders, number of shares held by them on which the dividends
were due and the year to which the dividends related.
(ix) Earnings in foreign exchange classified under following heads, namely:
(a) Export of goods calculated on F.O.B. basis;
(b) Royalty, know-how, professional and consultation fees;
(c) Interest and dividend;
(d) Other income, indicating the nature thereof.

4
 Auditor's Considerations (Part-3)
Responsibility/Objectives of the auditor of the CFS (very easy, very halka phulka)
▪ Sec. 129(4) of the Companies Act, 2013 requires that the provisions of the Act applicable to the
preparation, adoption and audit of the F.S. of a holding company shall, mutatis mutandis, apply
to the CFS.
▪ Auditor of the CFS is responsible for expressing an opinion on whether the CFS are prepared, in
all material respects, in accordance with the FRF under which the parent prepares the CFS.
▪ Therefore, the auditor's objectives in an audit of CFS are:
(a) To satisfy himself that CFS have been prepared in accordance with the requirements of
applicable FRF;
(b) To enable himself to express an opinion on the true and fair view presented by the CFS;
(c) To enquire into the matters as specified in Sec. 143(1) of the Companies Act, 2013;
(d) To report on matters given in clauses (a) to (i) of Sec. 143(3) of Companies Act, 2013; for
other matters u/s 143(3)(j) read with Rule 11 of CAAR, 2014.
▪ Auditor should also validate requirement of preparation of CFS for company as per applicable
FRF.
Application of SAs, Statements and Guidance Notes while auditing CFS
▪ SAs, Statements & Guidance Notes on auditing matters apply in same manner to audit of CFS as
they apply to audit of Standalone F.S.
▪ Hence auditors, while conducting audit of CFS are expected to:
(a) Plan work to conduct an effective audit in an efficient and timely manner;
(b) Obtain understanding of accounting & IC systems including IT system like consolidation
tool sufficient to plan the audit & determine NTE of his audit procedures;
(c) Use professional judgement to assess audit risk and to design audit procedures to ensure that
the risk is reduced to an acceptable level.
General Audit Considerations (time pass)
▪ Features of CFS having an impact on audit procedures:
(a) CFS are prepared on basis of separate F.S. of parent & its components, using consolidation
procedures prescribed by ASs; and
(b) Auditor of CFS may use work of other auditors as per requirement of SAs unless the auditor
of CFS is also the auditor of other components of the group.
▪ When an auditor accepts audit of CFS, he should assess whether based on his work alone, he
would be able to express an opinion on true and fair view presented by the CFS.
▪ If he is of the view that his own participation may not be enough or sufficient, he should consider
using the work of 'other auditors'.
▪ Such 'other auditors' might be the statutory auditors of the separate F.S. of one or more of
components. Where statutory auditors of components are also requested to assist the principal
auditor, work to be performed by such statutory auditors for use by the principal auditor would
constitute a separate assignment.
Using the Work of Another Auditor - SA 600
▪ SA 600, 'Using the Work of Another Auditor' establishes standards when an auditor (Principal
Auditor - PA), reporting on F.S. of an entity, uses work of another auditor (AO) on financial
information of one or more components included in F.S. of the entity. (thankyou)
▪ PA, if he decides to use work of AO in relation to audit of CFS, should comply with
requirements of SA 600. (thankyou again)

5
▪ In carrying out audit of standalone F.S., computation of materiality for purpose of issuing an
opinion on standalone F.S. of each component would be done component-wise on a standalone
basis. However, with regard to determination of materiality during audit of CFS, auditor should
consider the following:
(i) Auditor is required to compute materiality for the group as a whole. This materiality should
be used to assess the appropriateness of the consolidation adjustments (i.e., permanent
consolidation adjustments and current period consolidation adjustments) that are made by
the management in preparation of CFS.
(ii) PA can also use the materiality computed on the group level to determine whether the
component's F.S. are material to the group to determine whether they should scope in
additional components, and consider using the work of other auditors as applicable.
(iii) PA also computes materiality for each component and communicates to component auditor,
if he believes is required for true and fair view on CFS. (if necessary)
(iv) PA also obtains certain confirmations from component auditor like independence. Code of
ethics, certain information required for consolidation & disclosure requirement etc.
▪ While considering observations (for instance modification and/or EOM in accordance SA
705/706) of the component auditor in his report on the standalone F.S., PA should comply with
the requirements of SA 600.
Planning the audit of CFS
Before commencing an audit of CFS, the auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner.
The auditor should make plans, among other things, for the following:
(a) Understanding of the group structure and group-wide controls including assessment of
Information Technology (IT) system and related general and applications IT related controls
(manual and automated) for consolidation process;
(b) Understanding of accounting policies of the parent and its components as well as of the
consolidation process including the process of translation of F.S. of foreign components;
(c) Determining and programming the NTE of the audit procedures to be performed based on the
assessment of the risk of material misstatement in the consolidation process;
(d) Determining the extent of use of other auditor's work in the audit; and
(e) Coordinating the work to be performed.
Auditor's Procedures in Auditing CFS
(a) Obtain a list of components included in CFS.
(b) Review information provided by management of the parent identifying the components.
(c) Verify that all components have been included in the CFS unless these components meet
criterion for exclusion.
(d) In respect of completeness of the information, should perform the following procedures:
▪ Review working papers for the prior years for the known components;
▪ Review the parent's procedures for identification of components;
▪ Review the investments to determine the shareholding in other entities;
▪ Review the joint venture and other relevant agreements entered into by the parent;
▪ Review statutory records maintained by the parent, for example register required u/s 186 of
the Companies Act, 2013;
▪ Inquire the management to identify any new components or any component which goes
▪ Identify the changes in the shareholding that might have taken place since the last audit.

6
 Auditor should document the procedures performed.
(e) The auditor should verify that the adjustments required by the relevant AS have been made
wherever required and have been properly authorized by the management of the parent. The
preparation of CFS gives rise to Permanent Consolidation Adjustments and Current Period
Consolidation Adjustments.
Considerations = controlling the composition of BoD of others (De-Facto Control)
▪ There would be various means by which control (subsidiary) , joint control or significant
influence be obtained.
▪ In this regard, auditor may verify
✓ Board's minutes,
✓ shareholder agreements entered into by the parent,
✓ agreements with the entities to which the parent might have provided any technology or
know how, enforcement of statute, as the case may be, etc.
▪ The auditor would have to use his professional judgment to determine whether the parent
controls the composition of the BoD of any other entity.
▪ If yes, whether that entity has been consolidated as a subsidiary in the consolidated financial
statements.
Auditor's duties in case of exclusion of subsidiaries/ associates in consolidation
▪ Where a component is excluded from CFS, auditor should examine reasons for exclusion and
whether such exclusion is in conformity with the applicable FRF.
▪ For Example: In the case of an entity which is excluded from consolidation on the ground of
temporary relationship (as per AS 21), auditor should verify that the intention of the parent, to
dispose the subsidiary, investment in associate or interest in jointly controlled entity, in the near
future, existed at the time of acquisition of the subsidiary, making investment in associate or
jointly controlled entity.
▪ Auditor should verify that the reasons for exclusion are given in the CFS.
▪ If an entity is excluded from the CFS for reasons other than those allowed by the applicable FRF,
auditor should consider its effect on his report.
▪ Auditor should also examine whether there is any change in the status of a component (e.g.,
subsidiary to associate, JV to associate or vice versa). In such cases, auditor should examine
whether these changes have been appropriately accounted for in the CFS as required by the
relevant ASs/Ind AS under the applicable FRF.

7
 Special Considerations (Part-4)
Permanent Consolidation Adjustments
Meaning
Those adjustments that are made only on the first occasion or subsequent occasions in which there is
a change in the shareholding of a particular entity which is consolidated.

Types of adjustments
1. Determination of Goodwill or Capital Reserve as per applicable ASs.
2. Determination of the amount of equity attributable to minority/non-controlling interests.
Verification Points
▪ Auditor should verify that the adjustment of goodwill or capital reserve and minority interest
have been made appropriately.
▪ Auditor should pay particular attention to determination of pre-acquisition reserves of
components. Date of investment assumes importance in this regard.
▪ Examine whether pre-acquisition reserves have been allocated appropriately between parent and
minority.
▪ Verify changes that might have taken place in permanent consolidation adjustments on account
of subsequent acquisition of shares, disposal of components in subsequent years.
▪ If goodwill arise in case of one subsidiary and capital reserve may arise in case of another
subsidiary in parent choose to net off these amounts to disclose Single amount in consolidated
balance sheet, Should verify that gross amounts of goodwill & cap reserves have been disclosed
in notes to CFS.
Current Period Consolidation Adjustment
Meaning
Adjustments which are made in the accounting period which CFS are prepared.
Types of Adjustments
These adjustments primarily relate to elimination of intra-group transactions and account balances
including:
(a) intra-group interest paid & received or management fees, etc.;
(b) unrealised intra-group profits on assets acquired transferred from/to other subsidiaries;
(c) intra-group indebtedness;
(d) adjustments relating to harmonising different accounting policies being followed by parent and
its components;
(e) adjustments to the F.S. for recognized subsequent events or transactions that occur between the
balance sheet date and the date of the auditor's report on the CFS of the group;
(f) adjustments for the effects of significant transactions or other events that occur between date of
components balance sheet and not already recognised in its F.S. and the date of the auditor's
report on the group's CFS when the F.S. of the component to be used for consolidation are not
drawn up to the same balance sheet date as that of the parent;
(g) in case of a foreign component, adjustments convert a component's audited F.S. prepared under
the component's local GAAP to the GAAP under which the CFS are prepared;
(h) determination of movement in equity attributable the minorities interest since the date of
acquisition of the subsidiary;
(i) Adjustments of deferred tax on account of temporary differences arise out of elimination of
profits and losses resulting from intra-group transactions undistributed profits of the component
in case CFS prepared under Ind AS.
Verification Points
Adjustments required for preparation of CFS are made memorandum records kept for the purpose by

8
the parent.
Auditor should review these records to verify adjustment entries made in preparation of CFS.
Besides reviewing memorandum records, auditor should verify the following:
(a) Elimination of intra-group transactions and account balances;
(b) Preparation of CFS using uniform accounting policies for like transactions;
(c) Adequate disclosures have been made in the CFS of application of different accounting policies
if it was impracticable to harmonize them;
(d) Adjustments made to harmonise different accounting policies including adjustments made by
management to convert a component's F.S. prepared under component's GAAP to GAAP under
which the CFS are prepared;
(e) Calculation of minorities/non-controlling interest;
(f) Adjustments relating to deferred tax on account of temporary differences arising out of
elimination of profits & losses resulting from Inter-group transactions;
(g) Income & expenses of subsidiary are included in CFS from the date it gains control until the date
when the entity ceases to control the subsidiary.
Verification of adjustment related with Impairment Loss
▪ Goodwill arising on consolidation is carried at value determined at date of acquisition of
component & the same is to be tested for impairment loss at every balance sheet date.
▪ Examine whether parent has determined impairment loss. If yes, examine the procedure followed
for determination of impairment loss.
▪ Ensure that amount determined is fair.
▪ In case amount been determined in foreign currency, verify if any amount of loss in local
currency need to be adjusted from currency translation reserve due to movement in exchange rate
from the date when the goodwill was first accounted for in the CFS of parent, to the date of
determination of impairment loss.
▪ Perform audit procedures to understand and verify whether intragroup losses are indicating an.
impairment loss that requires recognition in the CFS.
Special Considerations in case of different Reporting dates
▪ F.S. of components used in consolidation should be drawn up to same reporting date as that of
the parent. If it is not practicable, adjustments should be made for effects of significant
transactions or other events that occur between those dates and date of the parent's F.S.
▪ In any case, the difference between reporting dates should not be more than 6 months case of
F.S. under AS and 3 months in case of financial statements under Ind AS.
▪ Auditor of CFS should review other components' results between its financial reporting date and
that of parent for significant transactions or other events that have taken place during the period
and therefore, need to be reflected in the CFS.
▪ Recognition should be given by disclosure or otherwise to the effect of intervening ever which
materially affect the financial position, results of operations or cash flows.
▪ Auditor should consider whether length of reporting periods and any difference in financial year-
ends are the same from period to period. In case of any change that have a material effect on the
F.S., ensure that entity discloses such changes and manner of treatment in F.S.
Management Representations (pratha)
▪ SA 580, “Written Representations” requires auditor to obtain WRs from management and
TCWG. Auditor of CFS should obtain evidence that management of the parent acknowledges its
responsibility for a true and fair presentation of the CFS in accordance with FRE applicable to
the parent and that parent management has approved the CFS.
▪ In addition, auditor obtains WRs from parent management on matters material to the Examples

9
of such representations include:
(a) Completeness of components included in the consolidated financial statements;
(b) Identification of reportable segments for segmental reporting;
(c) Identification of related parties and related party transactions for reporting;
(d) Appropriateness and completeness of consolidation adjustments, including the elimination
of intra-group transactions.

10
 Reporting Considerations (Part-5)
Parent Auditor is also the auditor of all of its components
▪ Auditor should issue an audit report expressing opinion whether CFS give a true and lar view of
the state of affairs of the Group as on balance sheet date and as to whether consolidated profit
and loss statement gives true and fair view of the results of consolidated profit or losses of the
Group for the period under audit.
▪ Where the CFS also include a cash flow statement, auditor should also give his opinion on the
true and fair view of the cash flows presented by the consolidated cash flow statements.
▪ Auditor of Parent should report whether principles and procedures for preparation and
presentation of CFS as laid down in the relevant AS(s) have been followed. In case of any
deviation, auditor should make adequate disclosure in the audit report so that users of the CFS
are aware of such deviation.
Parent's Auditor is not the Auditor of all of its components
▪ If the parent's auditor is not the auditor of the components included in the CFS, auditor of the
CFS should also consider the requirement of SA 600.
▪ If the parent's auditor decides that he will make reference to the audit of the other auditors in the
report, he should disclose clearly the portion of the F.S. audited by the other auditor(s). This may
be done by stating the amount or % age of total assets and total revenue of subsidiary(s) included
in CFS not audited by him.
▪ It is to be noted that reference in report of the auditor of CFS to the fact that part of the audit of
the group was made by other auditor(s) is not to be construed as a qualification of the opinion but
rather as an indication of the divided responsibility between the auditors of the parent and its
subsidiaries
Component Auditor Reports on F.S. under an Auditing Framework Different than that of
the Parent
When a component's F.S. are prepared under an accounting framework that is different than that of
the framework used by the parent in preparing group's CFS:-
▪ parent's management perform a conversion of the components' audited F.S. from the framework
used by the component to the framework under which the CFS are prepared.
▪ Conversion adjustments are audited by the principal auditor to ensure that the F.S. of the
component(s) is suitable and appropriate for the purposes of consolidation.
▪ Alternatively, component may prepare F.S. on the basis of the parent's accounting policies, as
outlined in the group accounting manual. The local component auditor can then audit and issue
an audit report on the components F.S. prepared in accordance with “group accounting policies”.
▪ Principal auditor can then decide whether or not to rely on the components' audit report and
make reference to it in the auditor's report on the CFS.
Component Auditor Reports under an Auditing Framework Different than that of the Parent
▪ Audits of F.S., including CFS are performed under auditing standards generally accepted in
India.
▪ In order to maintain consistency of the auditing framework and to enable the parent auditor to
rely and refer to the other auditor's audit report in their audit report on the CFS, the components'
F.S. should also be audited under a framework that corresponds to Indian Auditing Standards.
Components Not Audited
▪ F.S. of all components included in CFS should be audited or subjected to audit procedures. Such
audits and audit procedures can be performed by the auditor reporting on the CFS or by the
components' auditor.

11
▪ Where F.S. of one or more components continues to remain unaudited, auditor reporting on the
CFS should consider unaudited components in evaluating a possible modification to his report on
the CFS.
▪ Evaluation is necessary because auditor has not been able to obtain sufficient appropriate audit
evidence in relation to such consolidated amounts/balances.
▪ Auditor should evaluate both qualitative and quantitative factors on the possible effect of such
amounts remaining unaudited when reporting on the CFS using the guidance provided in SA
705, “Modifications to the Opinion in the Independent Auditor's Report”.

12
 GUIDANCE NOTE ON
DIVISION II - IND AS SCHEDULE III
TO THE COMPANIES ACT, 2013
(Revised January, 2022 Edition)

ISBN : 978-81-8441-868-2

January | 2022 | P2534 (Revised)

www.icai.org
 GUIDANCE NOTE
ON
DIVISION II - IND AS SCHEDULE III
TO THE COMPANIES ACT, 2013
(Revised January, 2022 Edition)

Corporate Laws & Corporate Governance Committee

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system or transmitted in any form or by any means electronic,
mechanical, photocopying, recording or otherwise without prior permission in
writing from the publisher.

First Edition : May 2017

Second Edition : July 2019
Third Edition : January 2022

Committee/Department : Corporate Laws & Corporate Governance

Committee

E-mail : clcgc@icai.in

Website : www.icai.org

Price : Rs. 200/-

ISBN No. : 978-81-8441-868-2

Published by : The Publication Department on behalf of the

Institute of Chartered Accountants of India. ICAI
Bhawan, Post Box No. 7100, Indraprastha Marg,
New Delhi – 110 002, India.

Printed by : Sahitya Bhawan Publications, Hospital Road,

Agra 282 003
July/2019/1,000
 Foreword to the Third Edition
The Companies Act, 2013 has been subjected to several changes from time
to time to keep the law at par with various developments in the economic
environment, regulatory requirement, technological advancements, ease of
doing business policies of the country and globalization.
In the recent years, there have been substantial changes in the reporting
requirement by the Auditors e.g. CARO, 2020 to make it more stringent for
compliance of the Law.
However, to ensure that the Management of companies also remain
accountable to a greater extent for reporting these disclosures, the Ministry
of Corporate Affairs (MCA) has brought out corresponding amendments in
Schedule-III to the Companies Act, 2013 for preparation of the financial
statements. In addition to the said amendments, various other disclosure
requirements have also been added in Schedule III to the Companies Act,
2013.
In light of the said amendments, guidance notes on the said disclosures was
necessitated. Accordingly, the Corporate Laws & Corporate Governance
Committee has decided to revise the earlier issued Guidance Note on
Division-II.
This publication aims to provide guidance on the amended Division-II to
Schedule III to the Companies Act, 2013. It also lays down broad guidelines
to deal with practical issues that may arise in the implementation of Division-
II to Schedule III to the Companies Act, 2013. Accordingly, wherever required
conceptual guidance has been provided in the Guidance Note.
I heartily congratulate Corporate Laws & Corporate Governance Committee
(CLCGC) of ICAI for revising the Guidance Note on Division-II to Schedule III
to the Companies Act, 2013.
I compliment CA. Shriniwas Y Joshi, Chairman, Corporate Laws & Corporate
Governance Committee, CA. Anuj Goyal, Vice-Chairman and all the
members of the Corporate Laws & Corporate Governance Committee who
have made invaluable contribution in the revision of this Guidance Note.
I am sure that the members and other stakeholders at large would find the
Guidance Note immensely useful in discharging their duties.

CA Nihar N Jambusaria
President, ICAI
Date: 21-01-2022
New Delhi

4
 Preface to the Third Edition
The Schedule III to the Companies Act, 2013 lays down the framework for
preparation of financial statements which is sub-divided into three divisions.
Division-II to the Schedule III is applicable for the Companies which prepares
their financial statements in accordance with Indian Accounting Standards.
The MCA vide notification dated 24.03.2021 has made enormous changes in
the requirements prescribed under the Schedule III to the Companies Act,
2013. Most of the changes introduced in all the three divisions are similar
subject to few additional changes in Division-II to Schedule III to the
Companies Act, 2013.
The incremental changes in Division-II relates to disclosure of lease
liabilities, Other Financial Assets, Revaluation disclosure i.e. whether
valuation is based on the Valuation by a Registered Valuer and for separate
disclosure for “Changes in Equity Share Capital due to prior period errors”
and “restated balance at the beginning of the respective reporting periods”
These amendments have been brought in by the Ministry of Corporate Affairs
to strengthen the corporate governance framework by imbuing transparency
in the financial statements.
In order to support the Government’s endeavour and to provide sufficient
guidance to the professionals and stakeholders in adhering to the
requirements of the Schedule III to the Companies Act, 2013, the Corporate
Laws & Corporate Governance has revised the “Guidance Note on Division-II
to the Schedule III to the Companies Act, 2013” brought out by it earlier.
We would like to convey our sincere gratitude to the President ICAI CA.
Nihar N Jambusaria, and the Vice President ICAI CA. (Dr.) Debashis Mitra
for supporting us in bringing out the publication.
We also wish to place on record our sincere thanks to all the Committee
members & Special Invitees for their suggestions, support and guidance in
finalizing this Guidance Note.
Our thanks to the Study Group members CA. Dhinal Shah, CA. Sandeep
Shah, CA. Himanshu Kishnadwala, CA. Vijay Maniar, CA. Aniruddha
Godbole, Shri Shriraj Bhandari, CA. Ritesh Goyal, CA. Pratik Haria,
CA. Ankit Kaistha, CA. Sumit Seth, CA. Nayan C Ratanghayra, and
CA. Sandeep Mishra for their contribution in Revising the Guidance Note.
We would also like to thank Shri Rakesh Sehgal, Director and CA. Sarika
Singhal, Secretary to the Committee and team members Ms Seema Jangid
and CA. Nikita Aggarwal for their technical and administrative support.
We sincerely believe that the members of the profession, industry & other
stakeholders would find the publication immensely useful.

CA. Shriniwas Y Joshi CA. Anuj Goyal

Chairman, Vice Chairman,
Corporate Laws & Corporate Corporate Laws & Corporate
Governance Committee Governance Committee

Date: 20-01-2022
New Delhi

6
 Foreword to the Second Edition
The Government is bringing out several changes in the Companies Act, 2013
from time to time to enhance transparency by way of mandating additional
disclosures. Towards the same, the Ministry for Corporate Affairs has issued
a Notification dated 11.10.2018 wherein amendments have been brought in
to the Schedule III to the Companies Act, 2013. The amendments are related
to additional disclosures for trade receivables, loan receivables, trade
payables and to comply with the disclosure requirements under the Micro,
Small and Medium Enterprises Development Act, 2006.
Keeping this in mind, a need was felt by ICAI for providing appropriate
guidance to the members in view of the amendments that have been brought
in by the Government so that the requirements of Schedule III can be
complied with by the companies that are required to prepare their financial
statements as per Ind AS in letter and spirit.
I am happy to note that Corporate Laws & Corporate Governance Committee
has undertaken the task of revision of Guidance Note on the Division II – Ind
AS Schedule III to the Companies Act 2013. The Guidance Note was initially
issued by same the Committee in July, 2017 for guidance to the companies
that are required to comply with Ind AS. In revised guidance note, detailed
guidance has been provided on the various items of Schedule III and various
issues and intricacies involved therein.
I wish to compliment CA. (Dr.) Debashis Mitra, Chairman, Corporate Laws &
Corporate Governance Committee, CA. Chandrashekhar V. Chitale, Vice-
Chairman and all the members of the Corporate Laws & Corporate
Governance Committee who have made invaluable contribution in the
revision of this Guidance Note.
I am sure that the members and other stakeholders at large would find the
Guidance Note immensely useful.

New Delhi
CA Prafulla P. Chhajed
President
ICAI
 Preface to the Second Edition
The Corporate Laws & Corporate Governance Committee issued the
Guidance Note on Schedule III to the Companies Act, 2013 (the ‘Act’) in July,
2017 after considering the newly introduced Division II to Schedule III to the
Act.
The Ministry of Corporate Affairs vide Notification dated 11.10.2018 made
amendments to Schedule III to the Act. Therefore, there was a need to revise
the aforesaid Guidance Note.
Major revisions have been made in the existing Division II of Schedule III. In
the case of Trade Receivables and Loan Receivables, it has been provided
that the total amount needs to be segregated into categories and disclosed
viz., considered good, having significant increase in credit risk and credit
impaired. Guidance has been provided regarding the disclosure of
impairment on trade receivables in cases where significant financing
component exists and in cases where it does not exist.
Trade payables are now required to be segregated into dues of micro
enterprises and small enterprises and other than micro enterprises and small
enterprises, w.r.t. MSME. Specific details mandated as per the MSMED Act,
2006 require disclosure. Changes required as per Ind AS 109 have been
incorporated. Further, disclosure requirements as per Ind AS 115 and Ind AS
116 have been incorporated in relevant parts.
We would like to convey our sincere gratitude to the President ICAI CA.
Prafulla P. Chhajed, and the Vice President ICAI CA. Atul Kumar Gupta for
supporting us in bringing out the publication.
We also wish to place on record our sincere thanks to all the Committee
members & Special Invitees for their suggestions, support and guidance in
finalizing this Guidance Note.
Our thanks to the Study Group members CA Dhinal Shah (Convenor), CA.
Himanshu Kishnadwala, CA. Vijay Maniar, CA. Suresh Yadav, CA. Sandeep
Shah, Sh Vignesh Poojari, Sh Shriraj Bhandari, CA. Keyur Dave and CA.
Pratik Haria for their contribution in Revising the Guidance Note
We would also like to thank Secretary to the Committee CA. Sarika Singhal
and Ms Seema Jangid for their technical and administrative support.
We sincerely believe that the members of the profession, industry & other
stakeholders would find the publication immensely useful.

CA. (Dr.) Debashis Mitra CA. Chandrashekhar V. Chitale

Chairman, Vice Chairman,
Corporate Laws & Corporate Corporate Laws & Corporate
Governance Committee Governance Committee

17.06.2019
 Foreword to the First Edition
The Companies Act, 2013 has been undergoing changes from time to time
through various amendments to the Act, Rules and through notifications and
circulars of the Ministry of Corporate Affairs which are issued to keep the law
at par with various developments in the economic environment, regulatory
requirement, policies of the country and globalization.
Further, the Government of India decided to converge Indian Accounting
Standards with certain carve outs from International Financial Reporting
Standards, in a phased manner to accomplish its commitment in G-20
summit with the objective of achieving high quality global accounting
standards.
At this backdrop, the Ministry of Corporate Affairs vide its notification dated
6th April, 2016 notified amendments to Schedule III of the Companies Act,
2013 thereby inserting Division II to Schedule III for preparation of financial
statements by those entities who have to comply with Indian Accounting
Standards (Ind AS).
In the light of the notification of Division II to Schedule III, the Corporate
Laws & Corporate Governance Committee (CL&CGC) of The Institute of
Chartered Accountants of India (ICAI) has taken an initiative of bringing out a
Guidance Note on Division II to Schedule III of the Companies Act, 2013 for
companies required to comply with Ind AS. In formalising the Guidance Note
on Division II-Ind AS Schedule III to the Companies Act, 2013, lot of efforts
has been made.
I commend the Corporate Laws & Corporate Governance Committee in
bringing out this useful publication. I place on record my appreciation to the
entire team of Committee under the Chairmanship of CA. Sanjay Kumar
Agarwal and Vice Chairmanship of CA. Debashis Mitra, Past Chairman, CA.
Dhinal A. Shah and Past Vice Chairperson CA K Sripriya.
I also put on record my appreciation to the Study Group comprising of CA
Dhinal A Shah, Convenor, CA. Himanshu Kishnadwala, CA. Vijay Maniar,
CA. Suresh Yadav, CA. Sandeep Shah, CA. Vignesh Poojari, CA. Shriraj
Bhandari, CA. Keyur Dave, CA. Pratik Haria, CA Ankita Nemani, CA Yash
Kaku, CA Somshekar Yaligar, CA Monil Gala, CA Neha Gohil, CA Harsh
Kapoor, CA. Amrish Darji, CA Ravi Karia, CA Gunjan Sharma, CA Ashwini
Salunke and CA Ravi Chauhan for their deliberations, comprehensive study
and efforts in bringing out this Guidance Note.
I am confident that this publication would be very useful to the members and
other stakeholders.

New Delhi CA. Nilesh S. Vikamsey

President, ICAI
 Preface to the First Edition
The Council of the Institute has previously issued Guidance Note on
Schedule III to the Companies Act 2013. In February, 2015, the Ministry of
Corporate Affairs notified Indian Accounting Standards thereby laying down
the roadmap for companies for adoption of Ind AS. Further, MCA notified
amendments to Schedule III to the Companies Act, 2013 and the format of
Schedule III was termed as Division I to be complied with by Non Ind AS
companies and inserted Division II-Ind AS Schedule III, which is a format of
Financial Statements for companies that are required to comply with the
Companies (Indian Accounting Standards) Rules, 2015.
In view of this, the Corporate Laws & Corporate Governance Committee of
The Institute of Chartered Accountants of India decided to bring out the
Guidance Note on Division II- Ind AS Schedule III to the Companies Act
2013.
The Guidance Note provides guidance on each of the item of the Balance
Sheet, Statement of Profit and Loss, Major differences in Division I and
Division II of the Schedule III to the Companies Act, 2013 besides providing
Illustrative format for Standalone financial statements and Consolidated
Financial Statements etc. Few illustrations have also been included with a
view to provide guidance on application of the principles provided in the
Guidance Note.
The Ind AS in the first phase shall be applicable to all companies, listed or
unlisted, with a net worth of Rs 500 crore or more (along with their holding,
subsidiary, joint venture or associate companies) and which shall be required
to adopt Ind AS for accounting periods commencing on or after 1 April 2016.
To facilitate the exercise of preparation of financial statements by such
companies as per Ind AS Schedule III to the Companies Act, 2013, the ICAI
in its endeavour has brought this Guidance Note for the benefits of its
members.
I take this opportunity in thanking the President of ICAI, CA. Nilesh S.
Vikamsey and Vice President CA. Naveen N. D. Gupta for their support and
guidance in bringing out the publication.
I am also thankful to all my Central Council colleagues for their valuable
inputs in giving shape to this Guidance Note. I wish to place on record
special appreciation to CA. Debashis Mitra, Vice Chairman, CL&CGC, CA.
Dhinal A Shah, Central Council member and Convenor of the Study Group
and his team comprising of CA. Himanshu Kishnadwala, CA. Vijay Maniar,
CA. Suresh Yadav, CA. Sandeep Shah, CA. Vignesh Poojari, CA. Shriraj
Bhandari, CA. Keyur Dave and CA. Pratik Haria deserves special
compliments and mention for their substantial effort and time in having in-
depth technical study and discussion in numerous meetings to bring out this
Guidance Note.
I also express my thanks to CA Ankita Nemani, CA Yash Kaku, CA
Somshekar Yaligar, CA Monil Gala, CA Neha Gohil, CA Harsh Kapoor, CA.
Amrish Darji, CA Ravi Karia, CA Gunjan Sharma, CA Ashwini Salunke and
CA Ravi Chauhan for their contribution in giving shape to this Guidance Note
on the basis of discussions held.
I also thank all the Members and Special Invitees to the Committee for their
support in finalising this Guidance Note.
I would also like to thank CA. Sarika Singhal, Ms S. Rita, Ms. Seema Jangid,
CA. Ashita Jain and Ms Nidhi Bansal working in the Secretariat of the
Corporate Laws & Corporate Governance Committee for their back up
support in bringing out this application.
I trust that this Guidance Note would be very useful to the members of the
Institute and others interested in the subject.

New Delhi CA. Sanjay Kumar Agarwal

Chairman
Corporate Laws & Corporate Governance Committee
 Index
1. Introduction ....................................................................................... 1
2. Objective and Scope ......................................................................... 2
3. Applicability ...................................................................................... 3
4. Main principles – Summary of Ind AS Schedule III ............................. 5
5. Structure of the Ind AS Schedule III ................................................... 7
6. General Instructions for Preparation of Financial Statements:
Notes 1 to 9 ...................................................................................... 7
7. Part I Notes: General Instructions for Preparation of Balance
Sheet – Notes 1 to 5 ....................................................................... 10
8. Part I – Form of Balance Sheet and Notes – General Instructions
for Preparation of Balance Sheet: Notes 6 to 11 .............................. 17
9. Part II – Statement of Profit and Loss and Notes – General
Instructions for Preparation of Statement of Profit and Loss:
Notes 1 to 6 .................................................................................. 114
10. Other Comprehensive Income ....................................................... 132
11. Additional information to be disclosed by way of Notes to
Statement of Profit and Loss ......................................................... 134
12. Part III – General Instructions for Preparation of Consolidated
Financial Statements ..................................................................... 140
Annexure A : Division II to Schedule III ('Ind AS Schedule III) to
the Companies Act, 2013 .............................................................. 152
Annexure B : Analytical Ratios ................................................................ 203
Annexure C : Illustrative List of Disclosures required under the Companies
Act, 2013 ...................................................................................... 207
Annexure D : List of Indian Accounting Standards notified as on date ...... 210
Annexure E : General Circular No. 39/2014 dated 14th October 2014 ...... 212
Annexure F : Illustrative Standalone and Consolidated Financial
Statements ................................................................................... 213
Glossary ................................................................................................. 243
1. Introduction
1.1 Schedule III to the Companies Act, 2013 (‘the Act’) was notified along
with the Act itself on 29 August, 2013 thereby providing the manner in which
every company registered under the Act shall prepare its Financial
Statements. Financial Statements as defined under the Act include Balance
Sheet, Statement of Changes in Equity for the period if applicable, the
Statement of Profit and Loss for the period, Cash flow statement for the
period and Notes.
1.2 Ministry of Corporate Affairs (‘MCA’) notified Indian Accounting
Standards (‘Ind AS’) on 16 February, 2015 thereby laying down the initial
roadmap for all companies, except insurance companies, banking companies
and non-banking finance companies, for adoption of Ind AS (‘MCA
roadmap’). Further, MCA notified amendments to Schedule III to the Act on 6
April, 2016 whereby:
1.2.1 The original Schedule III was renamed as ‘Division I’ to Schedule III
(‘Non-Ind AS Schedule III’) – which gives a format of Financial Statements
for Non-Ind AS companies, that are required to comply with the Companies
(Accounting Standards) Rules, 2006 (as amended from time to time).. In
other words, Non-Ind AS companies, will be required to prepare Financial
Statements as per Companies (Accounting Standards) Rules, 2006 (as
amended from time to time)., as per the format of Division I to Schedule III to
the Act;
1.2.2 ‘Division II’ - ‘Ind AS Schedule III’ (Refer Annexure A, Pg 152) was
inserted to give a format of Financial Statements for companies that are
required to comply with the Companies (Indian Accounting Standards) Rules,
2015, as amended from time to time (‘Companies Ind AS Rules’). This is
newly inserted into Schedule III for companies that adopt Ind AS as per Rule
4(1)(i) or Rule 4(1)(ii) or Rule 4(1)(iii) of the Companies Ind AS Rules.
Accordingly, such Companies, while preparing its first and subsequent Ind
AS Financial Statements, would apply Division II to Ind AS Schedule III to the
Act.
1.3 The requirements of Ind AS Schedule III however, do not apply to
companies as referred to in the proviso to Section 129(1) of the Act, i.e., any
insurance or banking company or any company engaged in the generation or
supply of electricity, or to any other class of company for which a form of
Balance Sheet and Statement of Profit and Loss has been specified in or
GN on Division II - Ind AS Schedule III to the Companies Act 2013

under any other Act governing such class of company. Moreover, the
requirements of Ind AS Schedule III do not apply to Non-Banking Finance
Companies (NBFCs) that adopt Ind AS as per Rule 4(1)(iv) of Companies
(Indian Accounting Standards) Rules, 2015 notified in Companies (Indian
Accounting Standards) (Amendment) Rules, 2016 as amended from time to
time.
1.4 It may, however, be clarified that for companies engaged in the
generation and supply of electricity, neither the Electricity Act, 2003 nor the
rules framed thereunder, prescribe any specific format for presentation of
Financial Statements by an electricity company. Section 1(4)(d) of the Act
states that the provisions of the Act shall apply to companies engaged in the
generation or supply of electricity companies, to the extent it is not
inconsistent with the provisions of the Electricity Act, 2003. Keeping this in
view, Ind AS Schedule III may be followed by such companies till the time
any other format is prescribed by the relevant statute.

2. Objective and Scope

2.1. The objective of this Guidance Note is to provide guidance in the
preparation and presentation of Financial Statements in accordance with
various aspects of Ind AS Schedule III, for companies adopting Ind AS. The
disclosure requirements under Ind AS, the Companies Act, 2013, other
pronouncements of the Institute of Chartered Accountants of India (ICAI),
other statutes, etc., would be in addition to the guidance provided in this
Guidance Note.
2.2. Guidance given in ‘Guidance Note on Schedule III to the Companies
Act, 2013’ published in May 2017 and third edition published in January 2022
as ‘Guidance Note on Division I- Non Ind AS schedule III to the Companies
Act, 2013’ would continue to be applied by Non-Ind AS companies which are
required to prepare Financial Statements as per the format of Non-Ind AS
Schedule III.
2.3. In preparing this Guidance Note, reference has been made to Ind AS
notified under Section 133 of the Act read together with Paragraph 3 of the
Companies Ind AS Rules given in Annexure D (Pg 210) and various other
pronouncements of the ICAI. The primary focus of the Guidance Note is to
lay down broad guidelines to deal with practical issues that may arise in the
implementation of Ind AS Schedule III while preparing Financial Statements
as per Ind AS.

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2.4. This Guidance Note includes changes to presentation and disclosure

requirements of Ind AS Schedule III pursuant to Ind AS notified up to
31 March, 2021.
2.5. As per the clarification issued by ICAI regarding the authority attached
to the Documents issued by ICAI, ‘Guidance Notes’ are primarily designed to
provide guidance to members on matters which may arise in the course of
their professional work and on which they may desire assistance in resolving
issues which may pose difficulty. Guidance Notes are recommendatory in
nature. A member should ordinarily follow recommendations in a guidance
note relating to an auditing matter except where he is satisfied that in the
circumstances of the case, it may not be necessary to do so. Similarly, while
discharging his attest function, a member should examine whether the
recommendations in a guidance note relating to an accounting matter have
been followed or not. If the same have not been followed, the member should
consider whether keeping in view the circumstances of the case, a disclosure
in his report is necessary.”

3. Applicability
3.1. As per the Government Notification no. S.O. 902 (E) dated 26 March,
2014, Schedule III is applicable for the Financial Statements prepared for the
financial year commencing on or after 1 April, 2014. Further, as per the
Government Notification no. G.S.R. 404(E) dated 6 April, 2016, Schedule III
is amended to include a format of Financial Statements for a company
preparing Financial Statements in compliance with the Companies Ind AS
Rules. Schedule III has been further amended vide the Government
Notification dated 24 March, 2021 to include certain additional presentation
and disclosures requirements and changes some existing requirements.
These changes need to be applied in preparation of financial statements for
the financial year commencing on or after 1 April, 2021. All companies that
prepare, either voluntarily or mandatorily, Financial Statements in compliance
with the Companies Ind AS Rules, should consider Ind AS Schedule III as
well as this Guidance Note. Additionally, preparers of financial statements
should also consider requirements of the Act as well as other Statutes,
Notifications, Circulars issued by various Regulators.
3.2. Ind AS Schedule III requires that except in the case of the first
Financial Statements laid before the company after incorporation, the
corresponding amounts (i.e. comparatives) for the immediately preceding
period are to be disclosed in the Financial Statements including the Notes to

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

Accounts. Thus, for the Financial Statements prepared for the financial year
2021-22 (i.e. 1st April 2021 to 31st March 2022), corresponding amounts need
to be given for the financial year 2020-21. As per Ind AS 101, a company’s
first Ind AS financial statements shall include at least three balance sheets,
two statements of profit and loss, two statements of cash flows and two
statements of changes in equity and related notes. This Guidance Note does
not deal with the presentation aspects of reconciliations that are required to
be provided as a part of a company’s first Ind AS financial statements.
3.3. For applicability, in the first and subsequent years, of the Ind AS
Schedule III format by a company to its interim Financial Statements (other
than quarterly, half-yearly and annual financial results published as per SEBI
guidelines), relevant paragraphs of Ind AS 34 – Interim Financial Reporting
are quoted below:
“9. If an entity publishes a complete set of Financial Statements in its
interim financial report, the form and content of those statements shall
conform to the requirements of Ind AS 1 for a complete set of
Financial Statements.
10. If an entity publishes a set of condensed Financial Statements in its
interim financial report, those condensed statements shall include, at a
minimum, each of the headings and subtotals that were included in its
most recent annual Financial Statements and the selected explanatory
notes as required by this Standard. Additional line items or notes shall
be included if their omission would make the condensed interim
Financial Statements misleading.”
In case, if a company is presenting condensed interim Financial Statements,
except in case of interim periods falling in the first Ind AS reporting period, its
format should also conform to that used in the company’s most recent annual
Financial Statements, i.e., which would be as per Ind AS Schedule III.
3.4. Listed entities shall follow guidelines issued by SEBI by way of
circulars prescribing formats for publishing financial results (quarterly,
half-yearly and annual) which are guided by the relevant provisions of the
Ind AS and Ind AS Schedule III and may make suitable modifications, as
applicable.

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4. Main principles – Summary of Ind AS

Schedule III
4.1. Every company to which Ind AS is applicable, shall prepare its
Financial Statements in accordance with Ind AS Schedule III or with such
modification as may be required under certain circumstances.
4.2. Financial Statements include Balance Sheet, Statement of Changes in
Equity for the period, Statement of Profit and Loss for the period and Notes.
Cash Flow Statement shall be prepared in accordance with the requirements
of the relevant Ind AS.
4.3. The Ind AS Schedule III requires that if the compliance with the
requirements of the Act including Ind AS as applicable to the companies,
require any change in presentation or disclosure in the Financial Statements,
the requirements of Ind AS Schedule III will stand modified accordingly.
4.4. Ind AS 1, para 60, states that an entity shall present current and non-
current assets, and current and non-current liabilities, as separate
classifications in its balance sheet, except when a presentation based on
liquidity provides information that is reliable and more relevant. When that
exception applies, an entity shall present all assets and liabilities in the order
of liquidity. Further, Ind AS 1, para 64, states that a company is permitted to
present some of its assets and liabilities using a current / non-current
classification and others in order of liquidity when this provides information
that is reliable and more relevant. The need for a mixed basis of presentation
might arise when an entity has diverse operations. However, as per para 2 of
the General Instructions for Preparation of Financial Statements in Ind AS
Schedule III, the option of presenting assets and liabilities in the order of
liquidity as permitted by paras 60 and 64 of Ind AS 1 is not available to
Companies preparing its Financial Statements as per Ind AS Schedule III.
Accordingly, a Company may choose to present the assets and liabilities in
the order of liquidity only in the Notes, which shall be considered as
‘Additional Information’ and the same shall be stated so explicitly in the
Notes.
4.5. The Ind AS Schedule III sets out the minimum requirements for
disclosure on the face of the Financial Statements, i.e., Balance Sheet,
Statement of Changes in Equity for the period, the Statement of profit and
Loss for the period (The term 'Statement of Profit and Loss' has the same
meaning as 'profit and loss Account) and Notes. Cash flow statement shall

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

be prepared, where applicable, in accordance with the requirement of the

relevant Indian Accounting Standard. Line items, sub-line items and sub-
totals can be presented as an addition or substitution on the face of the
Financial Statements when such presentation is relevant for understanding of
the company’s financial position or performance or to cater to industry or
sector-specific disclosure requirements or when required, for compliance with
the amendments to the Act or under any Ind AS. For e.g., line items required
by para 54 and para 82 of Ind AS 1 should be included, as an addition to or
substitution of the Ind AS Schedule III line items on the face of Balance
Sheet and Statement of Profit and Loss, respectively. Accordingly,
requirements of both Ind AS Schedule III as well as Ind AS 1 are to be
complied with. Illustrative Standalone & Consolidated Financial Statements
format is given in Annexure F (Pg 213)..
4.6. Disclosure under Ind AS (for e.g., fair value measurement
reconciliation, fair value hierarchy, risk management and capital
management, disclosure of interests in other entities, components of other
comprehensive income, reconciliations on first-time adoption of Ind AS, etc.)
shall be made in the Notes or by way of additional statement(s) unless
required to be disclosed on the face of the Financial Statements.
4.7. Where any Act or Regulation require specific disclosures to be made
in the Financial Statements of a company, the said disclosures shall be made
in addition to those required under Ind AS Schedule III.
4.8. Note 8 to General Instructions for Preparation of Financial Statements
in Ind AS Schedule III states that the terms used in the Ind AS Schedule III
will carry the same meaning as defined by the applicable Ind AS. For
example, the terms such as ‘associate’, ‘related parties’, etc. will have the
same meaning as defined in Ind AS notified under the Companies Ind AS
Rules.
For any terms which are not specifically defined in Ind AS, attention may also
be drawn to the Conceptual Framework for Financial Reporting under Indian
Accounting Standards (‘Ind AS Framework’) issued by ICAI. However, if any
term is not defined in the Ind AS Framework, the entity may give
consideration to the principles described in para 10 to para 12 of Ind AS 8 for
the purpose of developing and applying an accounting policy.
4.9. A General Instruction on ‘Materiality’ has been included in Note 7 to
General Instructions for Preparation of Financial Statements and a revision
made by Notification No. GSR 463(E) dated 24th July, 2020, requires
Financial Statements to disclose items/information that could, individually or

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collectively, influence the economic decisions that users make on the basis
of the Financial Statements. Such influence arises from information being
omitted, misstated or obscured (i.e. communicated in a way that has a similar
effect of omitting or misstating it). Materiality depends on the size or nature
of the item or a combination of both, to be judged based on particular facts
and in particular circumstances.
4.10. Moreover, para 29 of Ind AS 1 states w.r.t. ‘materiality’ that an entity
shall present separately each material class of similar items. An entity shall
present separately items of a dissimilar nature or function unless they are
immaterial except when required by law. Further, reference to para 29 to 31
of Ind AS 1 should be taken when determining materiality and aggregation.

5. Structure of the Ind AS Schedule III

The Structure of Ind AS Schedule III is as under:
A. General Instructions for Preparation of Financial Statements of a
Company required to comply with Ind AS (‘General Instructions for
Preparation of Financial Statements’)
B. Part I – Form of Balance Sheet and Statement of Changes in Equity
C. Part I Notes – General Instructions for Preparation of Balance Sheet
D. Part II – Form of Statement of Profit and Loss
E. Part II Notes – General Instructions for Preparation of Statement of
Profit and Loss
F. Part III – General Instructions for the Preparation of Consolidated
Financial Statements

6. General Instructions for Preparation of

Financial Statements: Notes 1 to 9
6.1. The General Instructions lay down the broad principles and guidelines
for preparation and presentation of Financial Statements.
6.2. As laid down in Part A of the Annexure to Companies Ind AS Rules,
Ind AS, which are specified, are intended to be in conformity with the
provisions of applicable laws. However, if due to subsequent amendments in
the law, a particular Ind AS is found to be not in conformity with law, the
provisions of the said law will prevail and the Financial Statements should be
prepared in conformity with such law. In such a scenario, the statement of

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

compliance with Ind AS should be considered in the light of the principle of

overriding effect of law over Ind AS when applying the presentation or
disclosure requirements of the Ind AS Schedule III.
6.3. The Ind AS Schedule III requires that if compliance with the
requirements of the Act including applicable Ind AS require any change in the
presentation or disclosure including addition, amendment, substitution or
deletion in the head/sub-head or any changes inter se, in the Financial
Statements or Notes to Accounts thereof, the same shall be made and the
requirements of Ind AS Schedule III shall stand modified accordingly.
6.4. Note 3 of the General Instructions for Preparation of Financial
Statements states that the disclosure requirements of the Ind AS Schedule III
are in addition to and not in substitution of the disclosure requirements
specified in Ind AS. They further clarify that the disclosures specified in Ind
AS shall be made in the Notes or by way of additional statement(s) unless
required to be disclosed on the face of the Financial Statements. Similarly, all
other disclosures as required by the Act shall be made in the Notes, in
addition to the requirements set out in this Schedule.
6.5. Examples to illustrate the above point are:
(a) Specific disclosure is required by para 33 of Ind AS-105 Non-
current Assets Held for Sale and Discontinued Operations which
has not been incorporated in Ind AS Schedule III.
(b) Ind AS-107 Financial Instruments: Disclosures, which requires
disclosure of information that enable users of the Financial
Statements to evaluate the significance of financial instruments
for its financial position and performance.
6.6. Disclosures required by Ind AS as well as by the Act will continue to
be made in the Financial Statements and in the Notes to Accounts. An
example of this is the separate disclosure required by Sub Section (3) of
Section 182 of the Act for donations made to political parties. Such
disclosures would be made in the Notes. An illustrative list of disclosures
required under the Act is enclosed as Annexure C (Pg 207).
6.7. The above principle would apply to disclosures to be made in
compliance with other legal requirements such as, disclosures required
under Regulation 34 (including Schedule V) and Regulation 53 of the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015. A
further extension of the above principle also means that specific disclosures
required by various pronouncements of regulatory bodies or disclosure

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requirements prescribed by various ICAI Guidance Notes – for e.g.,

Guidance Note on Accounting for Oil and Gas Producing Activities (for
entities to whom Ind AS is applicable), etc. should be made in the Financial
Statements in addition to the disclosures specified by Ind AS Schedule III.
6.8. The Ind AS Schedule III requires all information relating to each item
on the face of the Balance Sheet and Statement of Profit and Loss to be
cross-referenced to the Notes. The manner of such cross-referencing to
various other information contained in the Financial Statements has been
retained as “Note No.” in Ind AS Schedule III. The instructions state that the
Notes to Accounts should provide where required with narrative descriptions
or disaggregation of items recognized in those statements. Hence,
presentation of all narrative descriptions and disaggregation should
preferably be presented in the form of Notes rather than in the form of
Schedules. Such style of presentation is also in line with the manner of
presentation of Financial Statements followed by companies internationally
and would facilitate comparability of Financial Statements.
6.9. Note 4 of the General Instructions for Preparation of Financial
Statements also states that the Notes should also contain information about
items that do not qualify for recognition in Financial Statements. These
disclosures normally refer to items such as Contingent Liabilities and
Commitments which do not get recognised in the Financial Statements.
These have been dealt with in para 8.2.14 below (Pg 84).
6.10. The General Instructions for Preparation of Financial Statements also
lay down the principle that in preparing Financial Statements including Notes,
a balance shall be maintained between providing excessive detail that may
not assist users of Financial Statements and not providing important
information as a result of too much aggregation. Compliance with this
requirement is a matter of professional judgement and may vary on a case to
case basis based on facts and circumstances. However, it is necessary to
strike a balance between overburdening Financial Statements with excessive
detail that may not assist users of Financial Statements and obscuring
important information as a result of too much aggregation. For example, a
company should not obscure important information by including it among a
large amount of insignificant detail or in a way that it obscures important
differences between individual transactions or associated risks.
6.11. Ind AS Schedule III requires using the same unit of measurement
uniformly across the Financial Statements. Such requirement should be
taken to imply that all figures disclosed in the Financial Statements including

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Notes should be of the same denomination, except where a different

denomination may be required, say for ratios or metrics in order to increase
its understandability.
6.12. Ind AS Schedule III has specified the rounding off requirements as
given below:
Ind AS Schedule III
• Total income < Rs. 100 Crores - Round off to the nearest hundreds,
thousands, lakhs or millions or decimal thereof.
• Total income >= Rs. 100 Crores - Round off to the nearest lakhs,
millions or crores, or decimal thereof

6.13. A Note below Note 9 of the General Instructions for Preparation of

Financial Statements clarifies that Ind AS Schedule III sets out the minimum
requirements for disclosure in the Financial Statements including notes. It
states that line items, sub-line items and sub-totals shall be presented as an
addition or substitution on the face of the Financial Statements when such
presentation is relevant to the understanding of the company’s financial
position or performance or to cater to industry/sector-specific disclosure
requirements, apart from, when required for compliance with amendments to
the Act or Ind AS.
The application of the above requirement is a matter of professional
judgement. The following examples illustrate this requirement. ‘Earnings
before Interest, Tax, Depreciation and Amortization’ is often an important
measure of financial performance of the company relevant to the various
users of Financial Statements and stakeholders of the company. Hence, a
company may choose to present the same as an additional line item on the
face of the Statement of Profit and Loss. The method of computation adopted
by a company for presenting such measures should be followed consistently
over the years. Further, companies should also disclose the policy followed
in the measurement of such line items.

7. Part I Notes: General Instructions for

Preparation of Balance Sheet – Notes 1 to 5
7.1. Current/Non-current assets and liabilities:
The Ind AS Schedule III and Ind AS-1 Presentation of Financial Statements
require all items in the Balance Sheet to be classified as either Current or
Non-current and be reflected as such. Notes 1 to 3 in General Instructions for

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Preparation of Balance Sheet define Current Asset, Operating Cycle and

Current Liability, in line with Ind AS 1, as below:
A. Current Asset – “An entity shall classify an asset as current when:
(a) it expects to realise the asset, or intends to sell or consume it, in
its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the
reporting period;
(d) the asset is cash or a cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for at
least twelve months after the reporting period.
An entity shall classify all other assets as non-current.”
B. Operating Cycle – “The operating cycle of an entity is the time
between the acquisition of assets for processing and their realization
in cash or cash equivalents. When the entity’s normal operating cycle
is not clearly identifiable, it is assumed to be twelve months.”
C. Current Liability – “An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the
reporting period; or
(d) it does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Terms of a liability that could, at the option of the counterparty,
result in its settlement by the issue of equity instruments do not
affect its classification.
An entity shall classify all other liabilities as non-current.”
7.2. Ind AS Schedule III, in line with Ind AS 1, defines “current assets” and
“current liabilities”, with the non-current category being the residual. It is
therefore necessary that the balance pertaining to each item of assets and
liabilities contained in the Balance Sheet be split into its current and non-
current portions and be classified accordingly as on the reporting date.
7.3. Based on the definition, current assets include assets such as raw
material and stores which are intended for consumption or sale in the course

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of the company’s normal operating cycle. Items of inventory, or trade

receivables which may be consumed or realized within the company’s normal
operating cycle should be classified as current even if the same are not
expected to be so consumed or realized within twelve months after the
reporting date. Current assets would also include assets held primarily for
the purpose of being traded (for e.g., some financial assets that meet the
definition of held for trading as per Ind AS 109) and the current portion of
non-current financial assets.
7.4. Similarly, current liabilities would include items such as trade
payables, employee salaries payable and other operating costs that are
expected to be settled in the company’s normal operating cycle or due to be
settled within twelve months from the reporting date. It is pertinent to note
that such operating liabilities are normally part of the working capital of the
company used in the company’s normal operating cycle and hence, should
be classified as current even if they are due to be settled in more than twelve
months after the end of the reporting date.
7.5. Further, any liability, where the company does not have an
unconditional right to defer its settlement for at least twelve months after the
Balance Sheet date / reporting date, will have to be classified as current.
7.6. The application of this criterion could be critical to the Financial
Statements of a company and requires careful evaluation of the various
terms and conditions of a loan liability. To illustrate, let us understand how
this requirement will apply to the following example:
Company X has taken a five year loan. The loan contains certain debt
covenants, e.g., filing of quarterly information, failing which the bank can
recall the loan and demand repayment thereof. The company has not filed
such information in the last quarter; as a result of which the bank has the
right to recall the loan. However, based on the past experience and/or based
on the discussions with the bank, the management believes that default is
minor and the bank will not demand the repayment of loan. According to the
definition of Current Liability, what is important is, whether a borrower has an
unconditional right at the Balance Sheet date to defer the settlement
irrespective of the nature of default and whether or not a bank can exercise
its right to recall the loan. If the borrower does not have such right, the
classification would be “current.” It is pertinent to note that as per the terms
and conditions of the aforesaid loan, the loan was not repayable on demand
from day one. The loan became repayable on demand only on default in the
debt covenant and bank has not demanded the repayment of loan upto the

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date of approval of the financial statements. In the Indian context, the criteria
of a loan becoming repayable on demand on breach of a covenant, is
generally added in the terms and conditions as a matter of abundant caution.
Also, banks generally do not demand repayment of loans on minor defaults
of debt covenants as the banks view it more as a protective right which is
exercised in exceptional situations. Therefore, in such situations, the
companies generally continue to repay the loan as per its original terms and
conditions. Hence, considering that the practical implications of a minor
breach are negligible in the Indian scenario, an entity could continue to
classify the loan as “non-current” as on the Balance Sheet date since the
loan is not actually demanded by the bank at any time prior to the date on
which the Financial Statements are approved. However, in case a bank has
recalled the loan before the date of approval of the financial statements on
breach of a loan covenant that occurred before the year-end, the loan will
have to be classified as current. Above situation should not be confused with
a loan which is repayable on demand from day one. For such loans, even if
the lender does not demand repayment of the loan at any time, the same
would have to be continued to be classified as “current”.
Further, as per Ind AS 1, para 74, where there is a breach of a material
provision of a long-term loan arrangement on or before the end of the
reporting period with the effect that the liability becomes payable on demand
on the reporting date, the entity does not classify the liability as current, if the
lender agreed, after the reporting period and before the approval of the
financial statements for issue, not to demand payment as a consequence of
the breach.
With a view to focus only on the substantive breaches (e.g., amongst other
covenants, those that are financial covenants) the expression used in Ind AS
1 is ‘breach of a material provision’. The entity has to carefully evaluate what
would be construed as a “breach of a material provision” on case-to-case
basis considering the facts and the terms and conditions of each borrowing
arrangement.
7.7. The term “Operating Cycle” is defined as the time between the
acquisition of assets for processing and their realization in cash or cash
equivalents. A company’s normal operating cycle may be longer than twelve
months e.g. companies manufacturing wines, etc. However, where the
normal operating cycle cannot be identified, it is assumed to have a duration
of twelve months.

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7.8. Where a company is engaged in running multiple businesses, the

operating cycle could be different for each line of business. Such a company
will have to classify all the assets and liabilities of the respective businesses
into current and non-current, depending upon the operating cycles for the
respective businesses.
7.9. For the purpose of Ind AS Schedule III, a company also needs to
classify its employee benefit obligations as current and non-current
categories. While Ind AS-19 Employee Benefits governs the measurement of
various employee benefit obligations, their classification as current and non-
current liabilities will also be governed by the criteria laid down in Notes 1 to
3 to the General Instructions for Preparation of Balance Sheet in Ind AS
Schedule III, which are consistent with Ind AS 1. In accordance with these
criteria, a liability is classified as “current” if a company does not have an
unconditional right as on the Balance Sheet date to defer its settlement for
twelve months after the reporting date. Each company will need to apply
these criteria to its specific facts and circumstances and decide an
appropriate classification of its employee benefit obligations. Given below is
an illustrative example on application of these criteria in a simple situation:
(a) Liability towards bonus, etc., payable within one year from the Balance
Sheet date is classified as “current”.
(b) In case of accumulated leave outstanding as on the reporting date, the
employees have already earned the right to avail the leave and they
are normally entitled to avail the leave at any time during the year. To
the extent, the employee has an unconditional right to avail the leave,
the same needs to be classified as “current” even though the same is
measured as ‘other long-term employee benefit’ as per Ind AS-19
Employee Benefits.
However, whether the right to defer the employee’s leave is available
unconditionally with the company needs to be evaluated on a case to
case basis – based on the terms of employee contract and employer’s
leave policy, employer’s right to postpone/deny the leave, restriction to
avail leave in the next year for a maximum number of days, etc. In
case of such complexities, the amount of Non-current and Current
portions of leave obligation should normally be determined by a
qualified Actuary and presented accordingly.
(c) Regarding funded post-employment benefit obligations, amount due
for payment to the fund created for this purpose within twelve months

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may be treated as “current” liability. Regarding the unfunded post-

employment benefit obligations, a company will have settlement
obligation at the Balance Sheet date or within twelve months for
employees such as those who have already resigned or are expected
to resign (which is factored for actuarial valuation) or are due for
retirement within the next twelve months from the Balance Sheet date.
Thus, the amount of obligation attributable to these employees is a
“current” liability. The remaining amount attributable to other
employees, who are likely to continue in the services for more than a
year, is classified as “non-current” liability. Normally the actuary should
determine the amount of current & non-current liability for unfunded
post-employment benefit obligation based on the definition of Current
and Non-current assets and liabilities.
Since, para 133 of Ind AS 19 states that it does not specify whether an
entity should distinguish current and non-current portions of assets
and liabilities arising from post-employment benefits, entities may
continue to follow the guidance in the above paragraph (c).
7.10. For the purpose of presentation of Investments into current and non-
current, a company should consider whether the investments are intended to
be sold within twelve months from the balance sheet date / realizable within
its operating cycle in order to classify such investments as current
investments. However for recognition and measurement perspective, Ind AS-
109 Financial Instruments requires classification of all financial assets
(including investments, except investments in equity instruments) as
subsequently measured at amortized cost, fair value through other
comprehensive income (FVOCI) or fair value through profit or loss (FVTPL)
on the basis of both viz., (a) the contractual cash flow characteristics of the
financial asset and (b) the company’s business model for managing the
financial assets. Accordingly, the measurement of financial assets, i.e. at
amortized cost, or FVTPL or FVOCI would not decide presentation into
Current and Non-current. However, it may be one of the factors that a
company may consider in the current and non-current classification of
investments, based on its expected realization as at the reporting date. Ind
AS 1 para 68 also states that current assets include assets held primarily for
the purpose of trading (i.e., some financial assets that meet the definition of
held for trading as per Ind AS 109). Where a portion of a financial asset is
expected to be realized within 12 months of the balance sheet date, the

15
GN on Division II - Ind AS Schedule III to the Companies Act 2013

portion should be presented as current asset; remainder of the financial

asset should be shown as non-current.
7.11. Settlement of a liability by issue of equity instruments
7.11.1 Both, Ind AS 1 and Ind AS Schedule III clarifies that, “the terms of a
liability that could, at the option of the counterparty, result in its settlement by
the issue of equity instruments do not affect its classification”. A
consequence of this is, if the conversion option in convertible debt is
exercisable by the holder at any time, the liability cannot be classified as
“current” if the maturity for cash settlement is greater than one year. A
question, therefore, arises, as to how does the aforesaid requirement affect
the classification of items for say, a) convertible debt where the conversion
option lies with the issuer, or b) mandatorily convertible debt instrument.
7.11.2 Based on the specific exemption granted only to those cases where
the conversion option is with the counterparty, the same should not be
extended to other cases where such option lies with the issuer or is a
mandatorily convertible instrument. For all such cases, conversion of a
liability into equity should be considered as a means of settlement of the
liability. Accordingly, the timing of such settlement also decides the
classification of such liability in terms of Current or Non-current as defined in
Ind AS Schedule III.
7.12. Current and Non-Current Classification for Deferred Tax
Assets/Liabilities
7.12.1. As per Ind AS-1 Presentation of Financial Statements para 56
“When an entity presents current and non-current assets, and current and
non-current liabilities, as separate classifications in its balance sheet, it shall
not classify deferred tax asset (liabilities) as current assets (liabilities).”
Accordingly, deferred tax assets / liabilities will always be presented as ‘non-
current’. (Also, refer para 9.7.2 below (Pg 130) for presenting MAT Credit
Entitlement in the Balance Sheet).

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

8. Part I – Form of Balance Sheet and Notes –

General Instructions for Preparation of
Balance Sheet: Notes 6 to 11
As per the Ind AS Framework, asset, liability and equity are defined as
follows:
An asset is a present economic resource controlled by the entity as a result
of past events.
An economic resource is a right that has the potential to produce economic
benefits.
A liability is a present obligation of the entity to transfer an economic
resource as a result of past events.
Equity is the residual interest in the assets of the entity after deducting all its
liabilities.
8.1. Assets
On the face of the Balance Sheet, Ind AS Schedule III requires the following
items to be presented under non-current assets and current assets as below:
Non-current assets
(a) Property, plant and equipment
(b) Capital work in progress
(c) Investment property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under development
(g) Biological Assets other than bearer plants
(h) Financial assets
(i) Investments
(ii) Trade Receivables
(iii) Loans
(iv) Others (to be specified)
(i) Deferred tax assets (net)

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(j) Other non-current assets

Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
(iv) Bank balances other than (iii) above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (net)
(d) Other current assets
Non-current Assets
8.1.1. Property, Plant and Equipment: The company shall disclose the
following in the Notes as per serial no. 6(A)(I) of Part I of Ind AS Schedule III.
(i) Classification shall be given as:
(a) Land;
(b) Buildings;
(c) Plant and Equipment;
(d) Furniture and Fixtures;
(e) Vehicles;
(f) Office equipment;
(h) Bearer Plants;
(g) Others (specify nature).
(ii) Assets under lease shall be separately specified under each class of
asset.
(iii) A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the

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aggregate of the net carrying value of each class of Property, Plant

and Equipment) and other adjustments and the related depreciation
and impairment losses or reversals shall be disclosed separately.
8.1.1.1. Since reconciliation of gross and net carrying amounts of Property,
Plant and Equipment, Investment Property and Other Intangible assets is
required, the corresponding depreciation/amortization for each class of asset
should be disclosed in terms of Opening Accumulated Depreciation,
Depreciation / amortization for the period, Deductions / Other adjustments
and Closing Accumulated Depreciation / Amortization. Similar disclosures
should also be made for Impairment, if any, as applicable.
8.1.1.2. As per Ind AS 101, para D5 and D6, an entity may elect to measure
an item of property, plant and equipment at the date of transition to Ind ASs
at its fair value or use a previous GAAP revaluation as deemed cost. Further,
as per para D7AA of Ind AS 101, an entity may also consider previous GAAP
carrying amount of all its property, plant and equipment as its deemed cost
on the date of transition. In case when a company applies para D5 or para
D7AA, the deemed cost considered on the date of transition shall become
the new ‘gross block’ and accordingly presented in the reconciliation
statement as required by Ind AS Schedule III.
8.1.1.3. In case if the company wants to disclose information regarding gross
block of assets, accumulated depreciation and provision for impairment
under previous GAAP, the same may only be disclosed as an additional
information by way of a note forming part of the financial statements.
8.1.1.4. All acquisitions, whether by way of an asset acquisition or through a
business combination are to be disclosed as part of the reconciliation in the
note on Property, Plant and Equipment, Investment Property (refer para 8.1.3
below, Pg 21), Other Intangible assets (refer para 8.1.5 below, Pg 21) and
Biological Assets other than bearer plants (refer para 8.1.7 below, Pg 22).
Acquisitions through ‘Business Combinations’ need to be disclosed
separately for each class of assets. Similarly, though not specifically
required, it is advisable that asset disposals through demergers, etc. may
also be disclosed separately for each class of assets.
8.1.1.5. Other adjustments may include items as required by disclosure
requirements of Ind AS 16 and such disclosure should be made in the
manner prescribed therein. It may also include, for example net exchange

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

gain / loss arising on the translation of the financial statements from the
functional currency into a presentation currency.
8.1.1.6. Under the Ind AS Schedule III, land and building are presented as
two separate classes of property, plant and equipment. In contrast,
paragraph 37 of Ind AS 16 gives an example of grouping land and building
under same class for revaluation purposes. The para states that a class of
property, plant and equipment is a grouping of assets of a similar nature and
use in an entity's operations. However, companies should continue to
present land and building separately as given in Ind AS Schedule III and
such presentation needs to be followed consistently.
8.1.1.7. Ind AS Schedule III requires separate disclosure of the amount of
change due to revaluation, where change is 10% or more in the aggregate of
the net carrying value of each class of Property, Plant and Equipment. In
contrast, paragraph 73 of Ind AS 16 requires reconciliation of the carrying
amount at the beginning and end of the period showing increases or
decreases resulting from revaluations, irrespective of the percentage change.
Accordingly, separate presentation of the amount of change due to
revaluation should be continued, irrespective whether such a change is 10%
or more, in order to comply with a broader presentation requirement of Ind
AS 16 and such presentation needs to be followed consistently.
8.1.1.8. As per Ind AS 116, a lessee shall either present in the balance
sheet or disclose in the notes: right-of-use assets separately from other
assets (except those meeting the definition of investment property). If a
lessee does not present right-of-use assets separately in the balance sheet,
the lessee shall:
(i) include right-of-use assets within the same line item as that within
which the corresponding underlying assets would be presented if they
were owned; and
(ii) disclose which line items in the balance sheet include those right-of-
use assets.
8.1.1.9. For assets obtained on lease, and accounted as right-of-use (ROU)
assets, an entity shall apply the presentation and disclosure requirements
under Ind AS 116 in addition to the requirements of Ind AS Schedule III.

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8.1.1.10. For assets given on lease, an entity shall apply the presentation
and disclosure requirements under Ind AS 116 in addition to the
requirements of Ind AS Schedule III.
8.1.2. Capital work-in-progress
As per Ind AS Schedule III, capital advances/ advances for purchase of
capital assets should be included under other non- current assets and hence,
should not be included under capital work-in-progress.
8.1.3. Investment Property
Ind AS-40 Investment Property defines Investment Property as the property
(land or a building—or part of a building—or both) held (by the owner or by
the lessee as a right-of-use asset) to earn rentals or for capital appreciation
or both, rather than for: (a) use in the production or supply of goods or
services or for administrative purposes; or (b) sale in the ordinary course of
business.
Ind AS Schedule III requires a reconciliation of the gross and net carrying
amounts of each class of property at the beginning and end of the reporting
period showing additions, disposals, acquisitions through business
combinations and other adjustments and the related depreciation and
impairment losses or reversals shall be disclosed separately.
Right-of-use assets that meet the definition of investment property must be
presented in the balance sheet as investment property.
The guidance given above on Property, Plant and Equipment, to the extent
applicable, is also to be applied for Investment Property.
8.1.4. Goodwill
Ind AS Schedule III requires a company to present Goodwill as a separate
line item on the face of the balance sheet apart from ‘Other Intangible
Assets’. Further, it requires a reconciliation of the gross and net carrying
amount of goodwill at the beginning and end of the reporting period showing
additions, impairments, disposals and other adjustments.
8.1.5. Other Intangible assets
The company shall disclose the following in the Notes to Accounts:
(i) Classification shall be given as:
(a) Brands / trademarks;

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(b) Computer software;

(c) Mastheads and publishing titles;
(d) Mining rights;
(e) Copyrights, patents, other intellectual property rights, services
and operating rights;
(f) Recipes, formulae, models, designs and prototypes;
(g) Licenses and franchise;
(h) Others (specify nature).
(ii) A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of intangible assets)
and other adjustments and the related amortization and impairment
losses or reversals shall be disclosed separately.
The guidance given above on Property, Plant and Equipment, to the extent
applicable, is also to be used for Other Intangible Assets.
8.1.6. Intangible assets under development
Intangible Assets under development should be disclosed under this head
provided they can be recognized based on the criteria laid down in Ind AS-38
Intangible Assets.
8.1.7. Biological Assets other than bearer plants
As per Ind AS-41 Agriculture, a biological asset is a living animal or plant.
Examples of biological assets are sheep, Trees in a timber plantation, Dairy
Cattle, Cotton plants, Tea bushes, Oil palms, Fruit trees, etc. Some plants,
for example, cotton plants, tea bushes, oil palms, fruit trees, grape vines,
usually meet the definition of a bearer plant. However, the produce growing
on bearer plants, viz., cotton, tea leaves, oil palm fruit, fruits, grapes, are
biological assets other than bearer plants.
As per Ind AS 41, an entity shall present a reconciliation of changes in the
carrying amount of biological assets between the beginning and the end of
the current period. The reconciliation shall include:

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(i) the gain or loss arising from changes in fair value less costs to sell;
(ii) increases due to purchases;
(iii) decreases attributable to sales and biological assets classified as held
for sale (or included in a disposal group that is classified as held for
sale) in accordance with Ind AS 105;
(iv) decreases due to harvest;
(v) increases resulting from business combinations;
(vi) net exchange differences arising on the translation of financial
statements into a different presentation currency, and on the
translation of a foreign operation into the presentation currency of the
reporting entity; and
(vii) other changes.
The guidance given above on Property, Plant and Equipment, to the
extent applicable, is also to be used for Biological Assets other than bearer
plants.
Financial Assets
8.1.8. Non-Current Investments:
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the
bodies corporate that are –
(i) subsidiaries,
(ii) associates,

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(iii) joint ventures, or

(iv) structured entities,
in whom investments have been made and the nature and extent of
the investment so made in each such body corporate (showing
separately investments which are partly-paid). Investments in
partnership firms along with names of the firms, their partners, total
capital and the shares of each partner shall be disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value
thereof;
(b) Aggregate amount of unquoted investments; and
(c) Aggregate amount of impairment in value of investments.
8.1.8.1. Details regarding names of bodies corporate and nature and
extent of the investment made
Ind AS Schedule III, requires companies to give names of the bodies
corporate that are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv)
structured entities. It has done away with the requirement to give names of
all other bodies corporates in which a company has made any form of
investment (i.e. equity shares, preference shares, debentures, mutual fund
units). This is however, subject to the requirements of Ind AS 107 discussed
below.
Ind AS 107 para 11A requires, among other things, entities to disclose which
investments in equity instruments have been designated to be measured at
FVOCI along with the fair value of each such investment at the end of the
reporting period. Accordingly, over and above the requirements of Ind AS
Schedule III, companies will be required to disclose the names, number of
equity instruments held and the face value of such instrument of all other
bodies corporate for which they have designated the investments in equity
instruments at FVOCI.
However, apart from investments in equity instruments designated at FVOCI
and investments in subsidiaries, associates, joint ventures and structured
entities, if a company intends to provide such additional disclosure, it may
choose to do so.

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Under each sub-classification of Investments, there is a requirement to

disclose details of investments including names and the nature and extent of
the investment in each body corporate which is a subsidiary, associate, joint
venture and structured entity. The nature and extent would imply the number
of such instruments held and the face value of such instrument. There is also
a requirement to disclose separately, investments which are partly-paid.
It is advisable to clearly disclose whether investments are fully paid or partly
paid.
8.1.8.2. Disclosure of aggregate amount of investments and market
value thereof
Ind AS Schedule III requires disclosure of the aggregate amount of quoted
investments and market value thereof and the aggregate amount of unquoted
investments. The aggregate amount of such investments would include
aggregate amount of carrying value of these investments as at the reporting
date as included in the financial statements. This disclosure would need to
be made separately for non-current investments and current investments.
Also, refer para 8.1.14 below (Pg 44).
The market value of quoted investments would, generally, mean disclosure of
the ‘fair value’ of quoted investments as at each reporting date. Ind AS 113
defines fair value and also states that the fair value of assets might be
affected when there has been a significant decrease in the volume or level of
activity for that asset in relation to normal market activity for that asset. A
decrease in the volume or level of activity on its own may not indicate that a
quoted price does not represent fair value. However, based on the
company’s evaluation, if it determines that a quoted price does not represent
fair value, then the company shall disclose the market value of quoted
investments based on the quoted price which would be different from the
investment’s fair value.
Where the investments are measured at either FVTPL or FVOCI, as per Ind
AS 109, the carrying amount and the market value of such investments are
expected to be same subject to considerations of fair value as per the above
paragraph, and should be disclosed accordingly.
The term “quoted investments” has not been defined in Ind AS Schedule III.
The expression “quoted investment”, as defined in the erstwhile pre-Revised
Schedule VI under the Companies Act, 1956, means an investment in
respect of which there has been granted a quotation or permission to deal on
a recognized stock exchange, and the expression “unquoted investment”
shall be construed accordingly.

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

8.1.8.3. Aggregate amount for impairment in value of investments

As per Ind AS Schedule III, this amount should be disclosed separately. As
per Ind AS 109, the company is required to recognize a loss allowance (i.e.
impairment) for expected credit losses on investments measured at
amortized cost. Such loss allowance should be presented as an adjustment
to the amortized cost of the investment.
As per Ind AS 109, in case of debt investments measured at fair value
through other comprehensive income, the fair value changes will be
presented in other comprehensive income. A company shall estimate a
portion of fair value change, if any, attributable to a change in credit risk of
such investment, by applying the impairment requirements of Ind AS 109 in
recognising and measuring the loss allowance, and disclose the same in the
profit and loss section of the statement of profit and loss with a
corresponding impact in other comprehensive income section. In other
words, the company shall not reduce the carrying amount (which is the fair
value) of such investment in the balance sheet as it already includes the
effect of credit risk. Hence, investment needs to be presented at fair value.
Ind AS 109 does not permit a separate calculation / evaluation of impairment
amount for all equity investments measured at fair value and all other
investments measured at fair value through profit or loss. Hence, in case of
such investments, this disclosure is not applicable.
For the purpose of disclosing aggregate provision for impairment in the value
of investments, an entity shall disclose an amount equal to the aggregate
amount of impairment recognized and measured in accordance with Ind AS
109, as stated in the paragraphs above.
The aggregate provision for impairment as per Ind AS 36 in the value of
investments may be either presented in totality, where relevant, for all the
investments or separately for each class of investments (e.g., ‘Investment at
amortized cost’, ‘Investment in debt instruments at FVOCI’) disclosed in the
financial statements.
8.1.8.4. Investments in Subsidiaries / Associates / Joint Ventures
The terms ‘subsidiary’, ‘associate’ and ‘joint venture’ shall be as defined in
the respective Ind AS. Ind AS 32, Ind AS 107 and Ind AS 109 scope out
those interests in subsidiaries, associates, joint ventures that are accounted
for in accordance with Ind AS 110 Consolidated Financial Statements, Ind AS

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

27 Separate Financial Statements or Ind AS 28 Investments in Associates

and Joint Ventures. However, such investments still meet the definition of
financial instruments and should be presented within financial assets even if
Company chooses to present these as a separate line item on the face of a
company’s standalone balance sheet. In any case, the disclosure
requirements of Ind AS 107 would not apply to such investments.
In some cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an
entity to account for an interest in a subsidiary, associate or joint venture in
accordance with Ind AS 109. Accordingly, only in its Standalone Financial
Statements, the entity shall present such interests in a subsidiary, associate
or joint venture under the head ‘Investments’ separately either on the face of
a company’s standalone balance sheet or in the notes. Such presentation
would be in line with the guidance provided in para 8.1.8.6 (Pg 28) and
disclosure requirements of Ind AS 107 would also apply.
For an entity’s Consolidated Financial Statements, investments accounted
using the equity method (i.e. associates and joint ventures) need to be
shown as a separate line item outside ‘Financial Assets’ as per the
requirements of Ind AS 1, Para 54.
8.1.8.5. Structured Entities
In Ind AS Schedule III, in addition to investment in subsidiaries, associates,
joint ventures, there is also a requirement to disclose the names of bodies
corporate, including separate disclosure of investments in “structured
entities”. Ind AS-112 Disclosure of Interests in Other Entities states that a
“structured entity” is an entity that has been designed so that voting or similar
rights are not the dominant factor in deciding who controls the entity, such as
when any voting rights are related to administrative tasks only and the
relevant activities are directed by means of contractual arrangements.
As per Ind AS Schedule III, investments in all structured entities need to be
given, irrespective of whether controlled or not.
Ind AS Schedule III also requires disclosure of the ‘nature and extent’ of the
investment so made. In a normal company, the nature and extent would
imply the number of such instruments held and the face value of such
instrument. However, in case of a Structured Entity, rights are mainly
established by way of contractual arrangements and therefore as a part of
‘nature and extent’, a brief description of the nature of contracts may be

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

provided along with the rights held in such entities as evidenced by such
contracts.
8.1.8.6. Classification of Investments
As per Ind AS 107, para 8, the carrying amounts of each investments under
the scope of Ind AS 109 shall be disclosed either in the Balance Sheet or in
the Notes under the following categories:
(a) Measured at amortized cost;
(b) Mandatorily measured at FVTPL;
(c) Designated at FVTPL;
(d) Measured at FVOCI;
(e) Designated at FVOCI (e.g., investments in equity instruments).
Ind AS Schedule III does not specify whether the Investments should first be
categorized as above or should be first classified as per the nature (e.g.,
investment in equity instruments, investment in preference shares,
investment in debentures or bonds, etc.). Ind AS Schedule III allows addition
or substitution of line items on the face of the Financial Statements in order
to comply with the Act or with Ind AS. Accordingly, the companies may
disclose Investments by grouping them in the following manner:
(i) Broad Categories as per Ind AS 107 (see above (a) to (e));
(ii) Under each board categorization, nature-based classification as per
Ind AS Schedule III; (for e.g., Investment in Equity Instruments,
Investments in Preference Shares, etc.)
(iii) Under each nature-based classification, grouping based on the
relationship of bodies corporate (viz., subsidiaries, associates, joint
ventures, and structured entities) as required by Ind AS Schedule III;
and
(iv) Under each grouping of bodies corporate, details giving names of
bodies corporate and nature and extent of investments in bodies
corporate as required by Ind AS Schedule III. (for e.g., details are
required for investments at FVOCI, investment in subsidiary, etc.).
An example is given below only for illustrative purposes, wherein it is
assumed that each investment has such terms and conditions that qualify
them for being presented under respective categories of classification and
measurement as per Ind AS 109. Companies should carefully assess the

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terms and conditions specific to each investment for presenting them under
the classification and measurement categories of Ind AS 109:
Investments
A) Investments at amortized cost
(a) Investments in Redeemable Preference Shares
(b) Investments in Redeemable Debentures
(c) Investments in Redeemable Bonds
(d) Investments in Government Securities
(e) ……..
B) Investments at fair value through other comprehensive income
(a) Investments in Equity Instruments
(b) Investments in Redeemable Preference Shares
(c) Investments in Redeemable Debentures
(d) Investments in Redeemable Bonds
(e) Investments in Government Securities
(f) …….
C) Investments at fair value through profit or loss
(a) Investments in Equity Instruments
(b) Investments in Redeemable Preference Shares
(c) Investments in Optionally Convertible Preference Shares
(d) Investments in Optionally Convertible Debentures
(e) Investments in Redeemable bonds
(f) Investments in Government Securities
(g) …….
Where an entity chooses not to provide investment details in the format given
above, it could present the information in other ways by changing the order
of grouping. For e.g., Investments may be classified first as per their nature
(investment in equity instruments, investment in preference shares, etc.) as
given in Ind AS Schedule III and then within each nature, sub-classified into
broad categories (investments at amortized cost, etc.).

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8.1.8.7. Disclosure relating to partnership firms in which the company

has invested (under Non-current Investments in the Balance Sheet)
A company, as a juridical person, can enter into partnership. The Schedule
III provides for certain disclosures where the company is a partner in
partnership firms.
In the Balance Sheet, under the sub-heading “Non-current Investments”,
separate disclosure is to be made of any investment in the capital of
partnership firm by the company. In addition, in the Notes to Accounts
separate disclosure is required with regard to the names of the firms in which
the company is a partner, along with the names of their partners, total capital
and the shares of each partner.
The disclosure in the Balance Sheet relating to the value of the investment in
the capital of a partnership firm as the amount to be disclosed as on the date
of the Balance Sheet can give rise to certain issues, the same are discussed
in the following paragraphs:
(a) In case of a change in the constitution of the firm during the year, the
names of the other partners should be disclosed by reference to the
position existing as on the date of the company’s Balance Sheet.
(b) The total capital of the firm to be disclosed should be with reference to
the amount of the capital on the date of the company’s Balance Sheet.
If it is not practicable to draw up the Financial Statements of the
partnership upto such date and, are drawn up to different reporting
dates, drawing analogy from Ind AS 110 and Ind AS 28, adjustments
should be made for the effects of significant transactions or other
events that occur between those dates and the date of the parent’s
Financial Statements. In any case, the difference between reporting
dates should not be more than three months. In such cases, the
difference in reporting dates should be disclosed. This is relevant for
Consolidated Financial Statements.
(c) For disclosure of the share of each partner, it is suggested to disclose
share of each partner in the profits of the firm rather than the share in
the capital since, ordinarily, the expression “share of each partner” is
understood in this sense. Moreover, disclosure is already required of
the total capital of the firm as well as of the company’s share in that
capital. The share of each partner should be disclosed as at the date
of the company’s Balance Sheet.

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(d) The Investments Note in the Balance Sheet is required to disclose,

inter alia, the total capital of the partnership firm in which the company
is a partner. Where such a partnership firm has separate accounts for
partner’s capital, drawings or current, loans to or from partners, etc.,
disclosure must be made with regard to the total of the capital
accounts alone, since this is what constitutes the capital of the
partnership firm. Where, however, such accounts have not been
segregated, or where the partnership deed provides that the capital of
each partner is to be calculated by reference to the net amount at his
credit after merging all the accounts, the disclosure relating to the
partnership capital must be made on the basis of the total effect of
such accounts taken together.
Separate disclosure is required by reference to each partnership firm in
which the company is a partner. The disclosure must be made along with the
name of each such firm and must then indicate the total capital of each firm,
the names of all the partners in each firm and the respective shares of each
partner in the respective firm.
A limited liability partnership is a body corporate and not a partnership firm
as envisaged under the Partnership Act, 1932. Hence, disclosures pertaining
to Investments in partnership firms will not extend to investments in limited
liability partnerships. The investments in limited liability partnerships will be
disclosed separately under ‘other investments’. Also, other disclosures
prescribed for Investment in partnership firms, need not be made for
investments in limited liability partnerships.
8.1.8.8. Application money paid towards securities
Any application money paid towards securities, where security has not been
allotted on the date of the Balance Sheet, shall be disclosed as a separate
line item under ‘other non-current financial assets’. If the amount is material,
details about the date of allotment or when the allotment is expected to be
completed may also be disclosed.
In case the investment is of current investment in nature, such share
application money shall be accordingly, disclosed under other current
financial assets.
8.1.9. Non-current Trade Receivables
Non-current Trade Receivables, shall be sub-classified as:
(i) (a) Considered good – Secured;
(b) Considered good – Unsecured;

31
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(c) Trade Receivables which have significant increase in credit risk

(d) Trade Receivables – credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms
or private companies respectively in which any director is a partner or
a director or a member should be separately stated.
(iv) For trade receivables outstanding, following ageing schedule shall be
given:
Trade Receivables Ageing Schedule
(Amount in Rs.)
Particulars Outstanding for following periods from
due date of payment#
Less 6 1-2 2-3 More Total
than 6 months - years years than
months 1 year 3 years
(i) Undisputed
Trade receivables –
considered good
(ii) Undisputed
Trade Receivables –
which have significant
increase in credit risk
(iii) Undisputed
Trade Receivables –
credit impaired
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
A receivable shall be classified as 'trade receivable' if it is in respect of the
amount due on account of goods sold or services rendered in the normal
course of business and the company has a right to an amount of
consideration that is unconditional (i.e. if only the passage of time is required
before payment of that consideration is due). Hence, amounts due under
contractual rights, other than arising out of sale of goods or rendering of
services, cannot be included within Trade Receivables. Such items may
include dues in respect of insurance claims, sale of Property, Plant and
Equipment, contractually reimbursable expenses, etc. Such receivables
should be classified as "other financial assets" and each such item should be
disclosed nature-wise.
Impairment on Trade Receivables
As per Ind AS 109, the company is required to recognize a loss allowance
(i.e. impairment) for expected credit losses on financial assets including trade
receivables.
The impairment requirements in Ind AS 109 are based on forward-looking
expected credit loss (ECL) model which requires an application of one of the
following approaches:
a) The general approach, where an entity recognises ECLs in the following
stages viz.,
• credit exposures for which there has not been a significant
increase in credit risk since initial recognition;
• credit exposures for which there has been a significant increase in
credit risk since initial recognition but not credit-impaired;
• credit exposures that are credit impaired;
b) The simplified approach where an entity does not separately track
changes in credit risk.
c) The purchased or originated credit-impaired approach.
For trade receivables and contract assets under Ind AS 115 that do not
contain a significant financing component, it is a requirement to apply a
simplified approach while for trade receivables and contract assets under Ind
AS 115 that contain a significant financing component, and for lease

33
GN on Division II - Ind AS Schedule III to the Companies Act 2013

receivables, a choice between a general approach or a simplified approach is

available.
Application Guidance to Ind AS 109 allows using practical expedients when
measuring expected credit losses if they are consistent with the
measurement principles reflecting a probability-weighted outcome, the time
value of money and reasonable and supportable information that is available
without undue cost or effort at the reporting date about past events, current
conditions and forecasts of future economic conditions, for e.g., using a
provision matrix based calculation of expected credit loss on trade
receivables.
Disclosure if ‘Loss allowance’ is as per the general approach
If the company choses to calculate impairment under the general approach
for trade receivables and contract assets containing significant financing
component, then the disclosure representing the following for different
categories of Trade Receivables would be provided:
Non-current Trade Receivables
Rs. Rs.
Considered good – Secured --
Considered good – Unsecured* 1,25,000
Trade Receivables which have significant 20,000
increase in credit risk
Trade Receivables – credit impaired 5,000 1,50,000
Less: Loss allowance (27,000)
1,23,000
* It is assumed for simplicity that all the Trade Receivables considered good
are Unsecured.
Except in case of purchased or originated credit-impaired trade receivables
where a company only recognises cumulative changes in lifetime expected
credit losses since initial recognition, the impairment loss allowance does not
reduce the carrying amount of the trade receivables. Accordingly, the total
expected credit loss allowance is presented as a deduction in a single line
item from the total carrying amount of the trade receivables, as shown above.
In disclosing ‘Trade Receivables which have significant increase in credit
risk’, the company shall disclose the amount of trade receivables that have

34
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

experienced significant increase in credit risk since initial recognition but are
not credit-impaired.
In disclosing ‘Trade Receivables – credit impaired’, the company shall
disclose the amount of trade receivables which are credit impaired as defined
in Ind AS 109.
The balance amount of trade receivables which have neither experienced
significant increase in credit risk nor are credit impaired as defined in Ind AS
109, shall be disclosed as ‘good’.
The corresponding amount of loss allowance on all the three categories of
trade receivables viz., considered good, considered as significant increase in
credit risk and considered credit impaired would be aggregated and
presented as a separate line item.
For calculating the loss allowance, reference shall be drawn from Ind AS 109
which defines ‘credit loss’ as ‘the difference between all contractual cash
flows that are due to an entity in accordance with the contract and all the
cash flows that the entity expects to receive (i.e. cash shortfalls), discounted
at the original effective interest rate (or credit-adjusted effective interest rate
for purchased or originated credit-impaired financial assets) and including
cash flows from the sale of collateral held or other credit enhancements that
are integral to the contractual terms’.
Disclosure if ‘Loss allowance’ is as per the simplified approach
If the company choses to calculate impairment under the simplified approach
for trade receivables and contract assets containing significant financing
component and for the impairment calculated on trade receivables and
contract assets that do not contain significant financing component, then the
company is not required to separately track changes in credit risk of trade
receivables and contract assets as the impairment amount represents
“lifetime” expected credit loss.
Accordingly, based on a harmonious reading of Ind AS 109 and the break-up
requirements under Schedule III, the disclosure for all such trade receivables
would be made as below, irrespective of whether they contain a significant
financing component or not:
Non-current Trade Receivables
Rs. Rs.
Considered good – Secured --
Considered good – Unsecured* 1,50,000

35
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Trade Receivables which have (Refer para below)

significant increase in credit risk
Trade Receivables – credit impaired (Refer para below) 1,50,000
Less: Loss allowance (27,000)
1,23,000
* It is assumed for simplicity that all the Trade Receivables are Unsecured.
Break-up of trade receivables into ‘significant increase in credit risk’ and
‘credit impaired’
Ind AS 109 neither prohibits nor mandates a company to perform individual
assessment of credit risk for some of its financial assets however, in practice,
companies do perform individual credit risk assessment on specific parties
despite the normal collective pool-based assessment for a group of parties
falling under a particular credit exposure bucket (e.g., ageing, rating, etc.).
Individual credit risk assessment may not always indicate that a trade
receivable has experienced a significant increase in credit risk or is credit
impaired. Basis such individual credit risk assessment, a company may or
may not provide for a loss allowance.
Accordingly, the disclosure of trade receivables in the manner as required by
Schedule III shall be made specifically where the company has a trade
receivable for which credit risk is assessed individually. However, the
disclosure of ‘trade receivables – credit impaired’ shall be made if such trade
receivables meet the definition of ‘credit impaired’ as per Ind AS 109.
Further, when a company has assessed credit risk on an individual basis
irrespective of recognition of a loss allowance, it is recommended that a
company should disclose the following by way of a footnote just after the
illustrative table given above:
• The amount of trade receivables for which the company has assessed
credit risk on an individual basis; and
• The amount of loss allowance recognized for such trade receivables
Presentation of loss allowance
Except in case of purchased or originated credit-impaired trade receivables
where a company only recognises cumulative changes in lifetime expected
credit losses since initial recognition, the impairment loss allowance does not
reduce the carrying amount of the trade receivables. Accordingly, the total

36
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

expected credit loss allowance is presented as a deduction in a single line

item from the total carrying amount of the trade receivables, as shown above.
The above disclosure is consistent with the requirements of Ind AS 109 and
modification of the requirements under Ind AS Schedule III may be done in
light of para 2 of ‘General Instructions for Preparation of Financial
Statements of a Company Required to comply with Ind AS’ to Ind AS
Schedule III.
Ageing of non-current trade receivables outstanding
This disclosure requires the company to provide ageing of the trade
receivables outstanding as on the balance sheet date and as per the
prescribed format. However, in order to tie-up the amounts presented in the
‘total’ column with the amounts presented in the financial statements or
notes, two additional columns with heading ‘Unbilled’ and the heading ‘Not
due’ shall be added before the ageing columns to separately disclose the
amount for unbilled receivables and the amount of trade receivables which
are not due, respectively. An entity could have an unconditional right to
consideration before it invoices its customers, in which case it records an
unbilled receivable. For example, this could occur if an entity has satisfied its
performance obligations but has not yet issued the invoice.
The amounts presented under disputed and undisputed categories for each
category of credit profile should add up and match with the total amount
presented in a separate disclosure for the same category of credit profile. For
e.g., the amount of ‘Undisputed Trade Receivables – considered good’ and
‘Disputed Trade Receivables – considered good’ when added up should
match with the added up amount of ‘Trade Receivables considered good –
Secured’ and ‘Trade Receivables considered good – Unsecured’ provided as
part of a separate disclosure.
The ageing of the trade receivables needs to be determined from the due
date of the invoice. Due date is generally considered to be the date on which
the payment of an invoice falls due. The due date of an invoice is determined
based on terms agreed upon between the buyer and supplier.
In case if the due date is neither agreed in writing nor orally, then the ageing
related disclosure needs to be prepared from the transaction date. Ind AS
115 requires that an asset arising from contract with customers to be
recognised as a receivable when the entity’s right to consideration is
unconditional (that is, when payment is due only on the passage of time) and
such recognition date, which is based on reasonable evidences in

37
GN on Division II - Ind AS Schedule III to the Companies Act 2013

compliance with the principles of the applicable accounting standards, can be

considered as transaction date for the purpose of ageing disclosure.
Schedule III requires split of trade receivables between ‘disputed’ and
‘undisputed’. These terms have not been defined in the Schedule III. A
dispute is a matter of facts and circumstances of the case; however, dispute
means disagreement between two parties demonstrated by some positive
evidence which supports or corroborates the fact of disagreement. In case
there are any disputes such fact should also be considered while assessing
the credit risk associated with respective party while computing the
impairment loss. However, a dispute might not always be an indicator of
counterparty’s credit risk and vice-versa. Hence, both of these should be
evaluated independently for the purpose of making these disclosures.
8.1.10. Non-current Loans
(i) Loans shall be classified as:
(a) [Omitted];
(b) Loans to related parties (giving details thereof);
(c) Other loans (specify nature).
(ii) The above shall also be separately sub-classified as:
(a) Loans Receivables considered good – Secured;
(b) Loans Receivables considered good – Unsecured;
(c) Loans Receivables which have significant increase in credit risk
and
(d) Loans Receivables – credit impaired.
(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by directors or other officers of the company or any of them
either severally or jointly with any other persons or amounts due by
firms or private companies respectively in which any director is a
partner or a director or a member should be separately stated.
Details of loans to related parties need to be disclosed. Since Ind AS
Schedule III states that the terms used therein shall have the same meanings
assigned to them in applicable Ind AS, the term “details” shall mean the
disclosure requirements contained in Ind AS-24 Related Parties Disclosures.

38
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Other loans may include loans given to parties other than related parties, for
e.g., loans to employees, which are not expected to be realized within the
next twelve months from the Balance Sheet date.
Each item of loans should be further sub-classified as:
(a) Loans Receivables considered good – Secured;
(b) Loans Receivables considered good – Unsecured; and
(c) Loans Receivables which have significant increase in credit risk; and
(d) Loans Receivables – credit impaired
The corresponding amount of loss allowance on all the three categories of
loan receivables viz., considered good, considered as significant increase in
credit risk and considered credit impaired would be aggregated and
presented as a separate line item.
Disclosure if ‘Loss allowance’ is as per the general approach
The company would disclose the following for different categories of Loan
Receivables:
Non-current Loan Receivables
Rs. Rs.
Considered good – Secured --
Considered good – Unsecured* 2,60,000
Loan Receivables which have significant 1,20,000
increase in credit risk
Loan Receivables – credit impaired 5,000 3,85,000
Less: Loss allowance (127,000)
2,58,000
* It is assumed for simplicity that all the Loan Receivables considered good
are Unsecured.
Except in case of purchased or originated credit-impaired trade receivables
where a company only recognises cumulative changes in lifetime expected
credit losses since initial recognition, the impairment loss allowance does not
reduce the carrying amount of the loan receivables. Accordingly, the total
expected credit loss allowance is presented as a deduction in a single line
item from the total carrying amount of the loan receivables, as shown above.

39
GN on Division II - Ind AS Schedule III to the Companies Act 2013

In disclosing ‘Loan Receivables which have significant increase in credit risk’,

the company shall disclose the amount of loan receivables that have
experienced significant increase in credit risk since initial recognition but are
not credit-impaired.
In disclosing ‘Loan Receivables – credit impaired’, the company shall
disclose the amount of loan receivables which are credit impaired as defined
in Ind AS 109.
The balance amount of loan receivables which have neither experienced
significant increase in credit risk nor are credit impaired as defined in Ind AS-
109, shall be disclosed as ‘good’.
The corresponding amount of loss allowance on all the three categories of
loans receivables viz., considered good, considered as significant increase in
credit risk and considered credit impaired would be aggregated and
presented as a separate line item.
For calculating the loss allowance, reference shall be drawn from Ind AS 109
which defines ‘credit loss’ as ‘the difference between all contractual cash
flows that are due to an entity in accordance with the contract and all the
cash flows that the entity expects to receive (i.e. cash shortfalls), discounted
at the original effective interest rate (or credit-adjusted effective interest rate
for purchased or originated credit-impaired financial assets) and including
cash flows from the sale of collateral held or other credit enhancements that
are integral to the contractual terms’.
8.1.11. Other non-current financial assets
Other financial assets include:
(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) others (to be specified)
Only security deposits which meet the definition of financial assets as per Ind
AS 109 should be presented under this category.
As per Ind AS Schedule III, Bank deposits with more than 12 months maturity
shall be disclosed under ‘Other financial assets’. The maturity should be
construed as remaining maturity of more than 12 months.
The following disclosures as per Note 6(C) of General Instructions for
Preparation of Balance Sheet should be provided for such bank deposits:

40
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(a) Earmarked balances with banks (for e.g., for unpaid dividend) shall be
separately stated;
(b) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately;
(c) Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated.
Ind AS Schedule III does not specify about the presentation of finance lease
receivables. The scope paragraph of Ind AS 32, Ind AS 109 and Ind AS 107
acknowledges that rights and obligations under leases, to which Ind AS 116
applies, are financial instruments but their measurement is excluded from
the scope of these standards. Accordingly, the non-current portion of a
finance lease receivable shall be presented here under ‘Other non-current
financial assets’ while its current portion shall be presented under ‘Other
current financial assets’. The disclosure requirements of Ind AS 107 would
apply to such receivables.
8.1.11.1 Contract assets and impairment thereof
Ind AS 115 requires in case of a contract with customer, when either party
has performed, to present a contract asset in the balance sheet as a line
item separate from trade receivables. Contract asset arises if an entity
performs by transferring goods or services to a customer before the
customer pays consideration or before payment is due. It excludes any
amounts presented as a receivable.
The presentation requirements of trade receivables (viz., secured and
unsecured, considered good, significant increase in credit risk and credit
impaired) may be applied to contract assets if a company has sufficient and
appropriate information.
Ind AS 115 also requires impairment of contract assets to be measured
presented and disclosed on the same basis as a financial asset that is within
the scope of Ind AS 109.
Accordingly, all requirements as outlined above for trade receivables
(Section 8.1.9) shall be applied to contract assets as well, to the extent
applicable and based on the information available, for e.g., ageing analysis
for contract assets may not be feasible.

41
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Unless a company presents its balance sheet on a liquidity basis, it will need
to present contract assets arising from contracts within the scope of Ind AS
115 as current or non-current in the balance sheet. Companies should
consider the requirements of current / non-current classification (Section 7)
above.
8.1.12. Other non-current assets
Other non-current assets shall be classified as:
(i) Capital Advances; and
(ii) Advances other than capital advances
Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties(giving details thereof);and
(c) Other advances (specify nature).
Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated. In case advances are of the nature of a
financial asset as per relevant Ind AS, these are to be disclosed under ‘other
financial assets’ separately.
(iii) Others (specify nature)
Under Ind AS Schedule III, Capital Advances are not to be classified under
Capital Work in Progress, since they are specifically to be disclosed under
other non-current assets.
Capital advances are advances given for procurement of Property, Plant and
Equipment including bearer plants, Investment Property, Other Intangible
assets or Biological Assets which are non-current assets. Typically,
companies do not expect to realize them in cash. Rather, over the period,
these get converted into Property, Plant and Equipment including bearer
plants, Investment Property, Other Intangible assets or Biological Assets,
respectively, which are non-current assets. Hence, capital advances should
be treated as other non-current assets irrespective of when the Property,
Plant and Equipment including bearer plants, Investment Property, Other
Intangible assets or Biological Assets are expected to be received.
Security Deposits under other non-current assets should include those
deposits which do not meet the definition of a financial asset.

42
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Advances to related parties under other non-current assets may include,

long-term advances given to group entities. Details of advances to related
parties need to be disclosed. Since Ind AS Schedule III states that the terms
used therein should be interpreted based on applicable Ind AS, the term
“details” should be interpreted to mean the disclosure requirements
contained in Ind AS 24.
Other advances include all other items in the nature of advances which do
not meet the definition of a financial asset viz., prepaid expenses, CENVAT
credit receivable, VAT credit receivable, Service tax credit receivable, goods
and service tax input receivable etc., which are not expected to be realized
within the next twelve months from the Balance Sheet date.
It may be noted that in case advances are of the nature of a financial asset
as per Ind AS 32, these are to be disclosed under ‘other financial assets’
separately.
Current assets
As per Ind AS Schedule III, all items of assets and liabilities are to be
bifurcated between current and non-current portions. In some cases, the
items presented under the “non-current” head of the Balance Sheet may not
have a corresponding “current” head under the format given in Ind AS
Schedule III. Since Ind AS Schedule III permits the use of additional line
items, in such cases the current portion should be classified under the
“Current” category of the respective balance as a separate line item and
other relevant disclosures should be made.
8.1.13. Inventories
(i) Inventories shall be classified as:
(a) Raw materials;
(b) Work-in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools;
(g) Others (specify nature).

43
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of

inventories.
(iii) Mode of valuation shall be stated.
As per Ind AS Schedule III, goods in transit should be included under
relevant heads with suitable disclosure. Further, mode of valuation for each
class of inventories should be disclosed.
The heading Finished goods should comprise of all finished goods other than
those stock-in-trade acquired for trading purposes.
Financial Assets
8.1.14. Current Investments
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investment in Preference Shares
(c) Investments in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the
bodies corporate that are –
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of
the investment so made in each such body corporate (showing
separately investments which are partly-paid).
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investments and market value
thereof;
(b) Aggregate amount of unquoted investments; and
(c) Aggregate amount of impairment in value of investments.

44
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Guidance in respect of above items may be drawn from the guidance given in
respect of Non-current investments to the extent applicable.
Current Investments would typically include investments which either have a
remaining maturity of less than twelve months or within the company’s
operating cycle or are intended by the company to be sold within twelve
months or within the company’s operating cycle. Thus, a non-current
investment will be classified as a current investment due to passage of time.
Even though Ind AS Schedule III does not explicitly state the requirement to
disclose, with regard to current investments in partnership firms presented
under current assets, the names of the firms (with the names of all their
partners, total capital and the shares of each partner), the same should be
made in line with the disclosure made for investments in partnership firms
presented under non- current assets.
8.1.15. Current Trade Receivables
(i) Trade receivables shall be sub-classified as:
(a) Trade receivables – Considered Good Secured;
(b) Trade receivables – Considered Good Unsecured;
(c) Trade receivables which have significant increase in credit risk
(d) Trade Receivables – Credit impaired.
(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms
or private companies respectively in which any director is a partner or
a director or a member should be separately stated.
For trade receivables outstanding, following ageing schedule shall be given:

45
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Trade Receivables ageing schedule

(Amount in Rs.)
Particulars Outstanding for following periods from
due date of payment#

Less 6 1-2 2-3 More Total

than 6 months - years years than
months 1 year 3 years
(i) Undisputed
Trade receivables –
considered good
(ii) (ii) Undisputed Trade
Receivables – which
have significant
increase in credit risk
(iii) Undisputed
Trade Receivables –
credit impaired
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired
# similar information shall be given where no due date of payment is
specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
A trade receivable will be treated as current, if it is likely to be realized within
twelve months from the date of Balance Sheet or within the operating cycle
of the business.

46
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Ind AS Schedule III requires separate disclosure of debts due by directors or

other officers of the company or any of them either severally or jointly with
any other person or debts due by firms or private companies respectively in
which any director is a partner or a director or a member.
Ind AS Schedule III requires separate disclosure of the ageing schedule of
“Trade Receivables outstanding” for both viz, the non-current and the current
portion of trade receivables.
All other guidance given under Non-current Trade Receivables to the extent
applicable, are applicable here also.
8.1.16. Cash and Bank Balances
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks (of the nature of cash and cash
equivalents);
(b) Cheques, drafts on hand;
(c) Cash on hand;
(d) Others (specify nature).
(ii) Bank balances other than cash and cash equivalents as above,
shall be disclosed below cash and cash equivalents on the face of
the Balance Sheet
Further, Note 6(C) of General Instructions for Preparation of Balance Sheet
requires the following disclosures with regard to cash and bank balances:
(a) Earmarked balances with banks (for e.g., for unpaid dividend) shall be
separately stated;
(b) Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately;
(c) Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated.
Cash and cash equivalents is not defined in Ind AS Schedule III however,
according to Ind AS-7 Statement of Cash Flows, Cash is defined to include
cash on hand and demand deposits with banks. Cash Equivalents are
defined as short term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to an insignificant risk of
changes in value.

47
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Ind AS 7 further explains that an investment normally qualifies as a cash

equivalent only when it has a short maturity of, say, three months or less
from the date of acquisition. This would include term deposits with banks that
have an original maturity of three months or less. However, bank balances
(including term deposits) held as margin money or security against
borrowings are neither in the nature of demand deposits, nor readily
available for use by the company, and accordingly, do not meet the aforesaid
definition of cash equivalents.
The disclosure regarding ‘bank balances other than cash and cash
equivalents’ should include items such as Balances with banks held as
margin money or security against borrowings, guarantees, etc. and bank
deposits with original maturity of more than three months but less than 12
months.
Generally, there should not be a difference in the amount of cash and cash
equivalent as per Ind AS 1 and as per Ind AS 7. However, as per para 8 of
Ind AS 7 “where bank overdrafts which are repayable on demand form an
integral part of an entity’s cash management, bank overdrafts are included as
a component of cash and cash equivalents. A characteristic of such banking
arrangements is that the bank balance often fluctuates from being positive to
overdrawn.” Although Ind AS 7 permits bank overdrafts to be included as
cash and cash equivalent, however for the purpose of presentation in the
balance sheet, it is not appropriate to include bank overdraft as a component
of cash and cash equivalents unless the offset conditions as given in
paragraph 42 of Ind AS 32 are complied with. Bank overdraft, in the balance
sheet, should be included as ‘borrowings’ under Financial Liabilities.
8.1.17. Current Loans
(i) Current loans shall be classified as:
(a) [Omitted];
(b) Loans to related parties (giving details thereof);
(b) Others (specify nature).
(ii) The above shall also be sub-classified as:
(a) Loans receivables – Considered Good - Secured;
(b) Loans receivables – Considered Good - Unsecured;
(c) Loans receivables which have significant increase in credit risk
(d) Loans receivables – Credit Impaired.

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(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by directors or other officers of the company or any of them
either severally or jointly with any other person or amounts due by
firms or private companies respectively in which any director is a
partner or a director or a member shall be separately stated.
The guidance for disclosures under this head should be drawn from guidance
given for Non-current Loans.
8.1.18. Other financial assets
This is an all-inclusive heading, which incorporates financial assets that do
not fit into any other financial asset categories, such as, Security Deposits.
8.1.19. Current Tax Assets (Net)
If amount of tax already paid in respect of current and prior periods exceeds
the amount of tax due for those periods (assessment year-wise and not
cumulative unless tax laws allow for e.g., say tax laws in the country of
overseas subsidiary permits), then such excess tax shall be recognised as
an asset. The excess tax paid (presented as current tax assets) may not be
expected to be recovered / realised within one year from the balance sheet
date and if so, the same shall be presented under non-current assets. An
entity should evaluate whether current tax assets meet the definition of
current assets or not and should accordingly present the same.
8.1.20. Other current assets (specify nature)
This is an all-inclusive heading, which incorporates current assets that do not
fit into any other asset categories mentioned above. Other current assets
shall be classified as:
(i) Advances other than capital advances:
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any of
them either severally or jointly with any other persons or
advances to firms or private companies respectively in which

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any director is a partner or a director or a member should be

separately stated.
(ii) Others (specify nature)
In case any amount classified under this category is doubtful, it is advisable
that such doubtful amount as well as any provision made against the same
should be separately disclosed.
Advances to related parties under other current assets may include,
advances given to group entities for group expenses, say for e.g., the
company’s share in group employees’ insurance policy premium whereby
such advance will be adjusted in future against the premium payment made
by the relevant group entity who holds the insurance policy.
The guidance for disclosures under this head should be drawn from guidance
given for Other Non-current Assets.
8.2. Equity and Liabilities
Equity
Under this head, following line items are to be disclosed on the face of the
Balance Sheet:
• Equity Share Capital;
• Other Equity;
Ind AS Schedule III, Part I – Format of Balance Sheet includes not only the
format of Balance Sheet but also includes a ‘Statement of Changes in Equity’
comprising (A) Equity Share Capital and (B) Other Equity. Presentation and
Disclosures for both of these are included in Note 6(D) to General
Instructions for Preparation of Balance Sheet.
In the Statement of Changes in Equity, the portion for ‘Equity Share Capital’
provides reconciliation for current / previous reporting periods:
(a) Balance at the beginning of the current / previous reporting period;
(b) Changes in Equity Share Capital due to prior period errors;
(c) Restated balance at the beginning of the current / previous reporting
period
(d) Changes in equity share capital during the current / previous year;
(e) Balance at the end of the current / previous reporting period.

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As a part of Statement of Changes in Equity, the portion for ‘Other Equity’

requires an entity to provide a reconciliation during a particular reporting
period, as a part of one single statement, of all items other than equity share
capital, that are attributable to the holders of equity instruments of an entity.
The items included in columnar form are listed below:
(a) Share application money pending allotment;
(b) Equity component of compound financial instruments;
(c) Reserves and Surplus:
(i) Capital Reserve;
(ii) Securities Premium;
(iii) Other Reserves (specify nature);
(iv) Retained Earnings;
(d) Debt instruments at fair value through other comprehensive income;
(e) Equity instruments at fair value through other comprehensive income;
(f) Effective portion of Cash Flow Hedges;
(g) Revaluation Surplus;
(h) Exchange differences on translating the financial statements of a
foreign operation;
(i) Other items of other comprehensive income (specify nature);
(j) Money received against share warrants;
(k) Non-controlling interests (for Statement of Changes in Equity of
Consolidated Financial Statements)
The reconciliation of above line items needs to be provided for current /
previous reporting period by way of the following line items:
(i) Balance at the beginning of the current / previous reporting period;
(ii) Changes in accounting policy or prior period errors;
(iii) Restated balance at the beginning of the current / previous reporting
period;
(iv) Total comprehensive income for the current / previous year;
(v) Dividends;

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(vi) Transfer to retained earnings;

(vii) Any other change (to be specified);
(viii) Balance at the end of the current / previous reporting period.

Reconciliation as described in para 109 of Ind AS 1 states that, “changes in

an entity’s equity between the beginning and the end of the reporting period
reflect the increase or decrease in its net assets during the period. Except for
changes resulting from transactions with owners acting in their capacity as
owners (such as equity contributions, reacquisitions of the entity’s own equity
instruments and dividends) and transaction costs directly related to such
transactions, the overall change in equity during a period represents the total
amount of income and expenses, including gains and losses, generated by
the entity’s activities during that period.”
Schedule III provides two options for presentation of remeasurement of
defined benefit plans and fair value changes relating to own credit risk of
financial liabilities designated at fair value through profit or loss:
(i) recognise as a part of retained earnings with separate disclosure of
such items along with the relevant amounts in the Notes
(ii) shown as a separate column under Reserves and Surplus
The above two items are initially taken to Other Comprehensive Income
in the Statement of Profit and Loss.
8.2.1. Equity Share Capital
8.2.1.1. Notes to the General Instructions for Preparation of Balance Sheet
require a company to disclose in the Notes items referred to in Note 6(D).
Note 6(D)(I) deals with disclosures for Equity Share Capital and such
disclosures are required for each class of equity share capital. The
disclosure requirements for share capital are common under Non-Ind AS
Schedule III as well as Ind AS Schedule III. However, Division II restricts the
disclosures to ‘Equity’ while Division I makes it applicable for all kinds of
‘Share Capital’ but states an exception that different classes of preference
shares are to be treated separately.
8.2.1.2. As per ICAI Glossary of Terms Used in Financial Statements,
‘Capital’ means “Under a financial concept of capital, such as invested
money or invested purchasing power, capital is synonymous with the net
assets or equity of the enterprise. Under a physical concept of capital, such

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

as operating capability, capital is regarded as the productive capacity of the

enterprise based on, for example, units of output per day..”
8.2.1.3. The said Guidance Note defines ‘Share Capital’ as the “aggregate
amount of money paid or credited as paid on the shares and/or stocks of a
corporate enterprise.”
8.2.1.4. Ind AS Framework talks about ‘Concepts of Capital’, wherein, it
states that “a financial concept of capital is adopted by most entities in
preparing their financial statements. Under a financial concept of capital,
such as invested money or invested purchasing power, capital is
synonymous with the net assets or equity of the entity.”
8.2.1.5. Section 2(84) of the Act defines “share” as “a share in the share
capital of a company and includes stock”. While, section 2(30) of the Act
defines “debenture” to “include debenture stock, bonds or any other
instrument of a company evidencing a debt, whether constituting a charge on
the assets of the company or not”. Further, section 43 of the Act gives two
kinds of share capital of a company limited by shares viz.,
(a) Equity share capital;
(b) Preference share capital.
8.2.1.6. On the other hand, Ind AS 32 defines an equity instrument as “any
contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities”. The accounting definition of ‘Equity’ is principle
based as compared to the legal definition of ‘Equity’ or ‘Share’, such that any
contract that evidences residual interest in an entity’s net asset is termed as
‘Equity’ irrespective of whether it is legally recognized as a ‘Share’ or not.
Accordingly, all instruments (including convertible preference shares and
convertible debentures) that meet the definition of ‘Equity’ as per Ind AS 32
in its entirety and when they do not have any component of liability, should
be considered as having the nature of ‘Equity’ for the purpose of Ind AS
Schedule III. Such instruments shall be termed as ‘Instruments entirely equity
in nature’.
8.2.1.7. Instruments entirely equity in nature, may be presented as a
separate line item on the face of the Balance Sheet under ‘Equity’ after
‘Equity Share Capital’ but before ‘Other Equity’, as shown below:

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

Name of the Company……….

Balance Sheet as at……………
(Rupees in………….)

Particulars Note Figures as Figures

No. at the end as at the
of current end of
reporting previous
period reporting
period
EQUITY AND LIABILITIES
Equity
(a) Equity Share Capital
(b) Instruments entirely equity
in nature
(c) Other Equity

In the Statement of Changes in Equity, the reconciliation for instruments

entirely equity in nature should be presented as below:
STATEMENT OF CHANGES IN EQUITY
Name of the Company…………………..
(Rupees in……………)
A. Equity Share Capital
(1) Current reporting period

Balance at Changes in Restated Changes in Balance at

the Equity balance at equity the end of
beginning Share the share the current
of the Capital due beginning of capital reporting
current to prior the current during the period
reporting period reporting current
period errors period year

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the Equity balance at equity the end of
beginning of Share the share the
the previous Capital due beginning capital previous
reporting to prior of the during reporting
period period previous the period
errors reporting previous
period year

B. Instruments entirely equity in nature *

(a) Compulsorily Convertible Preference Shares
(1) Current reporting period

Balance at Changes in Restated Changes in Balance at

the beginning compulsorily balance at compulsorily the end of the
of the current convertible the convertible current
reporting preference beginning of preference reporting
period shares due the current shares period
to prior reporting during the
period period current year
errors

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at

the beginning compulsorily balance at compulsorily the end of the
of the convertible the convertible previous
previous preference beginning of preference reporting
reporting shares due the previous shares period
period to prior reporting during the
period period previous
errors year

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(b) Compulsorily Convertible Debentures

(1) Current reporting period

Balance at Changes in Restated Changes in Balance at

the beginning compulsorily balance at compulsorily the end of
of the current convertible the convertible the current
reporting debentures beginning of debentures reporting
period due to prior the current during the period
period errors reporting current year
period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at

the beginning compulsorily balance at compulsorily the end of
of the convertible the convertible the previous
previous debentures beginning of debentures reporting
reporting due to prior the previous during the period
period period errors reporting previous
period year

(c) [Instrument] (Any other instrument entirely equity in nature)

(1) Current reporting period

Balance at Changes in Restated Changes in Balance at

the beginning [instrument] balance at [Instrument] the end of the
of the current due to prior the during the current
reporting period beginning of current year reporting
period errors the current period
reporting
period

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the beginning [instrument] balance at [Instrument] the end of the
of the due to prior the during the previous
previous period beginning of previous reporting
reporting errors the previous year period
period reporting
period

C. Other Equity
[Table providing reconciliation of Other Equity]
* It may be emphasized that whether an instrument qualifies in its entirety for
classification as ‘equity’ depends on the terms and conditions associated
with it, evaluated based on the criteria given in para 16 of Ind AS 32. It is
assumed that Compulsorily Convertible Preference Shares and Compulsorily
Convertible Debentures in the above illustrative disclosure qualify for
classification as entirely equity however, companies should assess terms
and conditions specific to their instruments for deciding whether they are
entirely equity in nature.
All the disclosures as required by Note 6(D)(I) to General Instructions in
Preparation of Balance Sheet shall be provided for all instruments entirely
equity in nature, to the extent applicable.
8.2.1.8. Premium received on Compulsorily Convertible Preference Shares
which are entirely equity in nature shall be classified and presented as a part
of ‘Other Equity’ under ‘Securities Premium’.
8.2.1.9. All those compound financial instruments which have both ‘Equity’
and ‘Liability’ components, shall be split in accordance with Ind AS 32 and
their ‘Equity component’ shall be presented under ‘Other Equity’ portion of
Statement of Changes in Equity while their ‘Liability component’ shall be
presented as a separate line item under ‘Borrowings’.
8.2.1.10. Ind AS Schedule III, Notes 9 and 10 of General Instructions for
Preparation of Balance Sheet highlight that the disclosure and presentation
requirements as applicable to the relevant class of ‘Equity’ or ‘Liability’ shall
be applicable mutatis mutandis to the instruments (including, their
components) classified and presented under the relevant heads in ‘Equity’
and ‘Liabilities’. Accordingly, companies should provide all the relevant

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disclosures for ‘Equity component of a compound financial instrument’ as

applicable to ‘Equity Share Capital’ (given in Note 6(D)(I) of General
Instructions for Preparation of Balance Sheet), to the extent applicable. An
example could be to disclose, for equity component of compound financial
instrument, terms as per Clause (j) i.e. terms of any securities convertible
into equity shares issued along with the earliest date of conversion in
descending order starting from the farthest such date, etc. For the liability
component of compound financial instruments, all the disclosures applicable
to ‘Borrowings’ (refer para 8.2.3 to para 8.2.3.14 below) shall be made, to the
extent applicable. An example could be to disclose the rate of interest,
particulars of redemption or conversion stated in descending order of
maturity or conversion, etc. However, for those instruments which are entirely
liability in nature, all disclosures applicable to ‘Borrowings’ should be made.
8.2.1.11. Clause(a) of Note 6(D)(I) - the number and amount of shares
authorized:
As per the ICAI’s Glossary of Terms Used in Financial Statements
‘Authorised Share Capital’ or “nominal capital” means “such capital as is
authorised by the memorandum of a company to be the maximum amount of
share capital of the company.”
This disclosure is to be provided for instruments entirely equity in nature as
well as for compound instruments that have an equity component, to the
extent applicable.
8.2.1.12. Clause (b) of Note 6(D)(I) - the number of shares issued,
subscribed and fully paid, and subscribed but not fully paid:
The disclosure is for shares:
• Issued;
• Subscribed and fully paid;
• Subscribed but not fully paid.
Though the disclosure is only for the number of shares under each of the
above three categories, to make the disclosure relevant to understanding the
company’s share capital, even the amount for each category above should
be disclosed. Issued shares are those which are offered for subscription
within the authorised limit. It is possible that all shares offered are not
subscribed to and to the extent of unsubscribed portion, there will be
difference between shares issued and subscribed. As per the Glossary of
Terms Used in Financial Statements issued by ICAI, the expression

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‘Subscribed Share Capital’ means “such part of the capital which is for the
time being subscribed by the members of a company;”
Though there is no requirement to disclose the amount per share called, if
shares are not fully called, it should be appropriate to state the amount per
share called.
As per the definition contained in the Glossary of Terms Used in Financial
Statements, the expression ‘Paid-up Share Capital’ or ‘share capital paid-up’
means “such aggregate amount of money credited as paid-up as is
equivalent to the amount received as paid up in respect of shares issued and
also includes any amount credited as paid-up in respect of shares of the
company, but does not include any other amount received in respect of such
shares, by whatever name called..”
This disclosure is to be provided for instruments entirely equity in nature as
well as for compound instruments that have an equity component, to the
extent applicable.
8.2.1.13. Clause (c) of Note 6(D)(I) – par value per share:
Par value per share is the face value of a share as indicated in the Capital
Clause of the Memorandum of Association of a company. It is also referred
to as ‘face value’ per share. In the case of a company having share capital,
(unless the company is an unlimited company), the Memorandum shall also
state the amount of share capital with which the company is registered and
their division thereof into shares of fixed amount as required under clause
(e)(i) to the sub-section (1) of section 4 of the Act. In the case of a company
limited by guarantee, Memorandum shall state that each member undertakes
to contribute to the assets of the company in the event of winding-up while
he is a member or within one year after he ceases to be a member, for
payment of debts and liabilities of the company, as the case may be. There is
no specific mention for the disclosure by companies limited by guarantee and
having share capital, and companies limited by guarantee and not having
share capital. Such companies need to consider the requirement so as to
disclose the amount each member undertakes to contribute as per their
Memorandum of Association.
This disclosure is to be provided for instruments entirely equity in nature as
well as for compound instruments that have an equity component, to the
extent applicable.

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8.2.1.14. Clause (d) of Note 6(D)(I)– a reconciliation of the number of

shares outstanding at the beginning and at the end of the reporting
period:
As per Ind AS Schedule III, opening number of shares outstanding, shares
issued, shares bought back, other movements, etc. during the year and
closing number of outstanding shares should be shown. Though the
requirement is only for a reconciliation of the number of shares, as given for
the disclosure of issued, subscribed capital, etc. [Clause (b) of Note 6(D)(I)]
above, to make the disclosure relevant for understanding the company’s
share capital, the reconciliation is to be given even for the amount of share
capital. Reconciliation for the comparative previous period is also to be
given. Further, the above reconciliation should be disclosed separately for
each class of Equity Shares issued.
This disclosure is to be provided for instruments entirely equity in nature.
Also, for compound instruments having both equity and liability components,
the reconciliation should be given for total number of shares / debentures
outstanding, which will facilitate understanding the movement of compound
instrument upon either redemption or conversion or when both occur partly.
8.2.1.15. Clause (e) of Note 6(D)(I)– the rights, preferences and
restrictions attaching to each class of shares including restrictions on
the distribution of dividends and the repayment of capital:
As per the ICAI’s Glossary of Terms Used in Financial Statements, the
expression ‘Preference Share Capital’ refers to “a preference share is a
share carrying preferential rights to dividends and repayment of capital.”
The Glossary of Terms used in Financial Statement has also defined the
expression ‘Preference Share Capital” as ‘‘preference share capital’’, with
reference to any company limited by shares, means that part of the issued
share capital of the company which carries or would carry a preferential right
with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated
at a fixed rate, which may either be free of or subject to income-tax;
and
(b) repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum
or articles of the company;”

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

The rights, preferences and restrictions attached to shares are based on the
classes of shares, terms of issue, etc., whether equity or preference. In
respect of Equity Share Capital, it may be with voting rights or with
differential voting rights as to dividend, voting or otherwise in accordance
with such rules and subject to such conditions as may be prescribed under
Companies (Share Capital and Debentures) Rules, 2014. In respect of
Preference Shares, the rights include (a) with respect to dividend, a
preferential right to be paid a fixed amount or at a fixed rate and, (b) with
respect to capital, a preferential right of repayment of amount of capital on
winding up. For Compulsorily Convertible Debentures, the rights could be
with the holder to convert (for e.g., right to decide timing of conversion) into
Equity Shares.
This disclosure is to be provided for instruments entirely equity in nature as
well as for compound instruments that have an equity component, to the
extent applicable.
8.2.1.16. Clause (f) of Note 6(D)(I)– shares in respect of each class in
the company held by its holding company or its ultimate holding
company including shares held by subsidiaries or associates of the
holding company or the ultimate holding company in aggregate:
The requirement is to disclose shares of the company held by -
• Its holding company;
• Its ultimate holding company;
• Subsidiaries of its holding company;
• Subsidiaries of its ultimate holding company;
• Associates of its holding company; and
• Associates of its ultimate holding company.
Aggregation should be done for each of the above categories.
The terms ‘subsidiary’ and ‘associate’ should be understood as defined
under Ind AS 110 and Ind AS 28. The term ‘holding company’ is not defined
in Ind AS, therefore, it may be referred from the definition as per Section 2
(46) of the Act. However, the equivalent term ‘parent’ is defined in Ind AS
110. Based on the aforesaid definitions, for the purposes of the above
disclosures, shares held by the entire chain of subsidiaries and associates
starting from the holding company and going right up to the ultimate holding
company would have to be disclosed.

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

In case of a joint arrangement viz., a joint venture or a joint operation

conducted through a separate legal entity, disclosure may be made for
shares of such joint arrangement held by its venturers.
This disclosure is to be provided for instruments entirely equity in nature, to
the extent applicable.
8.2.1.17. Clause (g) of Note 6(D)(I)–shares in the company held by each
shareholder holding more than 5 percent shares specifying the number
of shares held:
In the absence of any specific indication of the date of holding, the date for
computing such percentage should be taken as the Balance Sheet date. For
example, if during the year, any shareholder held more than 5% Equity
shares but does not hold as much at the Balance Sheet date, disclosure is
not required. Though it is not specified as to whether the disclosure is
required for each class of shares or not, companies should disclose the
shareholding for each type of Equity Instruments. Accordingly, such
percentage should be computed separately for each class of shares
outstanding within Equity Shares. This information should also be given for
the comparative previous period.
This disclosure is to be provided for instruments entirely equity in nature, to
the extent applicable.
8.2.1.18. Clause (h) of Note 6(D)(I)– shares reserved for issue under
options and contracts or commitments for the sale of shares or
disinvestment, including the terms and amounts:
Shares under options generally arise under promoters or collaboration
agreements, loan agreements or debenture deeds (including convertible
debentures), agreement to convert preference shares into equity shares,
ESOPs or contracts for supply of capital goods, etc. The disclosure would be
required for the number of shares, amounts and other terms for shares so
reserved. Such options are in respect of unissued portion of share capital.
This disclosure is to be provided for instruments entirely equity in nature as
well as for compound instruments that has an equity component and liability
component, to the extent applicable.
8.2.1.19. Clause (i) of Note 6(D)(I) – For the period of five years
immediately preceding the date as at which the Balance Sheet is
prepared:(a) Aggregate number and class of shares allotted as fully

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

paid up pursuant to contract(s) without payment being received in cash.

(b) Aggregate number and class of shares allotted as fully paid up by
way of bonus shares. (c) Aggregate number and class of shares bought
back:
(a) Aggregate number and class of shares allotted as fully paid up
pursuant to contract(s) without payment being received in cash.
The following illustrate the allotments which are considered as shares
allotted for payment being received in cash and not as without
payment being received in cash and accordingly, the same are not to
be disclosed under this Clause:
(i) If the subscription amount is adjusted against a bona fide debt
payable in money at once by the company;
(ii) Conversion of loan into shares in the event of default in
repayment.
(b) Aggregate number and class of shares allotted as fully paid up by way
of bonus shares.
As per the Glossary of Terms Used in Financial Statements issued by
ICAI ‘Bonus shares’ are defined as shares allotted by capitalisation of
the reserves or surplus of a corporate enterprise. The requirement of
disclosing the source of bonus shares is omitted in the Schedule III.
(c) Aggregate number and class of shares bought back.
The total number of shares bought back for each class of shares
needs to be disclosed.
All the above details pertaining to aggregate number and class of shares
allotted for consideration other than cash, bonus shares and shares bought
back need to be disclosed only if such event has occurred during a period of
five years immediately preceding the Balance Sheet date. Since disclosure is
for the aggregate number of shares, it is not necessary to give the year-wise
break-up of the shares allotted or bought back, but the aggregate number for
the last five financial years needs to be disclosed.
This disclosure is to be provided for instruments entirely equity in nature, to
the extent applicable.

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8.2.1.20. Clause (j) of Note 6(D)(I)– Terms of any securities convertible

into equity/preference shares issued along with the earliest date of
conversion in descending order starting from the farthest such date:
Under this Clause, disclosure is required for any security, when it is either
convertible into equity or preference shares. In this case, terms of such
securities and the earliest date of conversion are required to be disclosed. If
there is more than one date of conversion, disclosure is to be made in the
descending order of conversion. If the option can be exercised in different
periods then earliest date in that period is to be considered. In case of
compulsorily convertible securities, where conversion is done in fixed
tranches, all the dates of conversion have to be considered. Terms of
convertible securities are required to be disclosed under this Clause.
However, in case of Convertible debentures/bonds, etc., for the purpose of
simplification, reference may also be made to the terms disclosed under the
note on Non-current borrowings where these are required to be classified in
the Balance Sheet, rather than disclosing the same again under this clause.
This disclosure is to be provided for instruments entirely equity in nature and
compound instruments that have an equity component and a liability
component. In other words, this disclosure is not required for instruments
entirely liability in nature (for e.g., those instruments which entirely meet the
definition of a financial liability as per para 11 of Ind AS 32) since similar
disclosure needs to be provided as a part of ‘Borrowings’. Accordingly,
duplication of disclosures is not intended.
8.2.1.21. Clause (k) of Note 6(D)(I) - Calls unpaid (showing aggregate
value of calls unpaid by directors and officers):
A separate disclosure is required for the aggregate value of calls unpaid by
directors and also officers of the company.
However, the unpaid amount towards shares subscribed by the subscribers
of the Memorandum of Association should be considered as 'subscribed and
paid-up capital' in the Balance Sheet and the debts due from the subscriber
should be appropriately disclosed as an asset in the balance sheet.
This disclosure is to be provided for instruments entirely equity in nature, to
the extent applicable.
8.2.1.22 Clause (m) of Note 6(D)(I) – Disclosure of Shareholding of
Promoters
Every company is required to make a separate disclosure of shareholding of
its promoters* as below:

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Shares held by promoters at the end of the year % Change during

the year***
S.No. Promoter name No. of % of total
shares** shares**
Total
* Promoter here means promoter as defined in the Act
** Details shall be given separately for each class of shares
*** percentage change shall be computed with respect to the number at the
beginning of the year or if issued during the year for the first time then with
respect to the date of issue.
For the purpose of disclosure, promoter definition should be considered as
per the Companies Act, 2013. The prescribed format requires disclosure only
in respect of shares held at the end of the year, however, companies should
also disclose number and percentage of shares at the beginning of the year
as additional columns in order to facilitate an understanding of the
percentage change during the year.
Percentage change during the year needs to be computed with respect to
shares held at the beginning of the year or where shares have been issued
for the first time during the reporting period, such percentage change needs
to be computed from date of such issuance.
This disclosure shall be made separately for each class of shares
outstanding, similar to the disclosure made for shareholders under other
clauses (for e.g., clause (g) of Note 6(D)(I)).
The percentage of total shares for a particular class of shares should be
calculated considering the total number of shares issued by the Company for
that particular class.
This disclosure is to be provided for instruments entirely equity in nature, to
the extent applicable.
8.2.1.23 In case of restatement due to prior period error, the column/line
items ‘balance at the beginning of the current reporting period/previous
reporting period’ in the statement of changes in equity shall include the
balances as originally presented in the previous years’ financial statements.
The adjustments on account of correction of prior period errors should be
included in the column/line items ‘changes due to prior period errors’ to arrive
at restated balance at the beginning of respective period.

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8.2.2. Other Equity

Note 6(D)(II) of the General Instructions for Preparation of Balance Sheet
deals with the disclosures of “Other Equity” in the Notes. Disclosure should
be made for the nature and amount of each item, along with the description
of the purpose of each reserve within equity.
Disclosures in Other Equity are required to be made for the following:
(i) Share application money pending allotment
Share Application money pending allotment is to be disclosed as a
separate line item under Other Equity. Note 8 of General Instructions
for Preparation of Balance Sheet states that share application money
pending allotment shall be classified into equity or liability in
accordance with relevant Ind AS. Share application money to the
extent not refundable shall be shown in this line item and share
application money to the extent refundable shall be separately shown
under ‘other financial liabilities’.
(ii) Equity component of compound financial instruments
For compound financial instruments that have both equity as well as
liability component, Ind AS 32 requires splitting the two components
and separately recognizing ‘equity component of compound financial
instrument’. Such equity component is required to be presented as a
part of ‘Other Equity’ under this head. On the other hand, the ‘liability
component of compound financial instrument’ is required to be
presented as a part of ‘Borrowings’ (refer para 8.2.3. below).For
recommended disclosures for equity component of compound financial
instrument, refer guidance given in para 8.2.1.10. to para 8.2.1.21.
(iii) Reserves and Surplus – these shall be further disclosed as (discussed
in para 8.2.2.1. below-):
(a) Capital Reserve;
(b) Securities Premium;
(c) Other Reserves (specify nature);
(d) Retained Earnings;
(iv) Debt Instruments through Other Comprehensive Income –
As per Ind AS 109, investments are subsequently measured at FVOCI
based on the company’s business model for managing the portfolio of

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debt instruments as well as the debt instruments’ contractual cash flow

characteristics. Any fair value gain or loss on debt instruments
measured at FVOCI is presented as a part of Other Equity under this
heading until the debt instrument is derecognized;
(v) Equity Instruments through Other Comprehensive Income –
As per Ind AS 109, companies have an irrevocable option to designate
investments in equity instruments to be measured at FVOCI. For such
instruments, the cumulative fair value gain or loss is presented as a
part of Other Equity under this heading;
(vi) Effective portion of Cash Flow Hedges –
For all qualifying cash flow hedges, this component of Other Equity
associated with the hedged item (i.e. cash flow hedge reserve) is
adjusted to the lower of the cumulative change in the fair value of the
hedging instrument and the cumulative change in the fair value of the
hedged item attributable to the hedged risk. The portion of the gain or
loss on the hedging instrument that is determined to be an effective
hedge (i.e. the portion that is offset by the change in the cash flow
hedge reserve) is recognized in Other Comprehensive Income. Also,
Ind AS 109 requires that exchange differences on monetary items that
qualify as hedging instruments in a cash flow hedge are recognized
initially in other comprehensive income to the extent that the hedge is
effective;
(vii) Revaluation Surplus –
As per Ind AS 16, if an asset’s carrying amount is increased as a
result of revaluation, the increase shall be recognized in other
comprehensive income and accumulated in equity under the heading
of revaluation surplus. However, such increase shall be recognized in
profit or loss to the extent that it reverses a revaluation decrease of the
same asset previously recognized in profit or loss.
Correspondingly, decreases as a result of revaluation are recognized
in other comprehensive income thereby reducing the amount
accumulated under this heading of revaluation surplus, to the extent of
any credit balance existing in the revaluation surplus in respect of that
asset.

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(viii) Exchange differences on translating the Financial Statements of a

foreign operation –
In accordance with Ind AS 21 The Effects of Changes in Foreign
Exchange Rates, the exchange differences arising on translation of the
financial statements of foreign operation from functional currency to
presentation currency needs to be included in this head of OCI.
(ix) Other items of Other Comprehensive Income (specific nature)
Any other items that need to be presented in Other Comprehensive
Income as per the relevant Ind AS shall be included under this head of
OCI.
Refer para 8.2.2.3. below (Pg 71) for guidance on presentation of ‘re-
measurement of defined benefit plans’.
(x) Money received against share warrants
Generally, in case of listed companies, share warrants are issued to
promoters and others in terms of the Guidelines for preferential issues
viz., SEBI (Issue of Capital and Disclosure Requirements), Guidelines,
2009. Ind AS 33 Earnings per Share defines ‘warrants’ as “financial
instruments which give the holder the right to acquire equity shares”.
Thus, effectively, warrants are nothing but the amount which would
ultimately form part of the Shareholders’ funds. Since shares are yet to
be allotted against the same, these are not reflected as part of Share
Capital but as a separate line item – ‘Money received against share
warrants.’
8.2.2.1. Reserves & Surplus:
Ind AS 103, Appendix C on Business Combinations under Common Control
defines the term ‘Reserve’ as “the portion of earnings, receipts or other
surplus of an entity (whether capital or revenue) appropriated by the
management for a general or a specific purpose other than a provision for
depreciation.” ‘Reserves’ should be distinguished from ‘provisions’. For this
purpose, reference may be made to the definition of the expression
‘provision’ in Ind AS 37 Provisions, Contingent Liabilities and Contingent
Assets.
As per Ind AS 37, a ‘provision’ is “a liability of uncertain timing or amount”. A
‘liability’ is “a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.” ‘Present obligation’ – “an

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obligation is a present obligation if, taking account of all available evidence, it

is more likely than not that a present obligation exists at the end of the
reporting period”.
(a) Capital Reserves :
It is necessary to make a distinction between capital reserves and revenue
reserves in the accounts. A revenue reserve is a reserve which is available
for distribution. The term “Capital Reserve” has not been defined under Ind
AS Schedule III. However, as per the Glossary of Terms Used in Financial
Statements issued by ICAI, the expression ‘capital reserve’ is defined as “a
reserve of a corporate enterprise which is not available for distribution as
dividend”. Though the Ind AS Schedule III does not have the requirement of
“transferring capital profit on reissue of forfeited shares to capital reserve”,
since profit on re-issue of forfeited shares is basically profit of a capital
nature and, hence, it should be credited to capital reserve.
A gain on bargain purchase arising in a business combination where clear
evidence of the underlying reasons does not exist, shall be recognized
directly in equity as Capital Reserves as per Ind AS 103.
(b) Securities Premium :
The ICAI’s Glossary of Terms Used in Financial Statements defines ‘Share
Premium’ as “the excess of the issue price of shares over their face value.”
Though the terminology used in Ind AS Schedule III is ‘Securities Premium”,
the nomenclature as per the Act is “Securities Premium Account”.
(c) Other Reserves (specify the nature and purpose of reserve and
the amount in respect thereof) :
Every other reserve which is not covered in above paragraphs is to be
reflected as ‘Other Reserves’. However, since the nature, purpose and the
amount are to be shown, each reserve under ‘Other Reserves’ is to be
shown separately in Notes to Accounts. This would include, for e.g., reserves
to be created under other statutes like Tonnage Tax Reserve to be created
under the Income Tax Act, 1961.
(i) Capital Redemption Reserve:
Under the Act, Capital Redemption Reserve is required to be created
in the following two situations:
(a) Under the provisions of Section 55 of the Act, where the

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redemption of preference shares is out of profits, an amount

equal to nominal value of shares redeemed is to be transferred
to a reserve called ‘capital redemption reserve’.
(b) Under Section 69 of the Act, if the buy-back of shares is out of
free reserves, the nominal value of the shares so purchased is
required to be transferred to capital redemption reserve from
distributable profit.
(ii) Debenture Redemption Reserve :
According to Section 71 of the Act where a company issues
debentures, it is required to create a debenture redemption reserve for
the redemption of such debentures. The company is required to credit
adequate amounts, out of its profits every year to debenture
redemption reserve, until such debentures are redeemed.
On redemption of the debentures for which the reserve is created, the
amounts no longer necessary to be retained in this account need to be
transferred to the General Reserve.
(iii) Share Options Outstanding Account :
Ind AS Schedule III requires Share Options Outstanding Account to be
shown as a part of ‘Reserve and Surplus’ under ‘Other Reserves’.
(d) Additions and deductions since the last Balance Sheet to be
shown under each of the specified heads:
This requires the company to disclose the movement in each of the
reserves and surplus since the last Balance Sheet.
Further, as per Ind AS Schedule III, a reserve specifically represented
by earmarked investments shall disclose the fact that it so
represented.
(e) Debit balance of Statement of Profit and Loss and in Other Equity:
Debit balance of Statement of Profit and Loss which would arise in
case of accumulated losses, is to be shown as a negative figure under
the head ‘Retained Earnings’. The aggregate amount of the balance of
‘Other Equity’ is to be shown after adjusting negative balance of
retained earnings, if any. If the net result is negative, the negative
figure is to be shown under the head ‘Other Equity’.

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8.2.2.2. Gain / Loss on changes in the proportion held by non-

controlling interests
Ind AS 110, para B96 requires that an entity shall recognize directly in
‘Equity’ any difference between the amount by which the non-controlling
interests are adjusted and the fair value of the consideration paid or
received, and attribute it to the owners of the parent.
Ind AS 1, para 106(d)(iii) requires for each component of equity, a
reconciliation between the carrying amount at the beginning and the end of
the period, separately disclosing changes resulting from changes in
ownership interests in subsidiaries that do not result in a loss of control.
For such difference, which is the gain / loss on changes in the proportion
held by non-controlling interests, Ind AS does not specify whether such gain /
loss should be presented separately under ‘Capital Reserve’ or under ‘Other
Reserves’. Ind AS Schedule III also does not specify anything in this regard.
An entity may present such gain / loss separately as ‘Gain/Loss on change in
proportion held by NCI’ shown under ‘Other Reserves’ by specifying the
nature.
8.2.2.3. Reconciliation of items in Other Equity
Reconciliations for each component of other equity, both for the current
period and previous period are required to be made in the following manner
(to the extent applicable):
(i) Balance at the beginning of the reporting period
(ii) Changes in accounting policy or prior period error
(iii) Restated balance at the beginning of the reporting period
(iv) Total Comprehensive Income for the year
(v) Dividends
(vi) Transfer to retained earnings
(vii) Any other change (to be specified)
(viii) Balance at the end of reporting period

Apart from the above items, Ind AS Schedule III states that:
• Re-measurement of defined benefit plans; and
• Fair value changes relating to own credit risk of financial liabilities
designated at fair value through profit or loss, shall be recognised as a

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part of retained earnings with separate disclosure of such items along

with the relevant amounts in the Notes or shall be shown as a
separate column under Reserves and Surplus.
Ind AS 19 states that re-measurements of the net defined benefit liability
(asset) recognized in other comprehensive income shall not be reclassified to
profit or loss in a subsequent period. However, the entity may transfer those
amounts recognized in other comprehensive income within equity.
Ind AS Schedule III requires ‘re-measurements of defined benefit plans’
during the reporting period to be shown as a separate line item in other
comprehensive income. (Refer para 10.2. below at Pg 132)
As per Ind AS Schedule III requirement mentioned above, such re-
measurements of defined benefit plans shall be recognized as a part of
retained earnings with separate disclosure of such item along with the
relevant amounts in the Notes to Accounts. Alternatively, it can also be
presented as a separate column under Reserves and Surplus.
Accordingly, a company shall present the re-measurements of defined
benefit plans at the end of each reporting period as a part of retained
earnings or separately under Reserves and Surplus.
Liabilities
On the face of the Balance Sheet, Ind AS Schedule III requires the following
items to be presented under non-current liabilities as well as current liabilities
as below:
Non-current Liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables
(A) Total outstanding dues of micro enterprise and small
enterprises
(B) Total outstanding dues of creditors other than micro
enterprises and small enterprises
(iii) Other financial liabilities (other than those specified in item (b),
to be specified)

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(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
Current Liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables
(A) Total outstanding dues of micro enterprise and small
enterprises
(B) Total outstanding dues of creditors other than micro
enterprises and small enterprises
(iii) Other financial liabilities (other than those specified in item (c))
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
8.2.3. Non-current Borrowings
Non-current borrowings shall be classified as:
(a) Bonds or debentures;
(b) Term loans;
(i) from banks;
(ii) from other parties;
(c) Deferred payment liabilities;
(d) Deposits;
(e) Loans from related parties;
(f) [Omitted];
(g) Liability component of compound financial instruments;
(h) Other loans (specify nature).

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8.2.3.1. Lease liabilities under non-current liabilities represent principal

amount of such lease liability payable (as recognised and measured in
accordance with Ind AS 116, Leases) beyond a period of 12 months from the
reporting date.
8.2.3.2. Borrowings shall further be sub-classified as secured and
unsecured. Nature of security shall be specified separately in each case.
8.2.3.3. Where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed. The
word “others” used in the phrase “directors or others” would mean any
person or entity other than a director. Therefore, this is not restricted to mean
only related parties. However, in the normal course, a person or entity
guaranteeing a loan of a company will generally be associated with the
company in some manner.
8.2.3.4. Bonds/debentures (along with the rate of interest and particulars of
redemption or conversion, as the case may be) shall be stated in descending
order of maturity or conversion, starting from farthest redemption or
conversion date, as the case may be. Where bonds/debentures are
redeemable by installments, the date of maturity for this purpose must be
reckoned as the date on which the first installment becomes due.
8.2.3.5. Particulars of any redeemed bonds/ debentures which the company
has power to reissue shall be disclosed.
8.2.3.6. Terms of repayment of term loans and other loans is also required to
be stated.
8.2.3.7. Period and amount of default as on the Balance Sheet date in
repayment of borrowings and interest shall be specified separately in each
case.
8.2.3.8. The phrase "term loan" has not been defined in the Schedule III.
Term loans normally have a fixed or pre-determined maturity period or a
repayment schedule.
8.2.3.9. As referred to in para 62 (a) of the ICAI Guidance Note on the
Companies (Auditor’s Report) Order, 2020 (CARO) for example, in the
banking industry, for example, loans with repayment period beyond thirty six
months are usually known as “term loans”. Cash credit, overdraft and call
money accounts/ deposit are, therefore, not covered by the expression
“terms loans”. Term loans are generally provided by banks and financial

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institutions for acquisition of capital assets which then become the security
for the loan, i.e., end use of funds is normally fixed.
8.2.3.10. Deferred payment liabilities would include any liability for which
payment is to be made on deferred credit terms. E.g. deferred payment for
acquisition of Property, Plant and Equipment, etc.
8.2.3.11. Guidance on liability component of compound financial instrument,
to the extent applicable, should be drawn from guidance given in paragraphs
for Equity Share Capital (refer para 8.2.1.10. to para 8.2.1.21.). Moreover,
disclosure requirements as applicable to ‘Borrowings’ should be given for
compound instruments with liability component and instruments entirely
liability in nature (for e.g., those instruments which entirely meet the
definition of a financial liability as per para 11 of Ind AS 32).
8.2.3.12. Ind AS Schedule III also stipulates that the nature of security shall
be specified separately in each case. A blanket disclosure of different
securities covering all loans classified under the same head such as ‘All
Term loans from banks’ will not suffice. However, where one security is given
for multiple loans, the same may be clubbed together for disclosure purposes
with adequate details or cross referencing.
8.2.3.13. Disclosure about the nature of security should also cover the type
of asset given as security e.g. inventories, plant and machinery, land and
building, etc. This is because the extent to which loan is secured may vary
with the nature of asset against which it is secured.
8.2.3.14. When promoters, other shareholders or any third party have given
any personal security for any borrowing, such as shares or other assets held
by them, disclosure should be made thereof, though such security does not
result in the classification of such borrowing as secured.
8.2.3.15. Ind AS Schedule III requires that under the head “Borrowings,”
period and amount of default as on the Balance Sheet date in repayment of
borrowings and interest shall be specified separately in each case. Even one
default by a company would create an obligation to disclose the period and
amount of default. Further, in line with para 18 of Ind AS 107, if there was a
default during the reporting period, an entity shall provide a disclosure even if
the default was remedied before the financial statements were approved for
issue.
8.2.3.16. The word “loan” has been used in a more generic sense. Hence,
the disclosures relating to default should be made for all items listed under

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the category of borrowings such as bonds/ debentures, deposits, deferred

payment liabilities, etc. and not only to items classified as “loans” such as
term loans, etc.
8.2.3.17. Ind AS Schedule III requires separate disclosure for default, as on
the balance sheet date, in repayment of borrowings and interest but does not
require any disclosure of breaches. However, para 19 of Ind AS 107 would
require an entity to disclose only those breaches made during the reporting
period, which permitted the lender to demand accelerated repayment and,
were not remedied on or before the end of the reporting period.
8.2.3.18. Terms of repayment of term loans and other loans shall be
disclosed. The term ‘other loans’ is used in general sense and should be
interpreted to mean all categories listed under the heading ‘Non – Current
borrowings’ as per Ind AS Schedule III. Disclosure of terms of repayment
should be made preferably for each loan unless the repayment terms of
individual loans within a category are similar, in which case, they may be
aggregated.
8.2.3.19. Disclosure of repayment terms should include the period of
maturity with respect to the Balance Sheet date, number and amount of
instalments due, the applicable rate of interest and other significant relevant
terms, if any.
8.2.3.20. Deposits classified under Borrowings would include deposits
accepted from public and inter corporate deposits which are in the nature of
borrowings.
8.2.3.21. Loans from related parties are required to be disclosed. All the
disclosure requirements of Non-current borrowings would be applicable to
such loans from related parties.
8.2.3.22. Ind AS Schedule III requires presenting ‘current maturities of long-
term debt’ under ‘current borrowings’. Long-term debt is specified in Ind AS
Schedule III as a borrowing having a period of more than twelve months at
the time of origination. The portion of non-current borrowings, which is due
for payments within twelve months of the reporting date is required to be
classified under “current borrowings” while the balance amount should be
classified under non-current borrowings.
8.2.3.23. Lease liabilities are to be presented under non-current financial
liabilities as a line item separately from borrowings. The disclosure
requirements stated above for borrowings shall not be applicable to lease
liabilities.

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8.2.4. Non-current Trade Payables

8.2.4.1. Ind AS Schedule III requires presentation of ‘Trade Payables’ as a
separate line item on the face of the Balance Sheet under ‘Financial
Liabilities’. The same should be further categorized into total outstanding
dues to micro enterprises and small enterprises and total outstanding dues to
creditors other than small enterprises and micro enterprises.
8.2.4.2. A payable shall be classified as 'trade payable' if it is in respect of
the amount due on account of goods purchased or services received in the
normal course of business. Hence, amounts due under contractual
obligations or which are statutory payables should not be included within
Trade Payables. Such items may include dues payable in respect of statutory
obligations like contribution to provident fund or contractual obligations like
contractually reimbursable expenses, amounts due towards purchase of
capital goods, etc.
8.2.4.3. The Micro, Small and Medium Enterprises Development (MSMED)
Act, 2006, however, requires specific disclosures to be made in the annual
Financial Statements of the buyer wherever such Financial Statements are
required to be audited under any law. Ind AS Schedule III requires such
disclosures to be made in the annual Financial Statements. The trade
payables should present separately the portion representing outstanding
dues of micro and small enterprises from the portion representing other trade
payables.
8.2.4.4. The following disclosures are required under Sec 22 of MSMED Act,
2006 under the Chapter on Delayed Payments to Micro, Small and Medium
Enterprises which are also required as per Ind AS Schedule III:
(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier as at the end of each
accounting year;
(b) the amount of interest paid by the buyer under MSMED Act, 2006
along with the amounts of the payment made to the supplier beyond
the appointed day during each accounting year;
(c) the amount of interest due and payable for the period of delay in
making payment (which has been paid but beyond the appointed day
during the year) but without adding the interest specified under the
MSMED Act, 2006);
(d) The amount of interest accrued and remaining unpaid at the end of
accounting year; and

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(e) The amount of further interest remaining due and payable even in the
succeeding year, until such date when the interest dues as above are
actually paid to the small enterprise, for the purpose of disallowance
as a deductible expenditure under section 23 of MSMED Act 2006.
8.2.4.5. The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro enterprise’,
‘small enterprise’ and ‘supplier’, shall have the same meaning as assigned to
them under clauses (b), (d), (e), (h), (m) and (n) respectively of section 2 of
the Micro, Small and Medium Enterprises Development Act, 2006. Such
statutory disclosures should be made by an entity in its Notes to Accounts.
8.2.4.6. In respect of trade payables due for payment, the following ageing
schedule should be given:

Particulars Outstanding for following periods from due

date of payment#
Less than 1-2 2-3 More than Total
1 year years years 3 years
(i) MSME
(ii) Others
(iii) Disputed
dues – MSME
(iv) Disputed
dues – Others
# similar information shall be given where no due date of payment is specified
in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
Ageing of trade payables due for payment
This disclosure requires the company to provide ageing of trade payables
due for payment as on the balance sheet date and as per the prescribed
format.
In order to tie-up the amounts presented in the ‘total’ column with the
amounts presented in the financial statements or notes, two additional
columns with heading ‘Unbilled’ and the heading ‘Not due’ shall be added
before the ageing columns to separately disclose the amount for unbilled
payables and the amount of trade payables which are not due, respectively.
The ageing requirement shall not apply to these trade payables not due for
payment. Ind AS 37 states that trade payables are liabilities to pay for goods

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or services that have been received or supplied and have been invoiced or
formally agreed with the supplier. Unbilled trade payables shall include
accruals which are not classified as provisions under Ind AS 37.
Ind AS 37 defines a “provision” as a liability of uncertain timing or amount.
Provisions can be distinguished from other liabilities such as trade payables
and accruals because there is uncertainty about the timing or amount of the
future expenditure required in settlement. Although it is sometimes necessary
to estimate the amount or timing of accruals, the uncertainty is generally
much less than for provisions. It is clarified that a “provision” shall not be
considered as unbilled trade payables.
The amounts to be presented under (i) MSME and (ii) Others shall include
those trade payable dues that are undisputed.
Due date shall be the date by when a buyer should make payment to the
supplier as per terms agreed upon between the buyer and supplier.
In case if the due date is neither agreed in writing nor oral, then the
disclosure needs to be prepared from the transaction date. Transaction date
shall be the date on which the liability is recognised in the books of accounts
as per the requirement of applicable standards.
A dispute is a matter of facts and circumstances of the case; However,
dispute means disagreement between two parties demonstrated by some
positive evidence which supports or corroborates the fact of disagreement.
(Refer the term “Dispute” as defined under the Insolvency and Bankruptcy
Code, 2016)
8.2.5. Non-current other financial liabilities
8.2.5.1. Ind AS Schedule III requires presenting ‘Other Financial Liabilities’
as a separate line item on the face of the Balance Sheet under ‘Financial
Liabilities’. Items which meet the definition of financial liabilities as per Ind
AS 32, like contingent consideration, derivative contracts, financial guarantee
contracts issued, contractually reimbursable expenses etc., should be
presented under other financial liabilities.
8.2.5.2. Contract liability
Ind AS 115 requires in case of a contract with customer, when either party
has performed, to present a contract liability in the balance sheet. Contract
liability arises if a customer pays consideration, or an entity has a right to an
amount of consideration that is unconditional (i.e. a receivable), before the
entity transfers a good or service to the customer, the entity shall present the

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contract as a contract liability when the payment is made or the payment is

due (whichever is earlier).
A company shall apply the requirements of Ind AS 1 and Ind AS 32 to
determine whether it is appropriate to offset contract assets and liabilities
against other balance sheet items (e.g., receivables).
Unless a company presents its balance sheet on a liquidity basis, it will need
to present contract liabilities arising from contracts within the scope of Ind AS
115 as current or non-current in the balance sheet. Companies should
consider the requirements of current / non-current classification (Section 7)
above.
8.2.6. Non-current Provisions
8.2.6.1. This should be classified into ‘provision for employee benefits’ and
‘others’ specifying the nature. Provision for employee benefits, mainly
unfunded defined post-employment benefits, are bifurcated into non-current
and current of which the non-current portion shall be disclosed under this
para. All non-current provisions, other than those related to employee
benefits should be disclosed separately based on their nature. Such items
would include provision for warranties, etc.
8.2.7. Other non-current liabilities
8.2.7.1. These should be classified as ‘advances’ and ‘others’, specifying the
nature. All advances that are not financial liabilities as defined in Ind AS 32
should be classified under ‘Other non-current liabilities’. For e.g., amount
received in advance against goods to be sold or services to be provided.
‘Others’ should include other non-current liabilities for e.g., statutory dues
payable, legal claims outstanding, interest payable on unpaid amount to
supplier as per MSMED Act, 2006, if such interest payable is not a
contractual obligation as per the MSMED Act, 2006.
Current Liabilities
As per Ind AS Schedule III, all items of assets and liabilities are to be
bifurcated between current and non-current portions. In some cases, the
items presented under the “non-current” head of the Balance Sheet may not
have a corresponding “current” head. Since Ind AS Schedule III permits the
use of additional line items, in such cases the current portion should be
classified under the “Current” category of the respective balance as a
separate line item and other relevant disclosures should be made.

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8.2.8. Current Borrowings

(i) Current Borrowings shall be classified as:
(a) Loans repayable on demand
• from banks;
• from other parties.
(b) Loans from related parties;
(c) Deposits;
(d) Other loans (specify nature).
(ii) Borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
(iii) Where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed.
(iv) Period and amount of default as on the Balance Sheet date in
repayment of borrowings and interest shall be specified separately in
each case.
(v) Current maturities of long-term borrowings shall be disclosed
separately
Loans payable on demand should be treated as part of current borrowings.
Current borrowings will include all loans payable within a period of 12 months
from the date of the loan. In the case of current borrowings, the period and
amount of defaults existing as at the date of the Balance Sheet should be
disclosed (item-wise).
Ind AS Schedule III requires presenting ‘current maturities of long-term
borrowings’ under ‘current borrowings’. Long-term debt is specified in Ind AS
Schedule III as a borrowing having a period of more than twelve months at
the time of origination. The portion of non-current borrowings, which is due
for payments within twelve months of the reporting date is required to be
classified under “current borrowings” while the balance amount should be
classified under non-current borrowings.
To provide relevant information to the users of the financial statements
regarding total amount of liability under the respective category of non-
current borrowings, Companies shall provide the amount of non-current as
well as current portion for each of the respective category of non-current
borrowings either by way of a note or a schedule or a cross-reference, as

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appropriate. This shall be in addition to Ind AS Schedule III requirements for

presenting ‘current maturities of long-term borrowings’ under current
borrowings.
Guidance on disclosure on various matters under this para should also be
drawn, to the extent possible, from the guidance given under Non-current
Borrowings.
8.2.9. Current Trade Payables
8.2.9.1. In respect of trade payables due for payment, the following ageing
schedule should be given:
Particulars Outstanding for following periods from due
date of payment#
Less than 1-2 2-3 More than Total
1 year years years 3 years
(i) MSME
(ii) Others
(iii) Disputed
dues – MSME
(iv) Disputed
dues – Others
# similar information shall be given where no due date of payment is specified
in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
Rest of the guidance on disclosure under this clause should be drawn from
the guidance given under Non-Current Trade Payables, to the extent
applicable.
8.2.10. Other Current Financial Liabilities
The amounts shall be classified as:
(a) [Omitted];
(b) [Omitted];
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent
refundable and interest accrued thereon;

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(g) Unpaid matured deposits and interest accrued thereon;

(h) Unpaid matured debentures and interest accrued thereon;
(i) Others (specify nature).
Interest Accrued
Interest accrued on financial liabilities shall form part of its carrying amount
whether it is at amortized cost (i.e. as per effective interest method), or at fair
value. Accordingly, an entity may not present ‘Interest Accrued’ separately
from the related financial liability.
8.2.11. Other Current Liabilities
The amounts shall be classified as:
(a) revenue received in advance;
(b) other advances (specify nature);
(c) others (specify nature);
Other advances, that satisfy the requirements for being classified as current
and that are not financial liabilities as defined in Ind AS 32, should be
classified under ‘Other current liabilities’. For e.g., amount received in
advance from customers or other parties against sale of investments or
immovable property. Others should include items under other current
liabilities for e.g., statutory dues payable, legal claims outstanding.
Trade Deposits and Security Deposits, which do not meet the definition of
financial liabilities, should be classified as ‘Others’ grouped under this head.
Others may also include liabilities in the nature of statutory dues such as
Withholding taxes, Service Tax, VAT, Excise Duty, Goods and Services Tax
(GST), etc.
Guidance on disclosure under this clause should be drawn from the guidance
given under Other Non-Current Liabilities, to the extent applicable.
8.2.12. Current provisions
The amounts shall be classified as:
(a) Provision for employee benefits;
(b) Others (specify nature).
Others would include all provisions other than provisions for employee
benefits such as provision for warranties, provision for decommissioning
liabilities, etc. These amounts should be disclosed separately specifying
nature thereof.

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8.2.13. Liabilities for non-current assets held for sale

The presentation of liabilities associated with group of assets classified as
held for sale and non-current assets classified as held for sale shall be in
accordance with Ind AS 105. (Refer Annexure F for Illustrative Standalone &
Consolidated Financial Statements Pg 213)
8.2.14. Contingent liabilities and commitments
(i) Contingent liabilities shall be classified as:
(a) Claims against the company not acknowledged as debt;
(b) Guarantees excluding financial guarantees; and
(c) Other money for which the company is contingently liable
(ii) Commitments shall be classified as:
(a) Estimated amount of contracts remaining to be executed on
capital account and not provided for;
(b) Uncalled liability on shares and other investments partly paid
(c) Other commitments (specify nature).
The provisions of Ind AS-37 Provisions, Contingent Liabilities and Contingent
Assets, will be applied for determining contingent liabilities.
8.2.14.1. A contingent liability in respect of guarantees arises when a
company issues guarantees to another person on behalf of a third party e.g.
when it undertakes to guarantee the loan given to a subsidiary or to another
company or gives a guarantee that another company will perform its
contractual obligations. However, where a company undertakes to perform its
own obligations, and for this purpose issues, what is called a "guarantee", it
does not represent a contingent liability and it is misleading to show such
items as contingent liabilities in the Balance Sheet. For various reasons, it is
customary for guarantees to be issued by Bankers e.g. for payment of
insurance premium, deferred payments to foreign suppliers, letters of credit,
etc. For this purpose, the company issues a "counter-guarantee" to its
Bankers. Such "counter-guarantee" is not really a guarantee at all, but is an
undertaking to perform what is in any event the obligation of the company,
namely, to pay the insurance premium when demanded or to make deferred
payments when due. Hence, such performance guarantees and counter-
guarantees should not be disclosed as contingent liabilities.
8.2.14.2. Ind AS Schedule III requires guarantees other than financial
guarantees to be disclosed as a part of contingent liabilities, since financial

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guarantees are recognized on the balance sheet in accordance with Ind AS

109. Ind AS 107 specifies certain disclosure in respect of the exposure to
credit risk on financial guarantee contracts as a part of the disclosures on
‘credit risk exposures’, which an entity should provide in its Notes to
Accounts.
8.2.14.3. The Ind AS Schedule III also requires disclosures pertaining to
various commitments such as Capital commitments not provided for and
Uncalled liability on shares. It also requires disclosures pertaining to ‘Other
commitments’, with specification of nature thereof.
8.2.14.4. The word ‘commitment’ has not been defined in the Schedule III.
The Glossary of Terms Used in Financial Statements issued by ICAI defines
‘Capital Commitment’ as future liability for capital expenditure in respect of
which contracts have been made. Hence, drawing inference from such
definition, the term ‘commitment’ would simply imply future liability for
contractual expenditure. Accordingly, the term ‘Other commitments’ would
include all expenditure related contractual commitments apart from capital
commitments such as commitments arising from long-term contracts for
purchase of raw material, employee contracts, lease commitments, etc. The
scope of such terminology is very wide and may include contractual
commitments for purchase of inventory, services, investments, employee
contracts, etc. However, the disclosure of all contractual commitments should
be made bearing in mind the overarching principle under Note 4(ii) in
General Instructions for Preparation of Financial Statements that “a balance
shall be maintained between providing excessive detail that may not assist
users of Financial Statements and not providing important information as a
result of too much aggregation.”
8.2.14.5. Disclosures relating to lease commitments for non-cancellable
leases are required to be disclosed by Ind AS 116 Leases.
8.2.14.6. Accordingly, the disclosures required to be made for ‘other
commitments’ should include only those non-cancellable contractual
commitments (i.e. cancellation of which will result in a penalty
disproportionate to the benefits involved) based on the professional
judgement of the management which are material and relevant in
understanding the Financial Statements of the company and impact the
decision making of the users of Financial Statements. Examples may include
commitments in the nature of buy-back arrangements, commitments to fund
subsidiaries and associates, non-disposal of investments in subsidiaries and
undertakings, derivative related commitments, etc.

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8.2.14.7. The Ind AS Schedule III requires disclosure of the amount of

dividends proposed to be distributed to equity and preference shareholders
for the period and the related amount per share to be disclosed separately.
Though, the Act prohibits issue of irredeemable preference shares, Ind AS
Schedule III requires separate disclosure of the arrears of fixed cumulative
dividends on irredeemable preference shares. Term ‘irredeemable’ is used in
the context of compulsorily convertible preference share rather than in the
context of perpetual preference share which are neither convertible nor
redeemable. Ind AS-10 Events after the Reporting Period requires that
dividends in respect of the period covered by the Financial Statements,
which are proposed or declared by the enterprise after the Balance Sheet
date but before approval of the Financial Statements, should not be adjusted
but should be disclosed in accordance with Ind AS-1 Presentation of
Financial Statements.
8.2.15 The Ind AS Schedule III requires that where, in respect of an issue of
securities made for a specific purpose, the whole or part of the amount has
not been used for the specific purpose at the Balance Sheet date, then the
company shall indicate by way of note, how such unutilized amounts have
been used or invested.
8.2.16 The Schedule III requires that where the company has not used the
borrowings from banks and financial institutions for the specific purpose for
which it was taken and such borrowings on an overall basis that are
outstanding at the balance sheet date, the company shall disclose the details
of where they have been used.
It is not necessary to establish a one-to-one relationship with the amount of
borrowing and its utilisation. It is quite often found that the amount of
borrowing obtained is deposited in the common account of the company from
which subsequently the utilisation is made. In such cases, it should not be
construed that the amount has not been utilised for the purpose for which it
was obtained. Accordingly, this needs to be determined based on overall
position of balance sheet at the reporting period
Normally, when banks or financial institutions make direct payments to the
vendors/suppliers, then it becomes easier to build a nexus between the
source and application of funds.
8.3. Regulatory Deferral Account Balances
Regulatory Deferral Account Balances are defined in Ind AS 114 as that
arising when an entity provides goods or services to customers at a price or

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rate that is subject to rate regulation.

Note 11 of General Instruction for Preparation of Balance Sheet requires
Regulatory Deferral Account Balances to be presented in the Balance Sheet
in accordance with the relevant Ind AS.
Accordingly, as per Ind AS 114, the entity shall not classify the totals of
regulatory deferral account balances as current or non-current. Instead, the
separate line items for the totals of all regulatory deferral account debit
balances and the totals of all regulatory deferral account credit balances
shall be distinguished from the assets and liabilities that are presented in
accordance with other Standards by the use of sub-totals, which are drawn
before the regulatory deferral account balances are presented.
8.4. Presentation of earlier comparative period
Note 7 to General Instructions for Preparation of Balance Sheet states that
when a company applies an accounting policy retrospectively or makes a
restatement of items in the financial statements or when it reclassifies items
in its financial statements, the company shall attach to the Balance Sheet, a
Balance Sheet as at the beginning of the earliest comparative period
presented.
Similar requirement is also in para 40A of Ind AS 1, which requires an entity
to present a third balance sheet as at the beginning of the preceding period
in addition to the minimum comparative financial statements required if:
(a) An entity applies an accounting policy retrospectively, makes a
retrospective restatement of items in its financial statements or
reclassifies items in its financial statements; and
(b) The retrospective application, retrospective restatement or the
reclassification has a material effect on the information in the balance
sheet at the beginning of the preceding period.
Further, para 41 of Ind AS 1 require an entity to reclassify comparative
amounts, unless impracticable, if an entity changes the presentation or
classification of items in its financial statements of the current reporting
period.
However, MCA notified amendments to Ind AS Schedule III would result in
the Company either changing the presentation or classification of certain
items in the financial statements. Such changes result in providing additional

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information to the users of the financial statements and are required to be

made by Companies in order to comply with the statutory requirements of Ind
AS Schedule III. The Company may not present a third balance sheet as at
the beginning of the preceding period when preparing financial statements in
line with the amended requirements of Ind AS Schedule III.
8.5 Additional Regulatory Information
Schedule III also requires some additional regulatory information to be
provided in financial statements. These are as below:
8.5.1 Title deeds of Immovable Property not held in the name of the
Company
The company shall provide the details of all the immovable property (other
than properties where the Company is the lessee and the lease agreements
are duly executed in favour of the lessee) whose title deeds are not held in
the name of the company in format given below and where such immovable
property is jointly held with others, details are required to be given to the
extent of the company’s share.
Relevant Description Gross Title Whether Property Reason for
line item in of item of carrying deeds title deed held not being
the Balance property value held holder is since held in the
Sheet in the a which name of
name promoter, date the
of director company**
or
relative#
of
promoter*
/ director
or
employee
of
promoter
/ director
PPE Land XX XX XX XX XX
PPE Building XX XX XX XX XX
Investment Land XX XX XX XX XX
property

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Investment Building XX XX XX XX XX
property
PPE Land XX XX XX XX XX
retired
from
active use
and held
for
disposal
PPE Building XX XX XX XX XX
retired
from
active use
and held
for
disposal
Others XX XX XX XX XX XX
# Relative here means relative as defined in the Companies Act, 2013.
* Promoter here means promoter as defined in the Companies Act, 2013.
** also indicate if in dispute
8.5.1.1 This disclosure requires the company to provide details, in the
prescribed format, of all the immovable properties (other than properties
where the company is the lessee and the lease agreements are duly
executed in favour of the lessee) whose title deeds are not held in the name
of the company. The Act does not define the term “Immovable Property”.
However, as per General Clauses Act, 1897, “Immovable Property shall
include land, benefits to arise out of land, and things attached to the earth, or
permanently fastened to anything attached to the earth”. In the absence of
any specific guidance, the immovable properties presented under ‘property,
plant and equipment’, ‘investment property’ or classified as ‘non-current
assets held for sale’ would be covered in the scope of this disclosure but
immovable property items presented as inventory by companies carrying on
real estate business will not fall under this disclosure.
8.5.1.2 The Act does not define ‘title deeds’. In general, title deeds mean a
legal deed or document constituting evidence of a right (eg. registered sale
deed, transfer deed, conveyance deed of land), especially to the legal
ownership of the immovable property.

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In case of leased assets, title deeds would imply the lease agreements and
related documents. Where the Company is the lessee of an immovable
property and the lease agreements are not duly executed in favour of the
lessee then appropriate disclosure has to be provided for such immovable
properties.
8.5.1.3 The prescribed format requires disclosure of ‘relevant line item in the
Balance Sheet’ and ‘description of item of property’. The prescribed format
cover various line items in the Balance Sheet i.e. PPE, Investment Property
etc. and therefore, ‘others’ is a residual category that may be used to
disclose those immovable properties which could not otherwise be disclosed
as part of the prescribed line items. For example, plant and machinery items
or equipment, bearer plants, any other item of PPE that would be covered
within the meaning of ‘immovable property’.
8.5.1.4 While making this disclosure in the financial statements, the company
should disclose the following information:
(i) Gross carrying value – the company shall disclose the gross carrying
amount in the financial statements;
(ii) Title deeds held in the name of – the company shall disclose the full
name of the individual/entity/person holding the title of immovable
property;
(iii) Whether title deed holder is a promoter, director or relative of
promoter / director or employee of promoter / director – the company
shall disclose the relationship between itself and the
individual/entity/person holding the title of immovable property;
(iv) Property held since which date – the company shall disclose the date
since the property is held and where the exact date is not available, it
shall disclose the month and year since the property is held.
(v) Reason for not being held in the name of the company, also
indicating if there is a dispute – the company shall state the reason
for the immovable property not being held in the name of the
company (for example, the documents are under preparation or the
registration process of transfer of name is in progress as on the
balance sheet date). In case the title deeds of immovable property
are not being held in the name of company due to a dispute, the
company shall state the nature of dispute.

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8.5.1.5 The term ‘relative’ and ‘promoter’ as referred to while making this
disclosure should be as defined in the Companies Act, 2013.
8.5.2 Fair valuation of investment property
The Company shall disclose as to whether the fair value of investment
property (as measured for disclosure purposes in the financial statements) is
based on the valuation by a registered valuer as defined under rule 2 of
Companies (Registered Valuers and Valuation) Rules, 2017.
8.5.3 Revaluation of Property, Plant and Equipment and Right-of-Use
Assets
Where the Company has revalued its Property, Plant and Equipment
(including Right-of-Use Assets), the company shall disclose as to whether
the revaluation is based on the valuation by a registered valuer as defined
under rule 2 of the Companies (Registered Valuers and Valuation) Rules,
2017.
8.5.3.1 This clause requires a Company to disclose whether the fair
valuation of its Investment Property (only as measured for the purpose
of disclosure in the financial statements), and revaluation of its
Property, Plant and Equipment (including Right-of-Use Assets) during
the year is based on the valuation by a registered valuer as defined
above. In case the Company has not used registered valuer for such
fair value/revaluation purposes, the fact needs to be disclosed in the
financial statements.
8.5.4 Revaluation of Intangible assets
Where the company has revalued its intangible assets, the company shall
disclose as to whether the revaluation is based on the valuation by a
registered valuer as defined under rule 2 of Companies (Registered Valuers
and Valuation) Rules, 2017.
8.5.4.1 This clause requires a Company to disclose whether revaluation of its
Intangible Assets during the year is based on the valuation by a registered
valuer as defined above. In case the Company has not used registered
valuer for such fair value/revaluation purposes, the fact needs to be
disclosed in the financial statements.
8.5.5 Loans or advances to specified persons
The following disclosures shall be made where Loans or Advances in the
nature of loans are granted to promoters, directors, KMPs and the related

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parties (as defined under Companies Act, 2013,) either severally or jointly
with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment

Type of Borrower Amount of loan or Percentage to the total

advance in the nature Loans and Advances in
of loan outstanding the nature of loans
Promoters
Directors
KMPs
Related Parties

8.5.5.1 This disclosure requires the company to provide details of the amount
in respect of loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment granted to
promoters, directors, KMPs and related parties (all of these to be identified
as defined under Companies Act, 2013).
8.5.5.2 Whether an advance is in the nature of a loan would depend upon the
facts and circumstances of each case. For example, a normal advance
against an order, in accordance with the normal trade practice would not be
an advance in the nature of a loan. But if an advance is given for an amount
which is far in excess of the value of an order or for a period which is far in
excess of the period for which such advances are usually extended as per
the normal trade practice, then such an advance may be in the nature of a
loan to the extent of such excess. When a trade practice does not exist, a
useful guide would be to consider the period of time required by the supplier
for the execution of the order, that is, the time between the purchase of the
raw material and the delivery of the finished product. An advance which
exceeds this period would normally be an advance in nature of loan unless
there is an evidence to the contrary. Similarly, a stipulation regarding interest
may normally be an indication that the advance is in nature of a loan but this
by itself is not conclusive and there may also be advances which are not in
the nature of loan and which carry interest.
8.5.5.3 For the purpose of making this disclosure, the relationship should be
considered on the date of loan and the amount should be outstanding as at
the balance sheet date.

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8.5.5.4 The prescribed format has been modified to provide similar

information for the comparative reporting period(s) as given below, while the
amounts and percentages shall be disclosed at an aggregate level with
separate categorization into ‘repayable on demand’ and ‘without specifying
any terms or period of repayment’:
Current Period Previous Period
Type of Amount % of Amount % of
Borrower outstanding* Total^ outstanding* Total^
Promoters
Directors
KMPs
Related
Parties
Total
* represents loan or advance in the nature of loan
^ represents percentage to the total Loans and Advances in the nature of
loans
Moreover, the amount outstanding should be the gross carrying amount
(without netting the provision for doubtful debts or impairment loss
allowance) included by the company in its respective balance sheet.
8.5.6 Capital work-in-progress (CWIP)
(a) For capital-work-in progress, following ageing schedule shall be
given:
CWIP ageing schedule
(Amount in Rs.)
CWIP Amount in CWIP for a period of Total*
Less 1-2 years 2-3 years More
than 1 than 3
year years
Projects in
progress
Projects
temporarily
suspended
* Total shall tally with CWIP amount in the balance sheet.

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8.5.6.1 This disclosure requires the total amount of CWIP as presented in the
financial statements to be split between two broad categories viz., ‘Projects
in progress’ and ‘Projects temporarily suspended’ along with its ageing
schedule. The disclosure is not required to be presented at an asset/project
level, however, the total amount presented in this disclosure should tally with
the total amount of CWIP as presented in the financial statements.
As this disclosure needs to be provided at every balance sheet date, the
ageing for an item of CWIP shall be determined from the date of its initial
recognition to the date of balance sheet. Accordingly, it may so happen that
for a single asset/project recognized as a CWIP, the ageing for the total
amount of CWIP shall fall into different ageing buckets as at a particular
balance sheet date. This can be explained with the help of below example:
Company A is commissioning a plant. The project activity was in progress at
the end of the reporting period (year 4). It has incurred following
expenditures on various items in commissioning that plant:
Period 1 Amount CWIP
balance
at the
year-end
Year 1 100 100
Year 2 150 250
Year 3 250 500
Year 4 50 550
1 For illustration purpose, it has been assumed that the expenditure has been
incurred on first day of each year.
Disclosure as at the end of Year 4 shall be made as follows:
CWIP Amount in CWIP for a period of Total
Less than 1-2 2-3 More than
1 year years years 3 years
Projects in 50 250 150 100 550
progress
Projects
temporarily - - - - -
suspended
* Total shall tally with CWIP amount in the balance sheet.

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8.5.6.2 When temporary suspension is a necessary part of the process of

getting an asset ready for its intended use, the project should not be
considered to have been temporarily suspended and the CWIP related to
such projects should continue to be presented under ‘Projects in progress’.
8.5.6.3 The classification of assets/projects into ‘projects in progress’ and
‘projects temporarily suspended’ needs to be evaluated at each reporting
date. Any change in status during the reporting period or any time after end
of the reporting period will not change the classification of assets/projects for
above disclosure purposes. For e.g., if a project was temporarily suspended
for most of the time during the reporting period but development of the asset
resumes before the end of the reporting period, then the ageing of its related
CWIP amounts will be presented under ‘Projects in progress’.
Similarly, where a project is temporarily suspended at the end of reporting
period but development on same resumes after end of reporting period, then
the ageing of its related CWIP amounts will be presented under ‘Projects
temporarily suspended’.
8.5.6.4 Any change in the asset’s/project’s category of disclosure as at the
end of current period will not affect disclosure given for that asset/project as
at the end of previous period. For e.g., where a project is in progress at the
end of current reporting period but was temporarily suspended at the end of
previous reporting period, the ageing schedule as at end of current period
will show the asset/project as part of the category ‘projects in progress’ while
the ageing schedule as at the end of previous period will continue to present
the asset/project as part of the category ‘project temporarily suspended’.
8.5.6.5 The requirements mentioned above in respect of CWIP shall be
applicable for investment property under development.
(b) For capital-work-in progress, whose completion is overdue or has
exceeded its cost compared to its original plan, following CWIP
completion schedule shall be given**:

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(Amount in Rs.)
CWIP To be completed in
Less than 1-2 years 2-3 years More than
1 year 3 years
Project 1
Project 2
** Details of projects where activity has been suspended shall be given
separately.

8.5.6.6 In respect of assets/projects forming part of CWIP and which have

become overdue compared to their original plans or where cost is exceeded
compared to original plans, disclosure is required to be given for expected
completion timelines in defined ageing brackets. Any variation between an
asset’s/project’s actual completion timeline or it’s actual cost and the
respective estimate is required to be evaluated from the original plan (i.e.
original completion timelines and original estimated costs). A company’s
‘original plan’ shall be considered as that plan which is approved by the
relevant approving authority and on the basis of which implementation
progress is evaluated. Such an original plan shall include management’s
estimates and assumptions w.r.t future business, economy / industry and
regulatory environments and such assumptions shall be subject to change
from time to time resulting in a ‘revised plan’. Management shall apply
judgement in determining whether such revisions in the plans are in the
nature of a fresh ‘Original Plan’ or simply an update of estimates and
assumptions such that the original plan is revisited and revised. When plans
are subsequently revisited and revised, same should not be considered for
determining variation when making above disclosures.
8.5.6.7 Disclosure is required only in those cases where the actual cost of an
asset/project has already exceeded the estimated cost as per original plan or
actual timelines for completion of an asset/project have exceeded the
estimated timelines as per original plan. Such assessment needs to be done
at each reporting date.
This disclosure is required to be made at project level and separately for the
two categories viz., ‘Projects in progress’ and ‘Projects temporarily
suspended’.

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Further, for the purpose of this disclosure, projects that are not considered as
material at an individual level can be aggregated and disclosed under the
relevant category.
The prescribed disclosure may be slightly modified as below:
CWIP To be completed in
Less than 1-2 years 2-3 years More than
1 year 3 years
Projects in
progress
Project 1
Project 2

Projects
temporarily
suspended
Project 1
Project 2
* Total shall tally with CWIP amount in the balance sheet.
8.5.6.8 The prescribed format of disclosure seems to require a disclosure for
both categories (exceeded cost or overdue) on a combined basis instead of
separately disclosing for each trigger viz., projects which are overdue and
projects where costs have exceeded. However, the company may choose to
provide disclosure for each trigger separately.
8.5.6.9 Neither Schedule III nor Ind AS 16 defines ‘project’. Project may be
construed as smallest group of assets having a common intended use. For
e.g., group of assets in an integrated plant may be treated as one project.
The identification of project will require judgement and management needs to
identify project based on facts of each case. Project identification should be
consistent with how management identifies and monitors progress on group
of assets internally.
8.5.7 Intangible assets under development
(a) For intangible assets under development, the following ageing
schedule shall be given:

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Intangible assets under development ageing schedule

(Amount in Rs.)
Intangible Amount in intangible assets under Total*
assets under development for a period of
development Less 1-2 years 2-3 years More
than 1 than 3
year years
Projects in
progress

Projects
temporarily
suspended
* Total shall tally with the amount of intangible assets under development in
the balance sheet.
(b) For intangible assets under development, whose completion is
overdue or has exceeded its cost compared to its original plan,
following intangible assets under development completion
schedule shall be given**:
(Amount in Rs.)
Intangible assets To be completed in
under development Less than 1-2 years 2-3 years More than
1 year 3 years

Project 1

Project 2

** Details of projects where activity has been suspended shall be given

separately.
All the relevant guidance given for a similar disclosure of capital work-in-
progress to the extent applicable to Intangible assets under development is
applicable here also.

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8.5.8 Details of Benami Property held

Where any proceedings have been initiated or pending against the company
for holding any benami property under the Benami Transactions
(Prohibitions) Act, 1988 (45 of 1988) and the rules made thereunder, the
company shall disclose the following:
(a) Details of such property, including year of acquisition;
(b) Amount thereof;
(c) Details of Beneficiaries;
(d) If property is in the books, then reference to the item in the Balance
Sheet;
(e) If property is not in the books, then the fact shall be stated with
reasons;
(f) Where there are proceedings against the company under this law as
an abetter of the transaction or as the transferor then the details shall
be provided;
(g) Nature of proceedings, status of same and company’s view on the
same.
8.5.8.1 The disclosure requirement refers to Benami Transactions
(Prohibition) Act, 1988. The name of the aforesaid Act has been changed to
Prohibition of Benami Property Transactions Act, 1988 in the year 2016.
Therefore, for the purpose of disclosures, reference shall be made to
Prohibition of Benami Property Transactions Act, 1988 (as amended in
2016).
8.5.8.2 For the meaning of the relevant terms, reference has to be made to
Prohibition of Benami Property Transactions Act, 1988 (as amended from
time to time) and the rules made thereunder. Relevant definitions applicable
for this disclosure are reproduced below:
Section 2(8) – "benami property" means any property which is the subject
matter of a benami transaction and also includes the proceeds from such
property;
Section 2(9) – “benami transaction" means,
(A) a transaction or an arrangement:
(a) where a property is transferred to, or is held by, a person, and the
consideration for such property has been provided, or paid by,
another person; and

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(b) the property is held for the immediate or future benefit, direct or
indirect, of the person who has provided the consideration,
except when the property is held by—
(i) a Karta, or a member of a Hindu undivided family, as the
case may be, and the property is held for his benefit or
benefit of other members in the family and the consideration
for such property has been provided or paid out of the known
sources of the Hindu undivided family;
(ii) a person standing in a fiduciary capacity for the benefit of
another person towards whom he stands in such capacity
and includes a trustee, executor, partner, director of a
company, a depository or a participant as an agent of a
depository under the Depositories Act, 1996 (22 of 1996) and
any other person as may be notified by the Central
Government for this purpose;
(iii) any person being an individual in the name of his spouse or
in the name of any child of such individual and the
consideration for such property has been provided or paid
out of the known sources of the individual;
(iv) any person in the name of his brother or sister or lineal
ascendant or descendant, where the names of brother or
sister or lineal ascendant or descendent and the individual
appear as joint-owners in any document, and the
consideration for such property has been provided or paid
out of the known sources of the individual; or
(B) a transaction or an arrangement in respect of a property carried out or
made in a fictitious name;
(C) a transaction or an arrangement in respect of a property where the
owner of the property is not aware of, or, denies knowledge of, such
ownership; or
(D) a transaction or an arrangement in respect of a property where the
person providing the consideration is not traceable or is fictitious.
Explanation – For the removal of doubts, it is hereby declared that benami
transaction shall not include any transaction involving the allowing of

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possession of any property to be taken or retained in part performance of a

contract referred to in section 53A of the Transfer of Property Act, 1882 (4 of
1882), if, under any law for the time being in force,—
(i) consideration for such property has been provided by the person to
whom possession of property has been allowed but the person who
has granted possession thereof continues to hold ownership of such
property;
(ii) stamp duty on such transaction or arrangement has been paid; and
(iii) the contract has been registered;
Section 2(10) - “benamidar” means a person or a fictitious person, as the
case may be, in whose name the benami property is transferred or held and
includes a person who lends his name;
Section 2(19) - “Initiating Officer” means an Assistant Commissioner or a
Deputy Commissioner as defined in clauses (9A) and (19A) respectively of
section 2 of the Income-tax Act, 1961;
Section 2(26) - "property" means assets of any kind, whether movable or
immovable, tangible or intangible, corporeal or incorporeal and includes any
right or interest or legal documents or instruments evidencing title to or
interest in the property and where the property is capable of conversion into
some other form, then the property in the converted form and also includes
the proceeds from the property.
8.5.8.3 The Initiating Officer (IO), as the name indicates is an authority who
initiates the proceedings under the aforesaid Act. As per section 2(19) of
aforesaid Act, the IO is the Assistant/ Deputy Commissioner of Income Tax.
Chapter IV of the aforesaid Act deals with the provisions relating to
attachment, adjudication, and confiscation of property involved in benami
transaction.
8.5.8.4 The IO collects the material during the investigation of suspicious
benami transaction, and based on such material in his possession, if he has
reason to believe that any person is benamidar in respect of the property,
then he has to record the reasons in writing and then issue a show cause
notice to such benamidar asking why the property should not be treated as
benami property. The IO issues the show cause notice under section 24(1) of
Prohibition of Benami Property Transactions Act, 1988. A copy of the show-
cause notice shall be sent to the beneficial owner also if his identity is
known.

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8.5.8.5 With the above background and guidance from the Prohibition of
Benami Property Transactions Act, 1988 (as amended in 2016), when
making this disclosure in the financial statements, the company should
provide the following information:
(i) Details of such property, including year of acquisition – the company
shall disclose the details like name and nature of the property and also
the year of acquisition;
(ii) Amount thereof – the company shall disclose the amount of acquisition
cost incurred at the time of acquisition of the property;
(iii) Details of Beneficiaries – the company shall disclose these details w.r.t
beneficiaries viz., name, address, any government identification
number (for e.g., PAN, Aadhar Card, SSN, CIN, etc.) and relationship
with the company;
(iv) If property is in the books, then reference to the item in the Balance
Sheet – the company shall disclose the line item of the balance sheet
in which such property is presented, if it is recognised in the books of
accounts;
(v) If property is not in the books, then the fact shall be stated with
reasons – the company shall state the fact along with the reason for
the property not recognised in the books of accounts of the company;
(vi) Where there are proceedings against the company under this law as
an abetter of the transaction or as the transferor then the details shall
be provided – the company shall provide details like the Initiating
Officer, date of show-cause notice, name and nature of the property
which is the subject of the proceedings etc;
(vii) Nature of proceedings, status of same and company’s view on same –
the company shall specify, as part of the nature of proceedings,
whether it involves an attachment, adjudication and/or confiscation of
property. The company shall also state the fact around the status of
the proceedings and its view on the same.
(viii) In case of a dispute on the proceedings initiated or pending against
the company, the company shall state the fact along with the period
(no. of years) since the beginning of the dispute till the balance sheet
date.
8.5.9 Borrowings secured against current assets
Where the company has borrowings from banks or financial institutions on
the basis of security of current assets, it shall disclose the following:

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(a) whether quarterly returns or statements of current assets filed by the

company with banks or financial institutions are in agreement with the
books of accounts.
(b) if not, summary of reconciliation and reasons of material
discrepancies, if any to be adequately disclosed.
8.5.9.1 This clause requires the company to provide certain disclosure in
case it has borrowings from banks or financial institutions on the basis of
security of current assets. It is not specified whether the existence of
borrowings should be assessed as at the end of the reporting period or
during the reporting period. However, there is similar reporting requirement
for the auditors as per the Companies (Auditors’ Report) Order, 2020 (‘CARO
2020’), whereby the clause refers to the words ‘during any point of time of
the year’. Accordingly, the disclosure requirement shall apply if the company
has borrowings ‘during any point of time of the year’ from banks or financial
institutions on the basis of security of current assets.
8.5.9.2 Schedule III to the Act defines a current asset as under:
“An asset shall be classified as current when it satisfies any of the following
criteria:
(a) it is expected to be realized in, or is intended for sale or consumption
in, the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months after the reporting
date; or
(d) it is Cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months after
the reporting date.
8.5.9.3 The Company shall provide this disclosure considering the
sanctioned borrowings even if the same is unutilized during the period or as
at the end of the reporting period. The utilization may be more or less than
the sanctioned amounts, but such cases will also be covered for the purpose
of reporting. The term "sanction" here should include fresh sanction during
the reporting period as well as limits renewed or due for renewal during the
reporting period. Moreover, both fund based and non-fund based credit
facilities availed by the Company shall be included for the purpose of this
disclosure. However, this would exclude any borrowings which are
sanctioned on the basis of security of the assets other than current assets.

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8.5.9.4 Although company may be submitting monthly returns/statements to

the lenders, reporting under this clause is confined to the quarterly
returns/statements only. For instance, if the company submits
returns/statements on a monthly basis say for the months of April, May and
June, then the disclosure would be required in the context of the
returns/statements submitted solely for the month of June, being the relevant
return as at the end of a quarter.
8.5.9.5 Such returns/statements may include stock statements, book debt
statements, statements on ageing analysis of the debtors/other receivables
to be submitted in stipulated format on a periodic basis to lenders.
8.5.9.6 The Statement as submitted to the Banks/Financial Institutions
should be compared to the Books of Accounts of the Company.
8.5.9.7 If any discrepancy arises when such returns/statements are
compared with the books of account, then the Company is required to
provide summary of reconciliation and reasons of material discrepancies.
Instances of such differences may be relating to difference in value of stock,
amount of debtors/creditors, ageing analysis of debtors, etc., between the
books of account and the returns/statements submitted to banks/financial
institutions.
8.5.9.8 The disclosure required under this clause should also be made where
borrowings have been availed based on security of current assets of other
companies/entities within the same Group as the reporting entity.
Illustrative format for disclosure is as follows (to be given separately for each
company/entity within the group:
Quarter Name Particulars Amount Amount as Amount Reason for
of of as per reported in of material
bank Securities books the difference discrepancies
Provided of quarterly
account return/
statement
June Bank Finished XX XX XX
20XX X Goods

8.5.10 Wilful Defaulter*

Where a company is declared wilful defaulter by any bank or financial
institution or other lender, following details shall be given:

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(a) Date of declaration as wilful defaulter;

(b) Details of defaults (amount and nature of defaults)
*‘wilful defaulter’ here means a person or an issuer who or which is
categorized as a wilful defaulter by any bank or financial institution (as
defined under the Companies Act, 2013) or consortium thereof, in
accordance with the guidelines on wilful defaulters issued by the Reserve
Bank of India.
8.5.10.1 This disclosure requirement applies to any company that has been
declared as a wilful defaulter by any lender who has powers to declare a
company as a wilful defaulter at any time during the financial year or after the
end of reporting period but before the date when financial statements are
approved or in an earlier period and the default has continued for the whole
or part of the current year. Such lenders shall include any bank or financial
institution or any other lender in which such powers shall be vested pursuant
to relevant regulations.
8.5.10.2 Reserve Bank of India vide its master circular RBI/2014-
15/73DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 on Wilful
Defaulters (“RBI Circular”) as updated from time to time has defined that a
"wilful default" would be deemed to have occurred if any of the following
events is noted:-
(i) The unit has defaulted in meeting its payment / repayment obligations
to the lender even when it has the capacity to honour the said
obligations.
(ii) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has not utilised the finance from the lender for the
specific purposes for which finance was availed of but has diverted the
funds for other purposes.
(iii) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has siphoned off the funds so that the funds have not
been utilised for the specific purpose for which finance was availed of,
nor are the funds available with the unit in the form of other assets.
(iv) The unit has defaulted in meeting its payment / repayment obligations
to the lender and has also disposed off or removed the movable or
immovable property given by him or it for the purpose of securing a
term loan without the knowledge of the bank/lender.

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Reserve Bank of India has prescribed a transparent mechanism for

identification of wilful defaulters. The term ‘lender’ appearing in the RBI
Circular covers all banks/financial institutions to which any amount is due,
provided it is arising on account of any banking transaction, including off
balance sheet transactions such as derivatives, guarantee and letter of
credit.
8.5.10.3 It is possible that the company may not have been declared as wilful
defaulter as at the date of the balance sheet but has been so declared before
the financial statements are approved for issue. A question, therefore, arises
whether the reporting under this clause is to be considered as at the balance
sheet date or on the date of approval of the financial statements. It is clarified
that the events upto date of approval of financial statements should be
considered for disclosure under this clause.
8.5.11 Relationship with Struck off Companies
Where the company has any transactions with companies struck off under
section 248 of the Companies Act, 2013 or section 560 of the Companies
Act, 1956, the company shall disclose the following details:
Name of the Nature of transactions with Balance Relationship with
struck off struck off company outstanding the struck off
company company, if any,
to be disclosed
Investment in securities
Receivables
Payables
Shares held by struck off
company
Other outstanding
balances (to be specified)

8.5.11.1 This disclosure requires the company to provide details of the

balances outstanding in respect of transactions undertaken with a company
struck off under section 248 of the Companies Act, 2013 or section 560 of
the Companies Act, 1956.
8.5.11.2 When making this disclosure in the financial statements, the
company should provide the following information:

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(i) Name of the struck off company – the company shall disclose the
name of the company which has been struck off by the respective
Registrar of Companies and such information is available vide public
notice (Form No. STK-7) u/s 248 of the Act, at any time during the
reporting period or in an earlier reporting period if any balance in
respect of the transactions with the struck off company is outstanding
at the period end, on the website of Ministry of Corporate Affairs;
(ii) Nature of transactions with struck off company – the company shall
use the prescribed format in grouping the nature of its transactions
with each struck off company. It shall utilise and specify as part of
‘other outstanding balances’ any other transactions that do not fit into
the prescribed categories;
(iii) Balance outstanding – the company shall disclose the amount
outstanding as the gross carrying amount (without netting the
provision for doubtful debts or impairment loss allowance) included in
its respective balance sheet; If any transaction with a struck off
company has happened during a financial year and settled / reversed /
squared off, etc., during the same financial year such that the balance
outstanding is NIL as at the end of the reporting period, the company
is required to disclose those transactions as well in the similar format
as prescribed in para 8.5.11.3 (Pg 108)
(iv) Relationship with the struck off company, if any, to be disclosed – the
company shall disclose the relationship with the struck off company
evaluated as per the definition of ‘related party’ under section 2(76) of
the Act. For the purpose of this disclosure, such relationship between
the company and the struck off company should exist as at the
respective balance sheet date.
However, when providing the above disclosure, the details should not be
included for those companies whose names were struck off during the
financial year but an order had been passed by any adjudicating authority
(for e.g., NCLT) restoring the company’s name before approval of the
financial statements.

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8.5.11.3 The illustrative format is as given below:

Name of Nature of Balance Relationship Balance Relationship
the transactions outstanding with the outstanding with the
struck with struck as at struck off as at struck off
off off company current company, if previous company, if
company period any, to be period any, to be
disclosed disclosed
Investment
in securities
Receivables
Payables
Shares held
by struck off
company
Other
outstanding
balances
(to be
specified)

8.5.12 Registration of charges or satisfaction with Registrar of

Companies (ROC)
Where any charges or satisfaction yet to be registered with ROC beyond the
statutory period, details and reasons thereof shall be disclosed.
The Company shall provide the details in relation to each charge or
satisfaction that are not registered by the statutory date. Such details may
include a brief description of the charges or satisfaction, the location of the
Registrar, the period (in days or months) by which such charge had to be
registered and the reason for delay in registration.
8.5.13 Compliance with number of layers of companies
Where the company has not complied with the number of layers prescribed
under clause (87) of section 2 of the Act read with Companies (Restriction on
number of Layers) Rules, 2017, the name and CIN of the companies beyond
the specified layers and the relationship / extent of holding of the company in
such downstream companies shall be disclosed.

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8.5.14 Following Ratios to be disclosed:

(a) Current ratio
(b) Debt-equity ratio
(c) Debt service coverage ratio
(d) Return on equity ratio
(e) Inventory turnover ratio
(f) Trade receivables turnover ratio
(g) Trade payables turnover ratio
(h) Net capital turnover ratio
(i) Net profit ratio
(j) Return on capital employed
(k) Return on investment
The company shall explain the items included in numerator and denominator
for computing the above ratios. Further explanation shall be provided for any
change in the ratio by more than 25% as compared to the ratio of preceding
year.
8.5.14.1 This disclosure requires the company to provide analytical ratios
with an explanation of the items included in numerator and denominator for
computing these ratios. Further, the company shall provide a commentary
explaining any change (whether positive or negative) in the ratio by more
than 25% as compared to the ratio of preceding year.
8.5.14.2 An illustrative format (Refer Annexure B) for this disclosure is given
below:
Ratio Numerator Denominator Current Previous % Reason
Period Period Varianc for
e variance
Current
Ratio
Debt-
equity ratio
.
.
.

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Return on
capital
employed
Return on
investment

8.5.14.3 The items that are considered as part of the numerator and as part
of the denominator should be such that a reference to the respective line
item in the financial statements or notes could be easily drawn. Such items
should be consistent for the periods presented and should also be consistent
with the industry practice over time. In other words, if there is any change in
the current period in relation to any item in the numerator or denominator for
any ratio, then the same change shall be made for the comparative period as
well and a footnote shall be added to explain the change in the item along
with the reason thereof.
8.5.14.4 In order to determine the items to be included in numerator and in
denominator for any ratio, reference may be drawn from several sources for
e.g., ratio’s usage in common parlance, investor reports, industry reports,
market research reports, approach of credit rating agencies, etc. There may
be a need to factor in company-specific and sector-specific nuances that may
require necessary modifications to the reference considered. In other words,
items included in numerator and denominator of any ratio may not be
standardized across companies as the calculation methodology would be a
matter of each company’s facts and circumstances, nature of transactions,
nature of industry/sector in which the company operations or the applicable
regulatory requirements that a company needs to comply with.
8.5.14.5 Ratios presented in any other place in annual report should be
consistent with the ratios mentioned in financial statement.
8.5.15 Compliance with approved Scheme(s) of Arrangements
Where any Scheme of Arrangements has been approved by the Competent
Authority in terms of sections 230 to 237 of the Companies Act, 2013, the
company shall disclose that the effect of such Scheme of Arrangements have
been accounted for in the books of account of the Company ‘in accordance
with the Scheme’ and ‘in accordance with accounting standards’ and
deviation in this regard shall be explained.
This requirement shall be applicable for schemes that have been approved
earlier and have an ongoing accounting impact as on the date of current or
comparative period financial statements where such requirements are
applied.

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Section 232 of the Companies Act, 2013 contains requirement that no

compromise or arrangement shall be sanctioned by the competent authority
unless a certificate by the company’s auditor has been filed to the effect that
the accounting treatment, if any, proposed in the scheme of compromise or
arrangement is in conformity with the accounting standards prescribed under
section 133 of the Companies Act, 2013.
Further, where a law requires a different treatment, accounting standards are
considered to be overruled to that extent. A scheme of arrangement
sanctioned by the competent authority under prevalent laws will have effect
of overriding requirements of the accounting standards where differing
requirements are present in sanctioned scheme vis-à-vis the requirement of
the relevant accounting standards.
Where an approved Scheme of Arrangement proposes an accounting
treatment that is given effect in the Company’s books of accounts, then a
disclosure shall be made that the effect of the Scheme of Arrangement in the
books of accounts is ‘in accordance with the Scheme’. In such a case, if
there is any deviation between the accounting treatment given in the Scheme
and as per the accounting standards, then the fact shall be stated along with
an explanation of the deviation.
Where an approved Scheme of Arrangement does not propose an
accounting treatment i.e. it is silent or it simply refers to the relevant
accounting standards and the effect is given accordingly in the Company’s
books of accounts, then a disclosure shall be made that the effect of the
Scheme of Arrangement in the books of accounts is ‘in accordance with the
accounting standards’.
8.5.16 Utilisation of Borrowed funds and share premium
8.5.16.1 (A) Where company has advanced or loaned or invested funds
(either borrowed funds or share premium or any other sources or kind of
funds) to any other person(s) or entity(ies), including foreign entities
(Intermediaries) with the understanding (whether recorded in writing or
otherwise) that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the company (Ultimate
Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the
Ultimate Beneficiaries,
the company shall disclose the following:

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(I) date and amount of fund advanced or loaned or invested in

Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested by
such Intermediaries to other intermediaries or Ultimate Beneficiaries
along with complete details of the ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on
behalf of the Ultimate Beneficiaries.
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and the Companies Act has been
complied with for such transactions and the transactions are not
violative of the Prevention of Money-Laundering Act, 2002 (15 of
2003).
(B) Where a company has received any fund from any person(s) or
entity(ies), including foreign entities (Funding Party) with the understanding
(whether recorded in writing or otherwise) that the company shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the Funding Party
(Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the
Ultimate Beneficiaries,
the company shall disclose the following:
(I) date and amount of fund received from Funding parties with complete
details of each Funding party.
(II) date and amount of fund further advanced or loaned or invested in
other intermediaries or Ultimate Beneficiaries along with complete
details of the other intermediaries’ or ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on
behalf of the Ultimate Beneficiaries.
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has been
complied with for such transactions and the transactions are not
violative of the Prevention of Money-Laundering Act, 2002 (15 of
2003).
8.5.16.2 The term Intermediary is not defined in the Act. The identification of
any other person(s) or entity(ies), including foreign entities as an

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intermediary shall be made on the basis of their objective of receiving funds

by way of advance or loan or investment from the company with the
understanding that they / it shall
(i) directly (i.e. without any further intermediaries) or indirectly (i.e.
through further intermediaries) lend or invest in other persons or
entities identified in any manner whatsoever by or on behalf of the
company (Ultimate Beneficiaries) or
(ii) provide any guarantee (viz. corporate, bank, personal or any other
form of guarantee), security or the like (i.e. it may include any assets,
comfort letter, Letter of Credit, Buyers credit, promissory note etc.) to
or on behalf of the Ultimate Beneficiaries,
The ultimate beneficiary is the company (irrespective of single intermediary
or multiple intermediaries used in the layer), when disclosure is to be made
for the utilisation of funds.
8.5.16.3 The term Funding Party is not defined in the Act. The identification
of any person(s) or entity(ies), including foreign entities as a Funding Party
shall be made on the basis of their objective of providing funds to the
company with the understanding that they / it shall
(i) directly (i.e. without any further funding party) or indirectly (i.e. through
further funding party) lend or invest in other persons or entities
identified in any manner whatsoever by or on behalf of the Funding
Party (Ultimate Beneficiaries) or
(ii) provide any guarantee (viz. corporate, bank, personal or any other
form of guarantee), security or the like (i.e. it may include any assets,
comfort letter, Letter of Credit, Buyers credit, promissory note etc.) to
or on behalf of the Ultimate Beneficiaries,
The ultimate beneficiary is the funding party (in case of single layer) or the
ultimate funding party (in case of multiple layers), when disclosure is to be
made for the receipt of funds.
8.5.16.4 This disclosure requires company to cover transactions that do not
take place directly between the company and the ultimate beneficiary but are
camouflaged by including a pass- through entity in order to hide the ultimate
beneficiary. The pass-through entity acts on the instructions of the company
for channeling the funds to the ultimate beneficiary as identified by the
company. It might be noted that the reporting obligation includes inbound as
well as outbound funding transactions. It is implied that advances given or
received in the ordinary course of business (e.g., advance to employees,

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advance to customers or suppliers against provision of goods or services,

etc.) shall not be covered as part of this disclosure requirement.
8.5.16.5 For the purpose of this disclosure, the company may restrict to
disclose only the pass through transactions during the current year i.e. for
the funds received on or after 01.4.2021 and the amounts unutilized as on
01.04.2021 which are now utilized in the current year.
8.5.16.6 When providing this disclosure, the term ‘complete details’ used at
various places would mean that details of each particular party / entity should
include the name, registered address, any government identification number
(for e.g., PAN, SSN, CIN, etc.) and relationship with the company making the
disclosure.
8.5.16.7 The term ‘with the understanding (whether recorded in writing or
otherwise)’ shall be construed basis appropriate evidences for e.g., board or
shareholder resolutions, investment agreements, share purchase
agreements, term sheets, or any other relevant / appropriate documents
evidencing such an understanding either specifically in writing or otherwise
(i.e. not specifically but through the objective / understanding of the overall
transaction / flow of funds).

9. Part II – Statement of Profit and Loss and

Notes – General Instructions for Preparation
of Statement of Profit and Loss: Notes 1 to 6
Part II deals with disclosures relating to the Statement of Profit and Loss.
The format prescribed is the vertical form wherein disclosure for revenues
and expenses has been given in various line items. Part II contains items I to
XVIII which lists items of Revenue, Expenses, Profit / (Loss) and Other
Comprehensive Income. “General Instructions for Preparation of Statement
of Profit and Loss” govern the other disclosures and presentation aspects
related to the Statement of Profit and Loss.
As per Note 1 of “General Instructions for Preparation of Statement of Profit
and Loss”, the provisions of this part also apply to the income and
expenditure account referred to in sub clause (ii) of clause (40) of section 2
of the Act in the same manner as they apply to a Statement of Profit and
Loss.
As per Note 2 of “General Instructions for Preparation of Statement of Profit
and Loss”, the Statement of Profit and Loss shall include:

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(1) Profit or loss for the period;

(2) Other Comprehensive Income for the period.
The sum of (1) and (2) above is ‘Total Comprehensive Income’.
‘Profit or loss’ is defined in Ind AS 1 as ‘the total of income less expenses,
excluding the components of other comprehensive income.
‘Other comprehensive income’ is defined in Ind AS 1 as ‘comprising items of
income and expense (including reclassification adjustments) that are not
recognised in profit or loss as required or permitted by other Ind ASs.
Other comprehensive income shall be presented as:
(a) Items that will not be reclassified to profit or loss and its related
income tax effects;
(b) Items that will be reclassified to profit or loss and its related income
tax effects.
‘Reclassification adjustments’ are defined in Ind AS 1 as amounts
reclassified to profit or loss in the current period that were recognised in
other comprehensive income in the current or previous periods.
As per Ind AS 1 ‘Total Comprehensive Income’ comprises all components of
‘profit or loss’ and of ‘other comprehensive income’.
The Statement of Profit and Loss is a single statement of profit and loss, with
profit or loss and other comprehensive income presented in two sections, as
per Part II of Ind AS Schedule III. The sections are presented together, with
the profit or loss section presented first followed directly by the other
comprehensive income section. This is in sync with para 10A of Ind AS 1.
Ind AS 1 prohibits an entity from presenting any items of income or expense
as extraordinary items, in the statement of profit and loss or in the notes.
Accordingly, there are no line items like ‘Extraordinary items’ and ‘Profit
before extraordinary items and tax’ in this Schedule.
The specific format laid down for presentation of various items of Income and
Expenses in the Statement of Profit and Loss indicate that expenses should
be aggregated based on their nature, which is in sync with Ind AS 1 para 99.
Accordingly, functional classification of expenses is prohibited.
As per the Ind AS Framework for the Preparation and Presentation of
Financial Statements, Income and expenses are defined as follows:

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(a) Income is increases in assets, or decreases in liabilities, that results in

increases in equity, other than those relating to contributions from
holders of equity claims.
(b) Expenses are decreases in assets, or increases in liabilities, that
result in decreases in equity, other than those relating to distributions
to holders of equity claims.
Further, separate line items should be included in the profit or loss section of
the Statement of Profit and Loss to present the following items in line with
para 82 of Ind AS 1:
(a) Revenue, presenting separately interest revenue calculated using the
effective interest method;
(b) Gains and losses arising from the de-recognition of financial assets
measured at amortized cost;
(c) Finance costs
(d) Impairment losses (including impairment gains or reversals of
impairment losses) determined as per Ind AS 109, Section 5.5;
(e) Share of profit or loss of associates and joint ventures accounted for
using the equity method;
(f) Any gain or loss arising from a difference between the previous
amortized cost of the financial asset and its fair value at the date when
the financial asset is reclassified from amortized cost to fair value
through profit or loss;
(g) Any cumulative gain or loss previously recognized in other
comprehensive income that is reclassified to profit or loss, when the
financial asset is reclassified from fair value through other
comprehensive to fair value through profit or loss;
(h) A single amount for the total of discontinued operations, as per Ind AS
105.
In separately disclosing the above, consideration should be given to Note
7(c) of General Instructions for Preparation of Statement of Profit and Loss,
that requires disclosure of any item of income or expenditure exceeding one
percent of the revenue from operations or Rs. 10,00,000, whichever is
higher, in addition to the consideration of ‘materiality’. An entity should
consider these requirements as mutually exclusive.

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9.1 Revenue from operations

The aggregate of Revenue from operations needs to be disclosed on the
face of the Statement of Profit and Loss as per Schedule III.
9.1.1. Note 3 of General Instructions for the Preparation of Statement of
Profit and Loss require that revenue from operations is to be separately
disclosed in the notes, showing revenue from:
(a) Sale of products (including Excise Duty);
(b) Sale of services;
(ba) Grants or donations received (relevant in case of section 8 companies
only); and
(c) Other operating revenues
9.1.2. As per the definition of Revenue in Ind AS 115, “revenue is income
arising in the course of an entity’s ordinary activities” and as per the
definition of Income in Ind AS 115, “Increase in economic benefits during the
accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.” Further, as per Ind AS 115,
revenue includes only the gross increase in economic benefits occurring to
the entity on its own account. Amounts collected, in capacity of an agent, on
behalf of third parties such as sales taxes, goods and services taxes and
value added taxes are not economic benefits which flow to the entity and do
not result in increases in equity. Therefore, they are excluded from revenue.
Similarly, in an agency relationship, the gross increase in economic benefits
include amounts collected on behalf of the principal and which do not result
in increases in equity for the entity. The amounts collected on behalf of the
principal are not revenue.
9.1.3. Indirect taxes such as Sales tax, Goods and Services tax, etc. are
generally collected from the customer on behalf of the government in majority
of the cases. However, this may not hold true in all cases and it is possible
that a company may be acting as principal rather than as an agent in
collecting these taxes. Whether revenue should be presented gross or net of
taxes should depend on whether the company is acting as a principal and
hence, is responsible for paying tax on its own account or, whether it is
acting as an agent i.e. simply collecting and paying tax on behalf of
government authorities. If the entity is the principal, then revenue should also

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be grossed up for the tax billed to the customer and the tax payable should
be shown as an expense. However, in cases, where a company collects such
taxes only as an agent, revenue should be presented net of taxes.
9.1.4. On the other hand, recovery of excise duty is an inflow that the entity
receives on its own account. For the manufacturer it is a part of the cost of
production, irrespective of whether the goods are sold or not. The
manufacturer acts as a principal in collecting excise duty and therefore,
revenue should be grossed up to include excise duty. Excise duty paid
should be presented as a separate line item under the ‘Expenses’ head on
the face of Statement of Profit and Loss. (Refer Annexure F (Pg 213))
9.1.5. Moreover, SEBI issued clarification, regarding its format for publishing
financial information by listed entities, that ‘Income from Operations’ may be
disclosed inclusive of excise duty.
9.1.6. Under the GST regime, the collection of GST by an entity would not be
an inflow on the entity’s own account but it shall be made on behalf of the
government authorities. Accordingly, the revenue should be presented net of
GST.
9.1.7. Revenue from operations needs to be disclosed separately as revenue
from
(a) sale of products,
(b) sale of services and
(c) other operating revenues.
It is important to understand what is meant by the term “other operating
revenues” and which items should be classified under this head vis-à-vis
under the head “Other Income”.
9.1.8. The term “other operating revenue” is not defined. This would include
Revenue arising from a company’s operating activities, i.e., either its
principal or ancillary revenue-generating activities, but which is not revenue
arising from sale of products or rendering of services. Whether a particular
income constitutes “other operating revenue” or “other income” is to be
decided based on the facts of each case and detailed understanding of the
company’s activities.
9.1.9. The classification of income would also depend on the purpose for
which the particular asset is acquired or held. For instance, a group engaged
in manufacture and sale of industrial and consumer products also has one

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real estate arm. If the real estate arm is continuously engaged in leasing of
real estate properties, the rent arising from leasing of real estate is likely to
be “other operating revenue”. On the other hand, consider a consumer
products company which owns a 10 storied building. The company currently
does not need one floor for its own use and has given the same temporarily
on rent. In that case, lease rent is not an “other operating revenue”; rather, it
should be treated as “other income”.
9.1.10. To take other examples, sale of Property, Plant and Equipment is
not an operating activity of a company, and hence, profit on sale of Property,
Plant and Equipment should be classified as other income and not other
operating revenue. On the other hand, sale of manufacturing scrap arising
from operations for a manufacturing company should be treated as other
operating revenue since the same arises on account of the company’s main
operating activity.
9.2. Other income
The aggregate of ‘Other income’ is to be disclosed on face of the Statement
of Profit and Loss. As per Note 5 of General Instructions for the Preparation
of Statement of Profit and Loss ‘Other Income’ shall be classified as:
(a) Interest Income;
(b) Dividend Income;
(c) Other non-operating income (net of expenses directly attributable to
such income).
Ind AS 107, para 20(b) requires total interest revenue calculated using the
effective interest method for financial assets that are measured at amortized
cost and that are measured at FVOCI, to be shown separately.
Accordingly, ‘Interest Income’ for financial assets measured at amortized
cost and for financial assets measured at FVOCI, calculated using effective
interest method, should be presented in separate line items under ‘Other
Income’.
Further, Ind AS 107 para B5(e) requires a company to disclose whether
interest income on financial assets measured at FVTPL is included as a part
of fair value changes. Accordingly, a company shall disclose as its
accounting policy, whether it presents interest income on financial assets at
FVTPL as a part of fair value changes or presents separately.
Presentation and disclosure of ‘net gains (losses) on fair value changes’
should be made as below:

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Net gains (losses) on fair value changes

As per Ind AS 107 para 20(a), the fair value gains or losses (net) on financial
assets which are measured at FVTPL should be presented under ‘Other non-
operating income’ with the following line items:
Net gains (losses) on fair value changes
Figures at Figures at
current previous
reporting reporting
period period end
end
Investments classified at FVTPL
Investments designated at FVTPL
Derivatives at FVTPL
Other Financial Instruments classified as
FVTPL
Other Financial Instruments designated at
FVTPL
Reclassification adjustments
Realised gain on debt investments classified
as FVOCI
Others (to be specified)
Total Net gains (losses) on fair value
changes*
* Total Net gains (losses) on fair value changes include Rs. xxxx (previous
year: Rs. xxxxx) as ‘Net gain or loss on sale of investments’.
For other non-operating income, income should be disclosed under this head
net off expenses directly attributable to such income. However, the expenses
so netted off should be separately disclosed.

9.3. Share of profits/losses in a Partnership firms

9.3.1. Though, there is no specific requirement in the Ind AS Schedule III to
disclose profit or losses on investments in a partnership firm, the same
should be disclosed as discussed hereunder.
9.3.2. The accounting of return on investment (i.e. profit share from
partnership) will depend on the terms of contract between Company and
partnership firm. The share of profit in partnership firm shall be recognised as

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income in the statement of profit and loss as and when the right to receive
the profit share is established. Hence, the same should be accordingly
accounted for by the company in its Standalone Financial Statements, except
where the investment in partnership firm is identified as a joint operation
(Refer para 9.3.6. below - Pg 121).
9.3.3. Separate disclosure of profits or losses from partnership firms should
be made. In a case where the company was a partner during the year but is
not a partner at the end of the year, the disclosure should be made for the
period during which the company was a partner.
9.3.4. The company's share of the profits or losses of the partnership firm
should be calculated by reference to the company's own accounting year.
The Financial Statements of the partnership for computing the share of
profits and losses should be drawn up to the same reporting date. If it is not
practicable to draw up the Financial Statements of the partnership upto such
date and, are drawn up to a different reporting date, drawing analogy from
Ind AS 110 – Consolidated Financial Statements and Ind AS 111 – Joint
Arrangements, adjustments should be made for the effects of significant
transactions or other events that occur between that date and the date of the
parent’s Financial Statements. In any case, the difference between reporting
dates should not be more than three months. In such cases, the difference in
reporting dates should be disclosed.
9.3.5. In case the year ending of the company and of the firm fall on different
dates, the Financial Statements of the company should also contain a note to
indicate that the accounting period of the partnership firm in respect of which
the profits or losses have been accounted for in the company's books.
9.3.6. If however, a partnership firm happens to be in the nature of a Joint
Operation as defined in Ind AS 111, the share of incomes, expenses, assets
or liabilities will have to be accounted by the company in its Standalone
Financial Statements as prescribed in Ind AS 111.
9.3.7. In case the partnership firm is a Subsidiary under Ind AS 110,
Associate under Ind AS 28 or Joint Venture under Ind AS 111, in the
Consolidated Financial Statements, the share of profit/loss from the firm
should be accounted for in terms of the applicable Ind AS as stated above. In
case the partnership firm is Join Operation under Ind AS 111, there shall be
no impact in the Consolidated Financial Statements as the share of income,
expenses would have already been recognized in standalone financial
statements.

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9.3.8. The aforesaid principles should also be applied to accounting for the
share of profits and losses in an Association of Persons (AOP).
9.4. Share of profits/losses in a Limited Liability
Partnership (LLP)
9.4.1. A Limited Liability Partnership, as per the LLP Act, is a body corporate.
The accounting of return on investment in LLP (i.e. profit share from LLP) will
depend on the terms of contract between Company and LLP. The share of
profit in LLP shall be recognised as income in the statement of profit and loss
as and when the right to receive its profit share is established by the
company.
9.4.2. Depending upon the terms of agreement between the Partners, the
LLP may be a Subsidiary under Ind AS 110, Associate under Ind AS 28 or
Joint Arrangement under Ind AS 111. Hence, accounting in respect of the
same in the Consolidated Financial Statements would be governed by the
applicable Ind AS. However, in case of Standalone Financial Statements an
adjustment of profit share from LLP to the carrying amount of the investment
in LLP is not permitted as Ind AS 27 requires accounting for investments in
subsidiaries, joint ventures and associates either at cost or in accordance
with Ind AS 109.
9.4.3. Additionally, principles of para 9.3.4 and para 9.3.5 above (Pg 121) will
apply to an LLP as well.
9.5. Expenses
The aggregate of the following expenses are to be disclosed on the face
of the Statement of Profit and Loss:
• Cost of materials consumed
• Purchases of Stock-in-Trade
• Changes in inventories of finished goods, work in progress and stock
in trade
• Employee benefits expense
• Finance costs
• Depreciation and amortization expense
• Other expenses

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9.5.1. Cost of materials consumed

This disclosure is applicable for manufacturing companies. Materials
consumed would consist of raw materials, packing materials (where
classified by the company as raw materials) and other materials such as
purchased intermediates and components which are ‘consumed’ in the
manufacturing activities of the company. Where packing materials are not
classified as raw materials the consumption thereof should be disclosed
separately. However, intermediates and components which are internally
manufactured are to be excluded from the classification:
9.5.1.1. For purpose of classification of inventories, internally manufactured
components may be disclosed as below:
(i) where such components are sold without further processing they are
to be disclosed as 'finished products'.
(ii) where such components are sold only after further processing, the
better course is to disclose them as 'work-in-progress' but they may
also be disclosed as 'manufactured components subject to further
processing’ or with such other suitable description as 'semi-finished
products' or 'intermediate products'.
(iii) where such components are sometimes sold without further
processing and sometimes after further processing it is better to
disclose them as 'manufactured components'.
9.5.1.2. For the purpose of interpreting the requirement to classify the raw
materials, some guidance may be necessary with regard to the question as
to what constitutes raw materials. According to the strict dictionary
connotation of this term, raw materials would include only materials obtained
in the state of nature. Such a definition would, however, be unrealistic in
context of this requirement because it would exclude even a basic material
such as steel. Generally speaking, the term “raw materials” would include
materials which physically enter into the composition of the finished product.
Materials, such as stores, fuel, spare parts etc., which do not enter physically
into the composition of the finished product, would therefore, be excluded
from the purview of the term “raw materials”.
9.5.1.3. The requirement is silent with regard to containers and packaging
materials. It is therefore; open to question whether such materials constitute
a category of “raw materials” for the purpose of the classification. The matter
should be decided in the light of the facts and circumstances of each case,

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the nature of the containers and packaging materials, their relative value in
comparison to the raw materials consumed, and other similar considerations.
Where, however, packaging materials, because of their nature are included
in raw materials it is preferable to show the description as “raw materials
including packaging materials consumed”.
9.5.1.4. Since in case of a company which falls under the category of
manufacturing or manufacturing and trading company, disclosure is required
with regard to raw materials consumed, care should be taken to ensure that
the figures relate to actual consumption rather than “derived consumption”.
The latter figure is ordinarily obtained by deducting the closing inventory from
the total of the opening inventory and purchases, but this figure may not
always represent a fair indication of actual consumption because it might
conceal losses and wastages. On the other hand, if the figure of actual
consumption can be compiled from issue records or other similar data, it is
likely to be more accurate. Where this is not possible, the derived figure of
consumption may be shown and it is left to the company, according to the
circumstances of each case, to determine whether any footnote is required to
indicate that the consumption disclosed is on the basis of derived figures
rather than actual records of issue.
9.5.1.5. Where the consumption is disclosed on the basis of actual records
of issue, a further question arises with regard to the treatment of shortages,
losses and wastages. In most manufacturing companies, these are
inevitable. It is, therefore, suggested that the company should itself establish
reasonable norms of acceptable margins. Any shortages, losses or wastages
which are within these norms may be regarded as an ordinary incidence of
the manufacturing process and may, therefore, be included in the figure of
consumption. On the other hand, any shortages, losses or wastages which
are beyond the permitted margin or when they are known to have occurred
otherwise than in the manufacturing process, should not be included in the
consumption figures. Whether or not such abnormal variations need to be
separately disclosed in the accounts would depend upon the facts and
circumstances of each case. The General Instructions for Preparation of
Statement of Profit and Loss do not require any specific disclosures.
9.5.1.6. In the case of industries where there are several processes,
materials may move from process to process, so that the finished product of
one department constitutes the raw materials of the next. The consumption
of raw materials for production of such intermediates would have to be
accounted as raw materials consumed and so, it follows that internal

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transfers from one department to another should be disregarded in

determining the consumption figures to be disclosed.
9.5.2. Purchases of Stock in Trade
Stock-in-trade refers to goods purchased normally with the intention to resell
or trade in. In case, any semi-finished goods/materials are purchased with an
intention of doing further processing activities on the same, the same should
be included in ‘cost of materials consumed’ rather than under this item.
9.5.3. Changes in inventories of finished goods, work-in-progress and
stock-in-trade
This requires disclosure of difference between opening and closing
inventories of finished goods, work-in-progress and stock-in-trade. The
difference should be disclosed separately for finished goods, work in
progress and stock in trade.
9.5.4. Employee benefits expense [Note 7(a)]
This requires disclosure of the following details:
9.5.4.1. Salaries and wages
The aggregate amounts paid/ payable by the company for payment of
salaries and wages are to be disclosed here. Expenses on account of bonus,
leave encashment, compensation and other similar payments also need to
be disclosed here. Where a separate fund is maintained for Gratuity payouts,
contribution to Gratuity fund should be disclosed under the sub-head
Contribution to provident and other funds.
The term employee should be deemed to include directors who are either in
whole-time or part-time employment of the company. It will exclude those
directors who attend only Board meetings and are not under a contract of
service with the company. Those who act as consultants or advisers without
involving the relationship of master and servant with the company should
also be excluded. A distinction should be made between persons engaged
under a contract of service and those engaged under a contract for services.
Only the former are to be included in the computation. Whether part-time
employees are to be included would depend on the facts and circumstances
of each case - the basic criterion being whether they are employed under a
contract of service or a contract for services.
9.5.4.2. Contribution to provident and other funds
The aggregate amounts paid / payable by a company on account of
contributions to provident fund and other funds like Superannuation fund,

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ESI, Labour Welfare Fund, etc., are to be disclosed here. This is true for
defined contribution plans since the expense recognized for a defined benefit
plan is not necessarily the amount of the contribution due for the period.
Contributions for such funds for contract labour may also be separately
disclosed here. However, penalties and other similar amounts paid to the
statutory authorities are not strictly in the nature of ‘contribution’ and should
not be disclosed here.
9.5.4.3. Share based payment to employees
The amount of expense under this head should be determined in accordance
with Ind AS 102 – Share-based Payments and/or the SEBI (Employee Stock
Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999,
as applicable. Companies should also consider all disclosures required by
the Ind AS 102.
9.5.4.4. Staff welfare expense
The total expenditure on staff welfare is to be disclosed herein.
9.5.5. Finance Costs
As per Note 4 of the General Instructions for the Preparation of the
Statement of Profit and Loss, disclosure of Finance costs is to be bifurcated
under the following:
(A) Interest;
(B) Dividend on redeemable preference shares
(C) Exchange differences regarded as an adjustment to borrowing costs;
(D) Other borrowing costs (specify nature).
(A) Interest expense
This would present the following types of finance charges incurred by the
Company:
(a) Interest cost on financial liabilities measured at amortized cost such as
borrowings from banks and others, on debentures, bonds or similar
instruments etc. calculated as per the effective interest method;
(b) Unwinding of the discount that results in an increase in financial
liabilities such as security deposits accepted for assets given on
lease;

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(c) Increases in the carrying amount of provisions / decommissioning

liabilities where such increase reflects the passage of time;
(d) Finance charges on finance leases that are in the nature of interest
expense;
(e) Net interest on net defined benefit liability which reflects the change in
net defined benefit liability that arises from the passage of time.
Accordingly, all of the above should also be classified as interest expense,
except that an entity shall have a choice in presenting, as employee benefits
costs, the net interest on net defined benefit liability which reflects the
change in net defined benefit liability that arises from the passage of time.
Further, Ind AS 107 para 20(b) requires total interest expense calculated
using the effective interest method for financial liabilities that are not
measured at FVTPL to be shown separately. Accordingly, the same shall be
presented as a separate line item under ‘Finance Costs’.
(B) Dividend on redeemable preference shares
Dividend on preferences shares, whether redeemable or convertible, is of the
nature of ‘Interest expense’, only where there is no discretion of the issuer
over the payment of such dividends. In such case, the portion of dividend as
determined by applying the effective interest method should be presented as
‘Interest expense’ under ‘Finance cost’. Accordingly, the corresponding taxes
on such portion of non-discretionary dividends should also be presented in
the Statement of Profit and Loss under ‘Interest expense’.
On the other hand, where there is a discretion of issuer over the payments of
dividend on preference shares, whether redeemable or convertible, the entire
dividend is in the nature of distribution of profit and accordingly, shall be
presented in Statement of Changes in Equity. Accordingly, the corresponding
taxes should also be presented in Statement of Changes in Equity.
(C) Exchange differences regarded as an adjustment to borrowing
costs
Ind AS 21 and Ind AS 23 deal with foreign exchange differences arising
on foreign currency transactions included in the financial statements of an
entity.
All exchange differences within the purview of Ind AS 21 are recognized as
exchange differences and presented accordingly. However, all exchange

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differences arising from foreign currency borrowings are within the purview of
Ind AS 23 and are regarded as a cost of borrowing irrespective of whether
they are capitalized or not as a part of the cost of the asset.
In accordance with Ind AS 23 – ‘Borrowing Costs’ that are directly
attributable to the acquisition, construction or production of a qualifying asset
form part of the cost of that asset. For the purpose of capitalization,
borrowing costs also include exchange difference regarded as an adjustment
to borrowing costs. Exchange difference eligible for capitalization are
determined in accordance with para 6(e) and 6A of Ind AS 23.
Accordingly, in case a company has utilized its foreign currency borrowings
for the purpose of acquisition or construction of a qualifying asset, it would
capitalize certain portion of foreign exchange difference in accordance with
the para 6(e) and 6A of Ind AS 23. All other borrowing costs are recognized
as an expense.
For presenting foreign exchange differences arising on foreign currency
borrowings in statement of profit and loss, there is no specific requirement to
apply the limit prescribed in paragraphs 6(e) and 6A of Ind AS 23 since the
nature of the exchange difference on foreign currency borrowing is effectively
a cost of borrowing. Accordingly, the entire foreign exchange differences
relating to foreign currency borrowings to the extent not capitalized in
accordance with Ind AS 23 can be presented under the head ‘finance costs’.
(D) Other borrowing costs
Other borrowing costs would include commitment charges, loan processing
charges, guarantee charges, loan facilitation charges, discounts/premium on
borrowings, other ancillary costs incurred in connection with borrowings, or
amortization of such costs, etc. Such finance costs that do not meet the
definition of transaction costs directly attributable to issue of a financial
liability and are therefore not included as a part of EIR, shall be presented
under ‘Other borrowing costs’.
9.5.6. Depreciation and amortization expense
A company has to disclose depreciation provided on Property, Plant and
Equipment, Investment Property and amortization of intangible assets under
this head.
9.5.7. Other Expenses
All other expenses not classified under other heads will be classified here.
Net losses on fair value changes should be classified under ‘Other

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Expenses’. (Refer para 9.2. for the line items to be presented as a part of Net
gains (losses) on fair value changes)
9.6. Exceptional items
The term ‘Exceptional items’ is neither defined in Ind AS Schedule III nor in
Ind AS. However, Ind AS 1 has reference to such items in paras 85, 86, 97
and 98.
Para 85 states that additional line items, headings and subtotals in the
statement of profit and loss shall be presented, when such presentation is
relevant to an understanding of the entity’s financial performance.
Further, para 86 states that disclosing the components of financial
performance assists users in understanding the financial performance
achieved and in making projections of future financial performance. An entity
considers factors including materiality and the nature and function of the
items of income and expense.
Para 97 states that when items of income or expense are material, an entity
shall disclose their nature and amount separately. Para 98 gives
circumstances that would give rise to the separate disclosure of items of
income and expense and includes:
(a) Write-downs of inventories to net realisable value or of property, plant
and equipment to recoverable amount, as well as reversals of such
write-downs;
(b) restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
In case the company has more than one such item of income / expense of
the above nature which is exceptional, then such items should be disclosed
on the face of the Statement of Profit and Loss. Details of the all individual
items should be disclosed in the Notes.
9.7. Tax expense
This is to be disclosed on the face of the Statement to Profit and Loss and
bifurcated into:

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(1) Current tax and

(2) Deferred tax
9.7.1. Current tax
The term ‘Current tax’ has been defined under Ind AS-12 “Income Taxes” as
the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period. Hence, details of all taxes on income payable
under the applicable taxation laws should be disclosed here.
Any interest on shortfall in payment of advance income-tax is in the nature of
finance cost and hence should not be clubbed with the Current tax. The
same should be classified as Interest expense under finance costs. However,
such amount should be separately disclosed.
Any penalties levied under Income tax laws should not be classified as
Current tax. Penalties which are compensatory in nature should be treated
as interest and disclosed in the manner explained above. Other tax penalties
should be classified under ‘Other Expenses’.
Excess/Short provision of tax relating to earlier years should be separately
disclosed.
9.7.2. Deferred tax
Any charge/credit for deferred taxes needs to be disclosed separately on the
face of the Statement of Profit and Loss.
Ind AS 12 defines ‘deferred tax liabilities’, ‘deferred tax assets’, ‘temporary
differences’ as:
‘Deferred tax liabilities’ are the amounts of income taxes payable in future
periods in respect of taxable temporary differences;
‘Deferred tax assets’ are the amounts of income taxes recoverable in future
periods in respect of:
(a) deductible temporary differences;
(b) the carry forward of unused tax losses; and
(c) the carry forward of unused tax credits.
‘Temporary differences’ are differences between the carrying amount of an
asset or liability in the balance sheet and its tax base

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Ind AS 12 has the concept of temporary differences. Moreover, deferred tax

asset is defined in Ind AS 12 to include amounts of income taxes recoverable
in future periods in respect of the carry forward of unused tax credits. MAT
Credits are in the form of unused tax credits that are carried forward by the
company for a specified period of time. Accordingly, MAT Credit Entitlement
should be grouped with Deferred Tax Asset (net) in the Balance Sheet of an
entity and a separate note should be provided specifying the nature and
amount of MAT Credit included as a part of deferred tax. However, the
company should review at each balance sheet date the reasonable certainty
to recover deferred tax asset including MAT Credit Entitlement. (Also, refer
para 7.12 above (Pg 16) for classification of MAT Credit Entitlement)
Correspondingly, MAT Credit Entitlement should be grouped with deferred
tax in the Statement of Profit and Loss and a separate note should be
provided specifying the amount of MAT Credit.
9.8. Profit / (loss) from discontinued operations
The term ’discontinued operations’ is defined in Ind AS 105 “Non-current
Assets Held for Sale and Discontinued Operations” as a component of an
entity that either has been disposed of or is classified as held for sale and:
(a) represents a separate major line of business or geographical area of
operations,
(b) is part of a single co-ordinated plan to dispose of a separate major line
of business or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to resale.
Profit or loss from Discontinued Operations needs to be separately disclosed
on the face of Statement of Profit and Loss. This disclosure is in line with the
disclosure requirement of Ind AS 105 para 33(a) which requires a single
amount in the statement of profit and loss comprising the total of: (i) post-tax
profit or loss of discontinued operations; and (ii) post-tax gain or loss
recognized on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued
operation.
Further, Ind AS-105 para 33(b) requires an entity to present an analysis of a
single amount either in Notes or on the face of the Statement of Profit and
Loss:
(i) the revenue, expenses and pre-tax profit or loss of discontinued
operations;

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(ii) the gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation.
(iii) the related income tax expense as required by paragraph 81(h) of Ind
AS 12.
If the above analysis is presented in the Statement of Profit and Loss, then it
shall be presented in a section identified as relating to discontinued
operations, i.e. separately from continuing operations.
9.9. Tax expense of discontinued operations
In case there are any taxes payable / tax credits available on profits / losses
of discontinued operations, the same needs to be disclosed as a separate
line item on the Statement of Profit and Loss, when presenting a separate
analysis as per para 33(b) of Ind AS 105, as stated above in para 9.8.
9.10. Earnings per equity share
Computation of Basic and Diluted Earnings per Share should be made in
accordance with Ind AS 33 Earnings per Share. It is pertinent to note that the
nominal value of equity shares should be disclosed along with the Earnings
per Share figures as required by Ind AS 33.

10. Other Comprehensive Income

10.1 ‘Other comprehensive income’ (OCI) is defined in Ind AS 1 as
‘comprising items of income and expense (including reclassification
adjustments) that are not recognised in profit or loss as required or permitted
by other Ind ASs.
10.2 Note 6A of General Instructions for Preparation of Statement of Profit
and Loss state that ‘Other Comprehensive Income’ shall be classified into:
(a) Items that will not be reclassified to profit or loss and their related
income tax effects:
(1) Changes in revaluation surplus;
(2) Re-measurements of the defined benefit plans;
(3) Fair value changes on Equity Instruments through other
comprehensive income;
(4) Fair value changes relating to own credit risk of financial
liabilities designated at fair value through profit or loss;

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(5) Share of Other Comprehensive Income in Associates and Joint

Ventures, to the extent not to be classified into profit or loss;
and
(6) Others (specify nature);
(b) Items that will be reclassified to profit or loss and its related income
tax effects:
(1) Exchange differences in translating the financial statements of a
foreign operation;
(2) Fair value changes in Debt Instruments through other
comprehensive income;
(3) The effective portion of gain and loss on hedging instruments in
a cash flow hedge;
(4) Share of Other Comprehensive Income in Associates and Joint
Ventures, to the extent to be classified into profit or loss; and
(5) Others (specify nature).
10.3 As a part of the definition of OCI given in Ind AS 1, the components of
OCI, which are in addition to above, are stated to include:
Items that will not be reclassified to profit or loss and its related income tax
effects:
(a) Gains and losses on hedging instruments that hedge investments in
equity instruments measured through Other Comprehensive Income;
Items that will be reclassified to profit or loss and its related income
tax effects:
(b) Changes in time value of options when separating the intrinsic value
and time value of an option contract and designating only intrinsic
value changes as the hedging instrument;
(c) Changes in the value of the forward elements of forward contracts
when separating the forward element and spot element of a forward
contract and designating only spot element changes as hedging
instrument;
(d) Changes in the value of the foreign currency basis spread of a
financial instrument when excluding it from the designation of that
financial instrument as the hedging instrument.

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10.4 Ind AS 1, para 91 gives a choice of presentation for tax effects of

items presented in other comprehensive income. An entity may present items
of OCI either:
(a) Net of related tax effects, or
(b) Before related tax effects with one amount shown for the aggregate
amount of income tax relating to those items.
10.5 If an entity elects alternative (b) above, then it shall allocate the tax
between the items that might be reclassified subsequently to the profit or loss
section and those that will not be reclassified subsequently to the profit or
loss section.
10.6 Further, an entity shall present for each component of equity, an
analysis of other comprehensive income by item as required by Ind AS 1,
para 106A (including, reclassification adjustments as required by Ind AS 1,
para 92). Such presentation may be made either in the Statement of
Changes in Equity or in the Notes to Accounts.
10.7 Ind AS Schedule III does not highlight about the presentation of
bargain purchase gains arising in a business combination. Para 34 of Ind AS
103, requires an acquirer to recognize a bargain purchase gain in other
comprehensive income on the acquisition date, after meeting the
requirements of para 36 of Ind AS 103. Such gain shall be attributed to the
acquirer (i.e. parent and not non-controlling interest) and may be presented
under ‘Other Items of other comprehensive income’ in statement of changes
in equity. The above would also hold true in case of an acquisition of a
business which is accounted for in Standalone Financial Statements.
However, if para 36 requirements are not met then, the acquirer shall
recognize and disclose such gain directly in capital reserve as per para 36A
of Ind AS 103.

11. Additional information to be disclosed by way

of Notes to Statement of Profit and Loss
Besides the above disclosures, Note 7 of the General instructions for
Preparation of Statement of Profit and Loss also require disclosure by way of
notes, additional information regarding aggregate expenditure and income on
the following items:

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11.1. Employee Benefits expense [Clause (a) of Note 7]

Employee benefits should be disclosed showing separately (i) salaries and
wages, (ii) contribution to provident and other funds, (iii) share-based
payments to employees, (iv) staff welfare expenses.
11.2. Net gain or loss on sale of investments [Clause (g)
of Note 7]
Ind AS Schedule III does not provide a distinction in presenting realized and
unrealized gains or losses on fair value changes. However, para 9.2 above
provides an illustrative format for presenting items as a part of Net gains
(losses) on fair value changes. Accordingly, an entity shall present "net gain
or loss on sale of investments" separately by way of a note below the table
on ‘Net gains (losses) on fair value changes’.
11.3. Net gain or loss on foreign currency translation
(other than considered as finance cost) [Clause (h)
of Note 7]
Any gains / losses on account of foreign exchange fluctuations are to be
disclosed separately as per Ind AS 21. Thus, net exchange loss should be
classified under other expenses and the amount so included should be
separately disclosed. Under this head, net gain or loss on foreign currency
transaction and translation to the extent considered as finance costs should
not be disclosed.
11.4. Payments to the auditor [Clause (i) of Note 7]
Payments covered here should be for payments made to the firm of
auditor(s). Expenses incurred towards such auditor’s remuneration should be
disclosed under each of the following sub-heads as follows:
(a) Auditor,
(b) For taxation matters,
(c) For company law matters,
(d) For other services,
(e) For reimbursement of expenses;

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11.5. Disclosures pertaining to corporate social

responsibility activities [Clause (j) and (m) of
Note 7]
This new requirement introduced by the Act is that the companies which are
covered under Section 135 are required to disclose the amount of
expenditure incurred on corporate social responsibility activities. The
Guidance Note on Accounting for Expenditure on Corporate Social
Responsibility Activities issued may be referred to for disclosure
requirements, which are essentially as under:
(a) From the perspective of better financial reporting and in line with the
requirements of Schedule III in this regard, it is recommended that all
expenditure on CSR activities, that qualify to be recognised as
expense should be recognised as a separate line item as ‘CSR
expenditure’ in the statement of profit and loss. Further, the relevant
note should disclose the break-up of various heads of expenses
included in the line item ‘CSR expenditure’.
(b) The notes to accounts relating to CSR expenditure should also contain
the following:
(1) Gross amount required to be spent by the company during the
year.
(2) Amount spent during the year on:
(i) Construction/acquisition of any asset
(ii) On purposes other than (i) above
The above disclosure, to the extent relevant, may also be made in the
notes to the cash flow statement, where applicable.
(c) Details of related party transactions, e.g., contribution to a trust
controlled by the company in relation to CSR expenditure as per Ind
AS 24, Related Party Disclosures.
(d) Where a provision is made in accordance with paragraph above the
same should be presented as per the requirements of Schedule III to
the Act. Further, movements in the provision during the year should be
shown separately.
MCA notification dated 24 March 2021 has included certain CSR-related
disclosure requirements in addition to the existing disclosures. The additional

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disclosures included in clause (m) of Note 7 with regard to CSR activities are
summarized below:-
(i) The amount of shortfall at the end of the year out of the amount
required to be spent by the Company during the year;
(ii) The total of previous years’ shortfall amounts;
(iii) The reason for above shortfalls by way of a note;
(iv) The nature of CSR activities undertaken by the Company.
11.6. Disclosures in addition to consideration of
‘materiality’ [Clause (c) of Note 7]
Any item of income or expenditure which exceeds one per cent of revenue
from operations or Rs. 10,00,000 whichever is higher, in addition to the
consideration of ‘materiality’ as specified in Note 7 of the General
Instructions for Preparation of Financial Statements of a Company.
Ind AS 1 states that Information is material if omitting, misstating or
obscuring it could reasonably be expected to influence decisions that the
primary users of general purpose financial statements make on the basis of
those financial statements, which provide financial information about a
specific reporting entity.
Materiality depends on the nature or magnitude of information, or both. An
entity assesses whether information, either individually or in combination with
other information, is material in the context of its financial statements taken
as a whole.
Further, the Conceptual Framework (Ind AS Framework) states in para that
Information is material if omitting, misstating or obscuring it could reasonably
be expected to influence decisions that the primary users of general purpose
financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity. In other words,
materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates in the
context of an individual entity’s financial report. Consequently, the ICAI
cannot specify a uniform quantitative threshold for materiality or
predetermine what could be material in a particular situation.
11.7. Changes in Regulatory Deferral Account Balances
Ind AS Schedule III (Note 8 of General Instructions to Statement of Profit and
Loss) requires changes in Regulatory Deferral Account Balances for the

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reporting period to be presented in the Statement of Profit and Loss in

accordance with the relevant Ind AS.
Accordingly, as per Ind AS 114, the net movement in all Regulatory Deferral
Account Balances relating to items recognised in other comprehensive
income, shall be presented as separate line items in OCI for the net
movement related to items that :
(a) Will not be reclassified subsequently to profit or loss; and
(b) Will be reclassified subsequently to profit or loss when specific
conditions are met.
The remaining net movement in all Regulatory Deferral Account Balances for
the reporting period shall be presented as a separate line item in the profit or
loss section of the Statement Profit or Loss. This separate line item shall be
distinguished from the income and expenses that are presented in
accordance with other Ind ASs.
11.8. Disclosure in relation to undisclosed income
[Clause (l) of Note 7]
This clause brings in a new disclosure requirement. It requires that the
Company shall give details of any transaction not recorded in the books of
accounts that has been surrendered or disclosed as income during the year
in the tax assessments under the Income Tax Act, 1961 (such as, search or
survey or any other relevant provisions of the Income Tax Act, 1961), unless
there is immunity for disclosure under any scheme.
The Company shall also state whether the previously unrecorded income and
related assets have been properly recorded in the books of account during
the year.
11.8.1 In this context, it is relevant to understand the meaning of
“undisclosed income”. As per the Income Tax Act, 1961, "undisclosed
income" includes any money, bullion, jewellery or other valuable article or
thing or any income based on any entry in the books of account or other
documents or transactions, where such money, bullion, jewellery, valuable
article, thing, entry in the books of account or other document or transaction
represents wholly or partly income or property which has not been or would
not have been disclosed for the purposes of this Act, or any expense,
deduction or allowance claimed under this Act which is found to be false. The
meaning of “undisclosed income” shall be considered on the basis of the
Income Tax Act, 1961 or basis judicial decisions provided on undisclosed
income.

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11.8.2 The emphasis under this clause is limited to examination of those

transactions, which were hitherto unrecorded in the books of account and
which were surrendered or disclosed as income in the tax assessments
under the Income Tax Act, 1961. The emphasis is on the words surrendered
or disclosed which implies that the company must have voluntarily admitted
to the addition of such income, which can be demonstrated on the basis of
the returns filed by the company.
11.8.3 Where a statement is made in the course of search and survey to
verify the nature of income so surrendered or disclosed however, such
statement has been retracted on the ground that such disclosure was
obtained under force, coercion, etc. the income cannot be treated as
surrendered or disclosed by the company.
Accordingly, where the addition is made by the income tax authorities and
the company has disputed such additions, reporting under this clause is not
applicable. Even where the company chooses not to file an appeal, it cannot
be presumed that the company has surrendered or disclosed the income.
The details that are required to be provided by the company as part of this
disclosure are prescribed below:
Sr. Assessment Section Amount Transaction Assessm Whether FY in
No. Year of the disclosed description ent transaction whic
Act in tax along with status recorded in h
return value books of trans
treated as accounts? actio
income n is
recor
ded

11.8.4 Proper recording, by implication, includes proper disclosure thereof in

the financial statements of the company which should be sufficient to enable
the users to understand the impact of such transactions. The nature of
disclosure shall depend on the nature of undisclosed income and the
treatment thereof if the same was duly disclosed and reported in the books of
account in the year to which the undisclosed income relates to.
11.8.5 In case the Company has not recorded /disclosed income in the books
of account/financial statements, as applicable, reasons for same shall be
disclosed.

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11.9. Details of Crypto Currency or Virtual Currency

[Clause (n) of Note 7]
Where the Company has traded or invested in Crypto currency or Virtual
Currency during the financial year, the following shall be disclosed:-
(i) profit or loss on transactions involving Crypto currency or Virtual
Currency;
(ii) amount of currency held as at the reporting date;
(iii) deposits or advances from any person for the purpose of trading or
investing in Crypto Currency or virtual currency.
11.9.1 Virtual currency is a digital representation of value, other than a
representation of the Indian Rupee (INR) or a foreign currency (“real
currency”), that functions as a unit of account, a store of value, and a
medium of exchange. Some virtual currencies are convertible, which means
that they have an equivalent value in real currency or act as a substitute for
real currency.
11.9.2 Crypto currency is a form of digital / virtual currency generated
through a series of written computer codes that rely on cryptography which is
encryption and is thus independent of any central issuing authority per se.

12. Part III – General Instructions for Preparation

of Consolidated Financial Statements
The Act defines a ‘subsidiary company’ and an ‘associate company’ which is
different from the definition of a ‘subsidiary’, an ‘associate’ and a ‘joint
venture’ under Ind AS. An amendment to Companies (Accounts) Rules, 2014
on 4 September 2015, newly inserted Rule 4A which state that “financial
statements shall be in the form specified in Schedule III to the Act and
comply with Accounting Standards or Indian Accounting Standards as
applicable, provided that the items contained in financial statements shall be
prepared in accordance with the definitions and other requirements specified
in the Accounting Standards or the Indian Accounting Standards, as the case
may be.”
The Act mandates that the companies which have one or more subsidiaries
or associates (which as per the Act includes joint ventures) are required to
prepare Consolidated Financial Statements (CFS), except under certain
circumstances exempted under the Act and Rules.

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Accordingly, Ind AS definitions of subsidiary, associate and joint venture

shall be considered for assessment of control, joint control and significant
influence even though the requirement of preparation of CFS will be
governed by the Act.
The companies are expected to prepare the Standalone Financial
Statements in addition to Consolidated Financial Statements.
Part III of Ind AS Schedule III provides for General Instructions for
Preparation of Consolidated Financial Statements. This is a new addition
brought in under the Act.
12.1 General requirements
Where the company is required to prepare Consolidated Financial
Statements, i.e. consolidated balance sheet, consolidated statement of
changes in equity and consolidated statement of profit and loss, the company
shall mutatis mutandis follow the requirements of this Schedule as applicable
to a company in preparation of the Standalone Financial Statements. This
means that all the reporting requirements of the Schedule III need to be
aggregated and reported for the group as a whole in the Consolidated
Financial Statements.
In addition, the Consolidated Financial Statements shall disclose the
information as per the requirements specified in the applicable Ind AS
notified under the Companies Ind AS Rules, including the following, namely:
(1) Profit or loss attributable to ‘non-controlling interest’ and to ‘owners of
the parent’ in the statement of profit and loss shall be presented as
allocation for the period. Further, ‘total comprehensive income’ for the
period attributable to ‘non-controlling interest’ and to ‘owners of the
parent’ shall be presented in the statement of profit and loss as
allocation for the period. The aforesaid disclosures for ‘total
comprehensive income’ shall also be made in the statement of
changes in equity. In addition to the disclosure requirements in the
Indian Accounting Standards, the aforesaid disclosures shall also be
made in respect of ‘other comprehensive income’. This requirement is
in line with para 81B of Ind AS 1.
(2) ‘Non-controlling interests’ in the Balance Sheet and in the Statement
of Changes in Equity, within equity, shall be presented separately from
the equity of the ‘owners of the parent’.

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(3) Investments accounted for using the equity method.

(4) Ind AS 110 para B96 deals with Changes in proportion held by non-
controlling interest. When the proportion of the equity held by non-
controlling interests changes, an entity shall adjust the carrying
amounts of the controlling and non-controlling interests to reflect the
changes in their relative interests in the subsidiary. The entity shall
recognise directly in equity any difference between the amount by
which the non-controlling interests are adjusted and the fair value of
the consideration paid or received, and attribute it to the owners of the
parent. An entity may present such gain / loss separately as ‘Non-
controlling Interest Reserve’ shown under ‘Other Reserves’ by
specifying the nature.
All of these would also indicate the need to obtain such information for all the
subsidiaries / associates for preparing the Consolidated Financial
Statements, including where such subsidiaries / associates are not audited
under the Act.
However, due note has to be taken of the fact that the Schedule III itself
states that the provisions of the schedule are to be followed mutatis mutandis
for a Consolidated Financial Statements. MCA has also clarified vide General
Circular No. 39 / 2014 dated 14th October 2014 that Schedule III to the Act
[Refer Annexure E (Pg 212)] read with the applicable Accounting Standards
does not envisage that a company while preparing its CFS merely repeats
the disclosures made by it under standalone accounts being consolidated.
Accordingly, the company would need to give all disclosures relevant for CFS
only.
In this context, the requirements of Ind AS Schedule III shall apply to a CFS,
subject to the following exemptions / modifications based on the relevance to
the CFS:

Ind AS Schedule III Requirements Applicability to CFS (if left blank,

is applicable, as it is)
Share capital – authorized, issued, It is adequate to present paid up
subscribed and paid up capital and any calls in arrears
Note: It has no relevance in the CFS
context.
Source from which bonus shares Not relevant at CFS level and
are issued, e.g., capitalisation of

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profits or Reserves or from hence, may be dispensed with.

Securities Premium Account.
Disclosure of all unutilized monies Not relevant at CFS level and
out of the issue indicating the form hence, may be dispensed with.
in which such unutilized funds have
been invested.
(a) Period and amount of On all these items, disclosure can
continuing default as on the be limited to those which are
Balance Sheet date in material to the CFS; materiality
repayment of borrowings and could be considered at 10% of the
interest, shall be specified respective balance sheet item
separately in each case.
(b) Loans and advances due by
directors or other officers of the
company or any of them either
severally or jointly with any
other persons or amounts due
by firms or private companies
respectively in which any
director is a partner or a
director or a member should be
separately stated
(c) Debts due by directors or other
officers of the company or any
of them either severally or
jointly with any other person or
debts due by firms or private
companies respectively in which
any director is a partner or a
director or a member should be
separately stated
(d) Where in respect of an issue of
securities made for a specific
purpose, the whole or part of
the amount has not been used
for the specific purpose at the
Balance Sheet date, there shall
be indicated by way of note how

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such unutilized amounts have

been used or invested.
Share application money pending Separate disclosure should be given
allotment shall be classified into for such monies due outside the
equity or liability in accordance with group in respect of entities which are
relevant Ind AS. Share application consolidated.
money to the extent not refundable
shall be shown under the head
‘Equity’ and share application
money to the extent refundable shall
be separately shown under ‘Other
financial liabilities’.
Additional Information for Not relevant at CFS level and
disclosure: hence, may be dispensed with.
(i) Payments to the auditor as (a)
auditor,(b) for taxation matters,
(c) for company law matters,
(d) for other services, (e) for
reimbursement of expenses;
(ii) In case of Companies covered
under section 135, amount of
expenditure incurred on
corporate social responsibility
activities
(iii) Disclosures required as per the
MSMED Act, 2006
MCA notification dated 24 March 2021 has included certain disclosure
requirements in addition to the existing disclosures. The applicability of
additional disclosures at Consolidated financial statement (CFS) level with
regard to its applicability is summarized below:-
The below requirements need to be disclosed at CFS level
Schedule III Requirement Description
Disclosure of Shareholding of Company should disclose the
Promoters promoter shareholding at the CFS
level.
Generally, the promoter would be
same for CFS level and standalone

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level.
Trade Payables ageing schedule Trade payable ageing schedule
should be disclosed at the CFS level
after applying the principles of
consolidation.
Trade Receivables ageing schedule Trade receivables ageing schedule
should be prepared at the CFS level
after applying the principles of
consolidation.
Revaluation of Property, Plant and In case revaluation of property is
Equipment done at CFS level, or for any of the
group entity, company may disclose
the following:
1. Name of the entity in which
revaluation is done;
2. Type & nature of PPE revalued;
3. Indicate whether the revaluation
is based on the valuation as per
the registered valuer.
Loans or Advances - additional This disclosure should be done at
disclosures the CFS level, on similar lines as the
‘Related Party Transactions’ are
disclosed in CFS. In other words,
parties to whom such loans or
advances are provided should be
assessed at consolidated group
level for the purpose of this
disclosure.
Details of Benami Property held Company should disclose the
required details of benami property
at CFS level providing the name of
each subsidiary / group entity that
has such Benami Property.
In case if there is any benami
proceedings initiated against any
associate company*, then Company
should disclose in case if the
proceeding is material to the group.
Wilful Defaulter Company should disclose the

145
GN on Division II - Ind AS Schedule III to the Companies Act 2013

required details of wilful defaulter at

CFS level providing the name of
each subsidiary / group entity that is
declared as a wilful defaulter.
In case if there is any wilful default
by an associate company*, then
Company should disclose if the
default is material to the group.
Relationship with Struck off Company should disclose the
Companies required details of relationship with
struck off companies at CFS level
providing the name of each
subsidiary / group entity that has
such a relationship.
In case if any of the subsidiary is the
under the struck off company list,
Company should indicate that fact
as a part of disclosure.
In case if there is any associate
company* having relationship with
struck off companies, then company
should disclose if the transaction is
material to the group.
Compliance with number of layers of Company should disclose this fact of
companies compliance for each entity in its
group.
Disclosure pertaining to ‘undisclosed Company should disclose the
income’ required details of undisclosed
income at CFS level providing the
name of each subsidiary / group
entity that has an ‘undisclosed
income’.
In case if there is any associate
company* having undisclosed
income, then Company should
disclose if such income is material
to the group.
* as defined under the Act

146
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

The below requirements need to be disclosed at CFS level, only if

material in nature

Schedule III Requirement Description

Capital work-in-progress (CWIP) CWIP ageing schedule shall be
ageing schedule / completion given at CFS level if it is material to
schedule the group i.e. more than 10% of the
respective balance sheet item in
CFS.
Intangible assets under development Ageing schedule shall be given at
ageing schedule / completion CFS level if it is material to the group
schedule i.e. more than 10% of the respective
balance sheet item in CFS.
Security of current assets against This disclosure shall be provided at
borrowings CFS level if it is material to the group
i.e. more than 10% of the respective
balance sheet item in CFS.
Compliance with approved This disclosure shall be provided at
Scheme(s) of Arrangements CFS level if it is material to the group
i.e. more than 10% of the respective
financial statement line item in CFS.
Utilization of Borrowed funds and This disclosure shall be provided at
share premium CFS level after applying principles of
consolidation i.e. this disclosure
would be for funds borrowed /
invested outside the group.
However, it shall be disclosed only if
material i.e. more than 10% of the
respective financial statement line
item in CFS.
Disclosure pertaining to ‘details of This disclosure shall be provided at
crypto currency or virtual currency’ CFS level if it is material to the group
i.e. more than 10% of the respective
financial statement line item in CFS.

147
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Not relevant at CFS level and hence, may be dispensed with

Schedule III Requirement Description

Title deeds of Immovable Property This requirement is not relevant at
not held in the name of the Company the CFS level and hence company
need not disclose in the CFS.
Registration of charges or This requirement is not relevant at
satisfaction with Registrar of the CFS level and hence company
Companies need not disclose in the CFS.
Analytical Ratios This requirement is not relevant at
the CFS level and hence company
need not disclose in the CFS.

12.2 Indian Accounting Standards

The Consolidated Financial Statements shall also disclose the information as
required under the various Indian Accounting Standards applicable.
12.3 Additional information on the entities included in
the Consolidated Financial Statements
Ind AS Schedule III also requires specific disclosure of additional information
on the entities which are included in the Consolidated Financial Statements
in the following format:
Name of Net Assets Share in profit Share in other Share in total
the i.e., total or loss comprehensive comprehensive
entity in assets income income
the minus total
Group liabilities
As % of Amo As % of Amou As % of Amou As % of Amou
Consoli unt Consoli nt consolidat nt total nt
dated dated ed other comprehe
profit or comprehe nsive
net
loss nsive income
assets
income
Parent
Subsidiari
es
Indian

148
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

1
2
3
…
…..
Foreign
1
2
3
…
…..
Non-
controlling
interest in
all
subsidiarie
s
Associate
s
(Investme
nt as per
equity
method)
Indian
1
2
3
…
…
Foreign
1
2
3
…
…..

149
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Joint
Ventures
(Investme
nt as per
equity
method)
Indian
1
2
3
…
…..
Foreign
1
2
3
…
…..
TOTAL

Certain joint arrangements which are of the nature of joint operations will be
consolidated to the extent of the share of joint operator based on the
principles laid down in Ind AS 111. Even though the above table does not
specify a disclosure about joint operations’ net assets, profit or loss, other
comprehensive income and total comprehensive income, it should be
disclosed in similar manner as disclosed for joint ventures. This requirement
would apply only if a joint operation is conducted through a separate legal
entity.
Moreover, as regards consolidation adjustments (including elimination of
intra-group transactions), it should be ensured that these are either disclosed
as a single line item separately or adjusted in the information (e.g., net
assets) disclosed for the parent and its each component.
These are necessary in order to match the respective amounts reported in
Consolidated Financial Statements with the respective Total amounts in the
above table.

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

12.4 Entities not consolidated

Entities which are not covered in the Consolidated Financial Statements,
whether subsidiaries, associates or joint ventures are to be listed in the
Consolidated Financial Statements along with the reasons for not
consolidating such entities. Additional disclosure requirements as set out in
Ind AS 112 should also be complied with in this regard.
12.5 Definition of terms relevant for consolidation
The terms “Control”, “Subsidiary” and “Associate” are defined very differently
in the Act as compared to definition in Ind AS. Rule 6 of the Companies
(Accounts) Rules, 2015 however states that Consolidated Financial
Statements shall be prepared in accordance with the provisions of Ind AS
Schedule III of the Act and the applicable Ind AS. Further, Rule 4A of the
Companies (Accounts) Rules, 2015 provides that the items contained in the
financial statements shall be prepared in accordance with the definitions and
other requirements specified in Ind AS.

151
 Annexure A
Schedule III
(See Section 129)
Division II
Financial Statements for a company whose financial statements are drawn
up in compliance of the Companies (Indian Accounting Standards) Rules,
2015.
GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL
STATEMENT OF A COMPANY REQUIRED TO COMPLY WITH IND AS
1. Every company to which Indian Accounting Standards apply, shall
prepare its financial statements in accordance with this Schedule or
with such modification as may be required under certain
circumstances.
2. Where compliance with the requirements of the Act including Indian
Accounting Standards (except the option of presenting assets and
liabilities in the order of liquidity as provided by the relevant Ind AS) as
applicable to the companies require any change in treatment or
disclosure including addition, amendment substitution or deletion in
the head or sub-head or any changes inter se, in the financial
statements or statements forming part thereof, the same shall be
made and the requirements under this Schedule shall stand modified
accordingly.
3. The disclosure requirements specified in this Schedule are in addition
to and not in substitution of the disclosure requirements specified in
the Indian Accounting Standards. Additional disclosures specified in
the Indian Accounting Standards shall be made in the Notes or by way
of additional statement or statements unless required to be disclosed
on the face of the Financial Statements. Similarly, all other disclosures
as required by the Companies Act, 2013 shall be made in the Notes in
addition to the requirements set out in this Schedule.
4(i) Notes shall contain information in addition to that presented in the
Financial Statements and shall provide where required-
(a) narrative description or disaggregations of items recognised in
those statements; and
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(b) information about items that do not qualify for recognition in

those statements.
(ii) Each item on the face of the Balance Sheet, Statement of Changes in
Equity and Statement of Profit and Loss shall be cross-referenced to
any related information in the Notes. In preparing the Financial
Statements including the Notes, a balance shall be maintained
between providing excessive detail that may not assist users of
Financial Statements and not providing important information as a
result of too much aggregation.
5. Depending upon the Total Income1 of the company, the figures
appearing in the Financial Statements shall be rounded off as below:

Total Income Rounding off

(i) less than one hundred crore To the nearest hundreds,
rupees thousands, lakhs or millions, or
decimals thereof
(li) one hundred crore rupees or To the nearest, lakhs, millions
more or crores, or decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the
Financial Statements.
6. Financial Statements shall contain the corresponding amounts
(comparatives) for the immediately preceding reporting period for all
items shown in the Financial Statement including Notes except in the
case of first Financial Statements laid before the company after
incorporation.
7. Financial Statements shall disclose all 'material' items, i,e., the items if
they could. individually or collectively, influence the economic
decisions that users make on the basis of the financial statements.
Materiality depends on the size or nature of the item or a combination
of both, to be judged in the particular circumstances.
8. For the purpose of this Schedule, the terms used herein shall have the
same meanings assigned to them in Indian Accounting Standards.

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153
GN on Division II - Ind AS Schedule III to the Companies Act 2013

9. Where any Act or Regulation requires specific disclosure to be made

in the standalone financial statement of a company, the said
disclosure shall be made in addition to those required under this
Schedule.
Note: This Schedule sets out the minimum requirements for disclosure
on the face of the Financial Statements, i.e., Balance Sheet,
Statement of Changes in Equity for the period, the Statement of profit
and Loss for the period (The term 'Statement of Profit and Loss' has
the same meaning as 'profit and loss Account) and Notes. Cash flow
statement shall be prepared, where applicable, in accordance with the
requirement of the relevant Indian Accounting Standard.
Line items, sub-line items and sub-totals shall be presented as an
addition or substitution on the face of the Financial Statements when
such presentation is relevant to an understanding of the company's
financial position or performance to cater to industry or sector-specific
disclosure requirements or when required for compliance with the
amendments to the Companies Act, 2013 or under the Indian
Accounting Standards.

154
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Part I -Balance Sheet

Name of the Company....................
Balance Sheet as at ......................
(Rupees in.........)
Particulars Note Figures as Figures as
No. at the end of at the end of
current the previous
reporting reporting
period period
1 2 3 4
ASSETS
(1) Non-current assets
(a) Property, Plant
and Equipment
(b) Capital work-in-
progress
(c) Investment
Property
(d) Goodwill
(e) Other Intangible
assets
(f) Intangible
assets under
development
(g) Biological
Assets other
than bearer
plants
(h) Financial Assets
(i) Investments
(ii) Trade
receivables
(iii) Loans

155
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(i) Deferred tax

assets (net)
(j) Other non-
current assets
(2) Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade
receivables
(iii) Cash and cash
equivalents
(iv) Bank balances
other than(iii) above
(v) Loans
(vi) Others (to be
specified)
(c) Current Tax
Assets (Net)
(d) Other current
assets
Total Assets
EQUITY AND
LIABILITIES
Equity
(a) Equity Share
capital
(b) Other Equity
Liabilities
Non-current
(1)
liabilities
(a) Financial
Liabilities

156
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(i) Borrowings
(ia) Lease liabilities2
(ii) Trade Payables:-
(A) total outstanding
dues of micro
enterprises and
small enterprises;
and
(B) total outstanding
dues of creditors
other than micro
enterprises and
small enterprises.
(iii)Other financial
liabilities (other than
those specified in
item (b), to be
specified)
(b) Provisions
(c) Deferred tax
liabilities (Net)
(d) Other non-
current liabilities
(2) Current liabilities
(a) Financial
Liabilities
(i) Borrowings
(ia) Lease liabilities3
(ii) Trade Payables:-
(A) total outstanding
dues of micro
enterprises and

2
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021
3
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157
GN on Division II - Ind AS Schedule III to the Companies Act 2013

small enterprises;
and
(B) total outstanding
dues of creditors
other than micro
enterprises and
small enterprises.
(iii) Other financial
liabilities (other than
those specified in
item (c)
(b) Other current
liabilities
(c) Provisions
(d) Current Tax
Liabilities (Net)
Total Equity and
Liabilities
see accompanying notes to the financial statements
STATEMENT OF CHANGES IN EQUITY4
Name of the Company..............
A. Equity Share Capital
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the beginning Equity Share balance at equity share the end of
of the current Capital due to the beginning capital the current
reporting prior period of the current during the reporting
period errors reporting current year period
period

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158
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(2) Previous reporting period

Balance at Changes in Restated Changes Balance
the Equity balance at in equity at the
beginning Share the share end of
of the Capital due beginning capital the
previous to prior of the during the previous
reporting period previous previous reporting
period errors reporting year period
period

159
 B. Other Equity

GN on Division II - Ind AS Schedule III to the Companies Act 2013

(1) Current reporting period
Reserves and Surplus
Share Equity Capi Secu Othe Reta Debt Equity Effe Reval Excha Other Mon To
applic compo tal rities r ined instrume Instrume ctive uation nge items of ey tal
ation nent Res Prem Rese Earn nts nts porti Surplu differ Other recei
mone of erve ium rves ings through through on s ences Compre ved
y compo (spe Other Other of on hensive agai
pendi und cify Compre Compre Cas transl Income( nst
ng financi natur hensive hensive h ating specify shar
160

allotm al e) Income Income Flow the nature) e

ent instru Hed financ warr
ments ges ial ants
state
ments
of a
foreig
n
opera
tion
Balance
at the
beginnin
g of the
 current
reportin
g period

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Change
s in
accounti
ng
policy or
prior
period
errors
Restate
d
161

balance
at the
beginnin
g of the
current
reportin
g period
Total
Compre
hensive
Income
for the
current
 year

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Dividend
s
Transfer
to
retained
earnings
Any
other
change
(to be
specifie
162

d)
Balance
at the
end of
the
current
reportin
g period
 (2) Previous reporting period
Reserves and Surplus

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Share Equity Capi Secu Othe Reta Debt Equity Effe Reval Excha Other Mone To
applic comp tal rities r ined instrum Instrum ctive uation nge items of y tal
ation onent Res Prem Rese Earn ents ents porti Surplu differ Other recei
mone of erve ium rves ings through through on s ences Compre ved
y comp (spe Other Other of on hensive again
pendi ound cify Compre Compre Cas transl Income( st
ng financ natu hensive hensive h ating specify share
allotm ial re) Income Income Flow the nature) warra
ent instru Hed financ nts
ments ges ial
state
163

ments
of a
foreig
n
opera
tion
Balance
at the
beginnin
g of the
previous
reportin
g period
 Change

GN on Division II - Ind AS Schedule III to the Companies Act 2013

s in
accounti
ng
policy or
prior
period
errors
Restate
d
balance
at the
164

beginnin
g of the
previous
reportin
g period
Total
Compre
hensive
Income
for the
previous
year
Dividend
s
 Transfer
to

GN on Division II - Ind AS Schedule III to the Companies Act 2013

retained
earnings
Any
other
change
(to be
specifie
d)
Balance
at the
end of
165

the
previous
reportin
g period
Note: Remeasurement of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated
at fair value through profit or loss shall be recognised as a part of retained earnings with separate disclosure of such items along
with the relevant amounts in the Notes or shall be shown as a separate column under Reserves and Surplus;
GN on Division II - Ind AS Schedule III to the Companies Act 2013

GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET:

1. An entity shall classify an asset as current when-
(a) it expects to realise the asset, or intends to sell or consume it, in
its normal operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the
reporting period; or
(d) the asset is cash or a cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for at
least twelve months after the reporting period.
An entity shall classify all other assets as non-current.
2. The operating cycle of an entity is the time between the acquisition of
assets for processing and their realisation in cash or cash equivalents.
When the entity's normal operating cycle is not clearly identifiable, it is
assumed to be twelve months.
3. An entity shall classify a liability as current when-
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the
reporting period; or
(d) it does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Terms of a liability that could, at the option of the counterparty,
result in it settlement by the issue of equity instruments do not
affect its classification.
An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a 'trade receivable' if it is in respect
of the amount due on account of goods sold or services rendered in
the normal course of business.
5. A payable shall be classified as a 'trade payable' if it is in respect of
the amount due on account of goods purchased or services received in
the normal course of business.

166
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

6. A company shall disclose the following in the Notes:

A. Non-Current Assets
l. Property. Plant and Equipment:
(i) Classification shall be given as:
(a) Land
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of
assets
(iii)5 A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant
and Equipment) and other adjustments and the related depreciation
and impairment losses or reversals shall be disclosed separately.
ll. Investment Property:
A reconciliation of the gross and net carrying amounts of each class of
property at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations and
other adjustments and the related depreciation and impairment losses
or reversals shall be disclosed separately.
III. Goodwill:
A reconciliation of the gross and net carrying amount of goodwill at the
beginning and end of the reporting period showing additions,
impairments, disposals and other adjustments.
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GN on Division II - Ind AS Schedule III to the Companies Act 2013

IV. Other Intangible assets

(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and
operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
(ii)6 A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations,
amount of change due to revaluation (if change is 10% or more in the
aggregate of the net carrying value of each class of intangible assets)
and other adjustments and the related amortization and impairment
losses or reversals shall be disclosed separately.
V. Biological Assets other than bearer plants:
A reconciliation of the carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions,
disposals, acquisitions through business combinations and other
adjustments shall be disclosed separately.
VI. Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;

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168
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(f) Investments in partnership firms; or

(g) Other investments (specify nature)
Under each classification, details shall be given of names of the
bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of
the investment so made in each such body corporate (showing
separately investments which are partly-paid). lnvestments in
partnership firms along with names of the firms, their partners, total
capital and the shares of each partner shall be disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value
thereof:
(b) Aggregate amount of unquoted investment and
(c) Aggregate amount of impairment in value of investment.
VII. Trade Receivables:
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit
Risk; and
(d) Trade Receivables - credit impaired.
(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by Directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms
or private companies respectively in which any director is a partner or
a director or a member should be separately stated.

169
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(iv)7 For trade receivables outstanding, following ageing schedule shall be

given:
Trade Receivables ageing schedule
(Amount in Rs.)
Particulars Outstanding for following periods from due date
of payment#
Less 6 1-2 2-3 More than Total
than 6 months Years years 3 years
months -1 year
(i) Undisputed
Trade receivables
— considered
good
(ii) Undisputed
Trade
Receivables —
which have
significant
increase in credit
risk
(iii) Undisputed
Trade
Receivables —
credit impaired
(iv) Disputed
Trade
Receivables —
considered good
(v) Disputed
Trade
Receivables —
which have
significant

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170
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

increase in credit
risk
(vi) Disputed
Trade
Receivables —
credit impaired
# similar information shall be given where no due date of payment is
specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately;
VIII. Loans;
(i) Loans shall be classified as:
(a)8 Omitted;
(b) Loans to related parties (giving details thereof); and
(c) others (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good – Secured;
(b) Loans Receivables considered good – Unsecured;
(c) Loans Receivables which have significant increase in Credit
Risk; and
(d) Loans Receivables – credit impaired.
(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by Directors or other officers of the company or any of them
either severally or jointly with any other person or amounts due by
firms or private companies respectively in which any director is a
partner or a director or a member shall be separately stated.
X9. Other financial assets
(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) Others (to be specified);

8
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171
GN on Division II - Ind AS Schedule III to the Companies Act 2013

X. Other non-current asset:

Other non-current assets shall be classified as-
(i) Capital Advances; and
(ii) Advances other than capital advances;
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to Directors or other officers of the company or any of
them either severally or jointly with any other persons or
advances to firms or private companies respectively in which
any director is a partner or a director or a member should be
separately stated, ln case advances are of the nature of a
financial asset as per relevant Ind AS, these are to be disclosed
under 'other financial assets' separately.
(iii) Others (specify nature).
B. Current Assets
I. Inventories:
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) Stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of
inventories.
(iii) Mode of valuation shall be stated.

172
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

II. Investment;
(i) Investments shall be classified as-
(a) Investments in Equity lnstruments;
(b) lnvestments in Preference Shares;
(c) lnvestments in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) lnvestments in partnership firms; and
(g) Other investments (specify nature).
Under each classification, details shall be given of names of the
bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of
the lnvestment so made in each such body corporate (showing
separately investments which are partly-paid)
(ii) The following shall also be disclosed
(a) Aggregate amount of quoted investments and market value
thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,
III. Trade Receivables
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit
Risk; and
(d) Trade Receivables - credit impaired.

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(ii) Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
(iii) Debts due by Directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms
or private companies respectively in which any director is a partner or
a director or a member should be separately stated.
(iv)10 For trade receivables outstanding, following ageing schedule shall be
given:
Trade Receivables ageing schedule
(Amount in Rs.)
Particulars Outstanding for following periods from due
date of payment#
Less 6 1-2 2-3 More than Total
than 6 months Years years 3 years
months -1 year
(i) Undisputed
Trade
receivables —
considered good
(ii) Undisputed
Trade
Receivables —
which have
significant
increase in credit
risk
(iii) Undisputed
Trade
Receivables —
credit impaired
(iv) Disputed
Trade
Receivables—
considered good
(v) Disputed
Trade

10
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

174
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Receivables —
which have
significant
increase in credit
risk
(vi) Disputed
Trade
Receivables —
credit impaired
# similar information shall be given where no due date of payment is
specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately;
IV. Cash and cash equivalents:
Cash and cash equivalents shall be classified as
(a) Balances with Banks (of the nature of cash and cash
equivalents);
(b) Cheques, drafts on hand;
(c) Cash on hand; and
(d) Others (specify nature).
V. Loans;
(i) Loans shall be classified as:
(a)11 Omitted;
(b) Loans to related parties (giving details thereof); and
(c) others (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit
Risk; and
(d) Loans Receivables - credit impaired.

11
Omitted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

175
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(iii) Allowance for bad and doubtful loans shall be disclosed under the
relevant heads separately.
(iv) Loans due by Directors or other officers of the company or any of them
either severally or jointly with any other person or amounts due by
firms or private companies respectively in which any director is a
partner or a director or a member shall be separately stated.
VA.12 Other Financial Assets:
This is an all-inclusive heading, which incorporates financial assets
that do not fit into any other financial asset categories, such as,
Security Deposits.
VI. Other current assets (specify nature):
This is an all-inclusive heading, which incorporates current assets that do
not fit into any other asset categories. Other current assets shall be
classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or
any of them either severally or jointly with any other persons
or advances to firms or private companies respectively in
which any director is a partner or a director or a member
should be separately stated.
(ii) Others (specify nature)
C. Cash and Bank balances:
The following disclosures with regard to cash and bank balances shall be
made:
(a) Earmarked balances with banks (for example, for unpaid
dividend) shall be separately stated.

12
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(b) Balances with banks to the extent held as margin money or

security against the borrowings, guarantees, other commitments
shall be disclosed separately.
(c) Repatriation restrictions, if any, in respect of cash and bank
balances shall be separately stated.
D. Equity
I. Equity Share Capital: For each class of equity share capital:
(a) the number and amount of shares authorised;
(b) the number of shares issued, subscribed and fully paid, and
subscribed but not fully paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the
beginning and at the end of the period;
(e) the rights, preferences and restrictions attaching to each class
of shares including restrictions on the distribution of dividends
and the repayment of capital;
(f) shares in respect of each class in the company held by its
holding company or its ultimate holding company including
shares held by subsidiaries or associates of the holding
company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more
than five percent shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or
commitments for the sale of shares or disinvestment, including
the terms and amounts;
(i) for the period of five years immediately preceding the date at
which the Balance Sheet is prepared
• number and class of shares allotted as fully paid up
pursuant to contract without payment being received in
cash;
• aggregate number and class of shares allotted as fully
paid up by way of bonus shares; and
• aggregate number and class of shares bought back;

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(j) terms of any securities convertible into equity shares issued

along with the earliest date of conversion in descending order
starting from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by
Directors and officers);
(l) forfeited shares (amount originally paid up).
(m)13 A company shall disclose Shareholding of Promoters* as under:
Shares held by promoters at the end of the year % Change
during the
year***
S. Promoter No. of %of total
No name Shares** shares

*Promoter here means promoter as defined in the Companies Act, 2013.

** Details shall be given separately for each class of shares
*** percentage change shall be computed with respect to the number at the
beginning of the year or if issued during the year for the first time then with
respect to the date of issue.
II. Other Equity:
(i) 'Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) Others- (specify the nature and purpose of each reserve and
the amount in respect thereof);
(Additions and deductions since last balance sheet to be shown
under each of the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant
column in the Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall
disclose the fact that it is so represented;

13
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(iv) Debit balance of Statement of Profit and Loss shall be shown as a

negative figure under the head 'retained earnings'. Similarly, the
balance of 'Other Equity', after adjusting negative balance of retained
earnings, if any, shall be shown under the head 'Other Equity' even if
the resulting figure is in the negative; and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the
nature and amount of each item.
E. Non-Current Liabilities
I. Borrowings:
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits
(e) Loans from related parties
(f) Omitted14
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case.
(iii) where loans have been guaranteed by Directors or others, the
aggregate amount of such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of
redemption or conversion, as the case may be) shall be stated in
descending order of maturity or conversion, starting from farthest
redemption or conversion date, as the case may be, where
bonds/debentures are redeemable by installments, the date of maturity
for this purpose must be reckoned as the date on which the first
installment becomes due;

14
Omitted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

179
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(v) particulars of any redeemed bonds or debentures which the company

has power to reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in
repayment of borrowings and interest shall be specified separately in
each case.
III. Provisions: The amounts shall be classified as-
(a) Provision for employee benefits; and
(b) Others (specify nature).
IV. Other non-current liabilities;
(a) Advances; and
(b) Others (specify nature).
F. Current Liabilities
I. Borrowings:
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured.
Nature of security shall be specified separately in each case;
(iii) where loans have been guaranteed by Directors or others, the
aggregate amount of such loans under each head shall be disclosed;
(iv) period and amount of default as on the balance sheet date in
repayment of borrowings and interest, shall be specified separately in
each case.
(v) 15Current maturities of Long term borrowings shall be disclosed
separately;

15 Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

180
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

II. Other Financial Liabilities: Other Financial liabilities shall be

classified as-
(a) Omitted16
(b) Omitted17
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the
extent refundable and interest accrued thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).
'Long term debt' is a borrowing having a period of more than twelve
months at the time of origination
III. Other current liabilities:
The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);
IV. Provisions: The amounts shall be classified as-
(i) provision for employee benefits; and
(ii) others (specify nature)
FA. Trade Payables
The following details relating to micro, small and medium enterprises shall be
disclosed in the notes:-
(a) the principal amount and the interest due thereon (to be shown
separately) remaining unpaid to any supplier at the end of each
accounting year;

16
Omitted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021
17
Omitted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

181
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(b) the amount of interest paid by the buyer in terms of section 16 of the
Micro, Small and Medium Enterprises Development Act, 2006 (27 of
2006), along with the amount of the payment made to the supplier
beyond the appointed day during each accounting year;
(c) the amount of interest due and payable for the period of delay in
making payment (which has been paid but beyond the appointed day
during the year) but without adding the interest specified under the
Micro, Small and Medium Enterprises Development Act, 2006;
(d) the amount of interest accrued and remaining unpaid at the end of
each accounting year; and
(e) the amount of further interest remaining due and payable even in the
succeeding years, until such date when the interest dues above are
actually paid to the small enterprise, for the purpose of disallowance of
a deductible expenditure under section 23 of the Micro, Small and
Medium Enterprises Development Act, 2006.
Explanation.- The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro
enterprise’, ‘small enterprise’ and ‘supplier’, shall have the same meaning as
assigned to them under clauses (b), (d), (e), (h), (m) and (n) respectively of
section 2 of the Micro, Small and Medium Enterprises Development Act,
2006.]
FB18. For trade payables due for payment, following ageing schedule shall
be given:
Trade Payables aging schedule
(Amount in Rs.)
Particulars Outstanding for following periods from due date of
payment#
Less than 1-2 2-3 More than Total
1 year years years 3 years
(i) MSME
(ii) Others
(iii) Disputed dues
— MSME
(iv)Disputed dues -
Others

18
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

182
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

# similar information shall be given where no due date of payment is

specified in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately;
G. The presentation of liabilities associated with group of assets
classified as held for sale and non-current assets classified as held for
sale shall be in accordance with the relevant Indian Accounting
Standards (Ind ASs)
H. Contingent Liabilities and Commitments:
(to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amount of contracts remaining to be executed
on capital account and not provided for;
(b) uncalled liability on shares and other investments partly
paid; and
(c) other commitments (specify nature).
I. The amount of dividends proposed to be distributed to equity and
preference shareholders for the period and title related amount per
share shall be disclosed separately. Arrears of fixed cumulative
dividends on irredeemable preference shares shall also be disclosed
separately.
J. Where in respect of an issue of securities made for a specific purpose
the whole or part of amount has not been used for the specific purpose
at the Balance sheet date, there shall be indicated by way of note how
such unutilised amounts have been used or invested.
JA.19 Where the company has not used the borrowings from banks and
financial institutions for the specific purpose for which it was taken at

19
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

183
GN on Division II - Ind AS Schedule III to the Companies Act 2013

the balance sheet date, the company shall disclose the details of
where they have been used.
K20. Omitted
L21. Additional Regulatory Information
(i) Title deeds of Immovable Properties not held in name of the
Company
The company shall provide the details of all the immovable properties
(other than properties where the Company is the lessee and the lease
agreements are duly executed in favour of the lessee) whose title
deeds are not held in the name of the company in following format and
where such immovable property is jointly held with others, details are
required to be given to the extent of the company‘s share.
Relevant Descripti Gross Title Whether title Proper Reason
line item on of carryi deed deed holder is ty held for not
in the item of ng s a promoter, since being
Balance property value held director or which held in
sheet in relative# of date the
the promoter*/dire name of
nam ctor or the
e of employee of company
promoter/direc **
tor
PPE - Land - - - - **also
Building indicate
if in
dispute
Investme Land
nt Building
property
-
PPE Land
retired Building
from

20
Omitted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021
21
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

184
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

active
use and
held for
disposal.
others
#Relative here means relative as defined in the Companies Act, 2013.
*Promoter here means promoter as defined in the Companies Act, 2013.

(ii) The Company shall disclose as to whether the fair value of investment
property (as measured for disclosure purposes in the financial
statements) is based on the valuation by a registered valuer as
defined under rule 2 of Companies (Registered Valuers and Valuation)
Rules, 2017.
(iii) Where the Company has revalued its Property, Plant and Equipment
(including Right-of-Use Assets), the company shall disclose as to
whether the revaluation is based on the valuation by a registered
valuer as defined under rule 2 of Companies (Registered Valuers and
Valuation) Rules, 2017.
(iv) Where the company has revalued its intangible assets, the company
shall disclose as to whether the revaluation is based on the valuation
by a registered valuer as defined under rule 2 of Companies
(Registered Valuers and Valuation) Rules, 2017.
(v) The following disclosures shall be made where Loans or Advances in
the nature of loans are granted to promoters, Directors, KMPs and the
related parties (as defined under Companies Act, 2013), either
severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,
Type of Amount of loan or advance in the Percentage to the total
Borrower nature of loan outstanding Loans and Advances in
the nature of loans
Promoters
Directors
KMPs
Related
Parties

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

(vi) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be given:
CWIP aging schedule
(Amount in Rs.)
CWIP Amount in CWIP for a period of Total*
Less than 1 1-2 2-3 More
year years years than 3
years
Projects in
progress
Projects
temporarily
suspended
*Total shall tally with CWIP amount in the balance sheet.
(b) For capital-work-in progress, whose completion is overdue or has
exceeded its cost compared to its original plan, following CWIP
completion schedule shall be given**:

(Amount in Rs.)
CWIP To be completed in
Less than 1 1-2 years 2-3 years More than 3
year years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.
(vii) Intangible assets under development:
(a) For Intangible assets under development, following ageing schedule
shall be given:

186
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Intangible assets under development aging schedule

(Amount in Rs.)
Amount in CWIP for a period of Total*
Intangible Less 1-2 2-3 More
assets under than 1 years years than 3
development year years
Projects in
progress
Projects
temporarily
suspended
* Total shall tally with the amount of Intangible assets under development in
the balance sheet.
(b) For Intangible assets under development, whose completion is
overdue or has exceeded its cost compared to its original plan, the
following Intangible assets under development completion
schedule shall be given**:
(Amount in Rs.)
To be completed in
Intangible assets Less than 1-2 years 2-3 years More than
under 1 year 3 years
development
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.
(viii) Details of Benami Property held
Where any proceeding has been initiated or pending against the company for
holding any benami property under the Benami Transactions (Prohibition)
Act, 1988 (45 of 1988) and rules made thereunder, the company shall
disclose the following:-
(a) Details of such property,
(b) Amount thereof,

187
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(c) Details of Beneficiaries,

(d) If property is in the books, then reference to the item in the Balance
Sheet,
(e) If property is not in the books, then the fact shall be stated with
reasons,
(f) Where there are proceedings against the company under this law as
an abetter of the transaction or as the transferor then the details shall
be provided,
(g) Nature of proceedings, status of same and company‘s view on same.
(ix) where the Company has borrowings from banks or financial
institutions on the basis of security of current assets, it shall
disclose the following:-
(a) whether quarterly returns or statements of current assets filed by the
Company with banks or financial institutions are in agreement with the
books of accounts;
(b) if not, summary of reconciliation and reasons of material
discrepancies, if any to be adequately disclosed.
(x) Wilful Defaulter*
Where a company is a declared wilful defaulter by any bank or financial
institution or other lender, following details shall be given:
(a) Date of declaration as wilful defaulter,
(b) Details of defaults (amount and nature of defaults)
* wilful defaulter" here means a person or an issuer who or which is
categorized as a wilful defaulter by any bank or financial institution (as
defined under the Companies Act, 2013) or consortium thereof, in
accordance with the guidelines on wilful defaulters issued by the Reserve
Bank of India.
(xi) Relationship with Struck off Companies
Where the company has any transactions with companies struck off under
section 248 of the Companies Act, 2013 or section 560 of Companies Act,
1956, the Company shall disclose the following details, namely:-

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Name of Nature of Balance Relationship with

struck off transactions with outstanding the Struck off
Company struck off Company company, if any,
to be disclosed
Investments in
securities
Receivables
Payables
Shares held by stuck
off company
Other outstanding
balances (to be
specified)
(xii) Registration of charges or satisfaction with Registrar of
Companies (ROC)
Where any charges or satisfaction yet to be registered with ROC beyond the
statutory period, details and reasons thereof shall be disclosed.
(xiii) Compliance with number of layers of companies
Where the company has not complied with the number of layers prescribed
under clause (87) of section 2 of the Act read with the Companies
(Restriction on number of Layers) Rules, 2017, the name and CIN of the
companies beyond the specified layers and the relationship or extent of
holding of the company in such downstream companies shall be disclosed.
(xiv) Following Ratios to be disclosed:-
(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,

189
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(i) Net profit ratio,

(j) Return on Capital employed,
(k) Return on investment.
The company shall explain the items included in numerator and denominator
for computing the above ratios. Further explanation shall be provided for any
change in the ratio by more than 25% as compared to the preceding year.
(xv) Compliance with approved Scheme(s) of Arrangements
Where the Scheme of Arrangements has been approved by the Competent
Authority in terms of sections 230 to 237 of the Companies Act, 2013, the
company shall disclose that the effect of such Scheme of Arrangements have
been accounted for in the books of account of the Company ‘in accordance
with the Scheme’ and ‘in accordance with accounting standards’ and any
deviation in this regard shall be explained.
(xvi) Utilisation of Borrowed funds and share premium:
(A) Where company has advanced or loaned or invested funds (either
borrowed funds or share premium or any other sources or kind of funds) to
any other person(s) or entity(ies), including foreign entities (Intermediaries)
with the understanding (whether recorded in writing or otherwise) that the
Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the company (Ultimate
Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the
Ultimate Beneficiaries;
the company shall disclose the following:-
(I) date and amount of fund advanced or loaned or invested in
Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested by
such Intermediaries to other intermediaries or Ultimate Beneficiaries
along with complete details of the ultimate beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on
behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has been

190
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

complied with for such transactions and the transactions are not
violative of the Prevention of Money-Laundering act, 2002 (15 of
2003).;
(B) Where a company has received any fund from any person(s) or
entity(ies), including foreign entities (Funding Party) with the understanding
(whether recorded in writing or otherwise) that the company shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the Funding Party
(Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of the Ultimate
Beneficiaries, the company shall disclose the following:-
(I) date and amount of fund received from Funding parties with
complete details of each Funding party.
(II) date and amount of fund further advanced or loaned or invested
other intermediaries or Ultimate Beneficiaries along with
complete details of the other intermediaries‘ or ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or
on behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions
are not violative of the Prevention of Money-Laundering act,
2002 (15 of 2003).]
7. When a company applies an accounting policy retrospectively or
makes a restatement of items in the financial statements or when it
reclassifies items in its financial statements, the company shall attach
to the Balance Sheet, a "Balance Sheet" as at the beginning of the
earliest comparative period presented.
8. Share application money pending allotment shall be classified into
equity or liability in accordance with relevant Indian Accounting
Standards. Share application money to the extent not refundable shall
be shown under the head Equity and share application money to the
extent refundable shall be separately shown under 'Other financial
liabilities'.

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

9. Preference shares including premium received on issue, shall be

classified and presented as 'Equity' or 'Liability' in accordance with the
requirements of the relevant Indian Accounting Standards.
Accordingly, the disclosure and presentation requirements in that
regard applicable to the relevant class of equity or liability shall be
applicable mutatis mutandis to the preference shares. For instance,
9 [plain vanilla] redeemable preference shares shall be classified and

presented under 'non-current liabilities' as 'borrowings' and the

disclosure requirements in this regard applicable to such borrowings
shall be applicable mutatis mutandis to redeemable preference shares.
10. Compound financial instruments such as convertible debentures,
where split into equity and liability components, as per the
requirements of the relevant Indian Accounting Standards, shall be
classified and presented under the relevant heads in 'Equity' and
'Liabilities'
11. Regulatory Deferral Account Balances shall be presented in the
Balance Sheet in accordance with the relevant Indian Accounting
Standards.

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 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Part II - Statement of Profit and Loss

Name of the Company.........................
Statement of Profit and Loss for the period ended................
(Rupees in………….)
Particulars Note Figures as Figures for
No. at the end the previous
of current reporting
reporting period
period
I Revenue From operations
II Other Income
III Total Income (l+Il)
IV EXPENSES
Cost of materials
consumed
Purchases of Stock-in-
Trade
Changes in inventories of
finished goods, Stock-in -
Trade and work-in-progress
Employee benefits expense
Finance costs
Depreciation and
amortization expenses
Other expenses
Total expenses (lV)
V Profit/(loss) before
exceptional items and tax
(I-IV)
VI Exceptional Items
VII Profit/ (loss) before
exceptions items and tax(V-
VI)

193
GN on Division II - Ind AS Schedule III to the Companies Act 2013

VIII Tax expense:

(1) Current tax
(2) Deferred tax
XI Profit (Loss) for the period
from continuing operations
(VlI-VlII)
X Profit/(loss) from
discontinued operations
XI Tax expenses of
discontinued operations
XII Profit/(loss) from
Discontinued operations
(after tax) (X-XI)
XIII Profit/(loss) for the period
(IX+XII)
XIV Other Comprehensive
Income
A. (i) Items that will not be
reclassified to profit or loss
(ii) Income tax relating to
items that will not be
reclassified to profit or loss
B. (i) Items that will be
reclassified to profit or loss
(ii) lncome tax relating to
items that will be
reclassified to profit or loss
XV Total Comprehensive
Income for the period
(XIII+XIV)Comprising Profit
(Loss) and Other
comprehensive Income for
the period )
XVI Earnings per equity share
(for discontinued
operation):

194
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(1) Basic
(2) Diluted
XVIII Earning per equity share
(for discontinued &
continuing operation)
(1) Basic
(2) Diluted
see accompanying notes to the financial statements
Notes:
GENERAL INSTRUCTIONS FOR PREPARING OF STATEMENT OF
PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure
account, in like manner as they apply to a Statement of Profit and
Loss,
2. The Statement of Profit and Loss shall include:
(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is 'Total Comprehensive Income"
3. Revenue from operations shall disclose separately in the notes
(a) sale of products (including Excise Duty);
(b) sale of services; 20[Omitted]
ba)22 Grants or donations received (relevant in case of section 8
companies only); and
(c) other operating revenues.
4. Finance Costs: Finance costs shall be classified as-
(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing
costs; and
(d) other borrowing costs (specify nature).

22
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

195
GN on Division II - Ind AS Schedule III to the Companies Act 2013

5. Other income: other income shall be classified as-

(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly
attributable to such income)
6. Other Comprehensive Income shall be classified into-
(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Remeasurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive
Income;
(iv) Fair value changes relating to own credit risk of financial
liabilities designated at fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and
Joint Ventures, to the extent not to be classified into profit
or loss; and
(vi) Others (specify nature).
(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial
statements of a foreign operation;
(ii) Debt lnstruments through Other Comprehensive Income;
(iiii) The effective portion of gains and loss on hedging
instruments in a cash flow hedge;
(iv) Share of other comprehensive lncome in Associates and
Joint Ventures, to the extent to be classified into profit or
loss; and
(v) Others (specify nature)
7. Additional Information: A Company shall disclose by way of notes,
additional information regarding aggregate expenditure and income on
the following items:

196
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(a) employee Benefits expense (showing separately (i) salaries and

wages, (ii) contribution to provident and other funds, (iii) share
based payments to employees, (iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent
of the revenue from operations or Rs.10,00,000, whichever is
higher, in addition to the consideration of 'materiality' as
specified in clause 7 of the General Instructions for Preparation
of Financial Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation
(other than considered as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters,
(c) for company law matters, (d) for other services, (e) for
reimbursement of expenses;
(j) in case of companies covered under section 135, amount of
expenditure incurred on corporate social responsibility activities;
and
(k) details of items of exceptional nature;
(l)23 Undisclosed income
The Company shall give details of any transaction not recorded
in the books of accounts that has been surrendered or disclosed
as income during the year in the tax assessments under the
Income Tax Act, 1961 (such as, search or survey or any other
relevant provisions of the Income Tax Act, 1961), unless there
is immunity for disclosure under any scheme and shall also
state whether the previously unrecorded income and related
assets have been properly recorded in the books of account
during the year.

23
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197
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(m)24 Corporate Social Responsibility (CSR)

Where the company covered under section 135 of the
Companies Act, the following shall be disclosed with regard to
CSR activities:-
(i) amount required to be spent by the company during the
year,
(ii) amount of expenditure incurred,
(iii) shortfall at the end of the year,
(iv) total of previous years shortfall,
(v) reason for shortfall,
(vi) nature of CSR activities,
(vii) details of related party transactions, e.g., contribution to a
trust controlled by the company in relation to CSR
expenditure as per relevant Accounting Standard,
(viii) where a provision is made with respect to a liability
incurred by entering into a contractual obligation, the
movements in the provision during the year shall be
shown separately.
(n)25 details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency
or Virtual Currency during the financial year, the following shall
be disclosed:-
(i) profit or loss on transactions involving Crypto currency or
Virtual Currency,
(ii) amount of currency held as at the reporting date,
(iii) deposits or advances from any person for the purpose of
trading or investing in Crypto Currency or virtual
currency.
8. Changes in Regulatory Deferral Account Balances shall be presented
in the Statement of Profit and Loss in accordance with the relevant
Indian Accounting Standards

24
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021
25
Inserted pursuant to MCA Notification G.S.R. 207(E) dated 24th March 2021

198
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

PART III- GENERAL INSTRUCTIONS FOR THE PREPARATION OF

CONSOLIDATED FINANCIAL STATEMENTS
1. Where a company is required to prepare Consolidated Financial
Statements, i.e,, consolidated balance sheet, consolidated statement
of changes in equity and consolidated statement of profit and loss, the
company shall mutatis mutandis follow the requirements of this
Schedule as applicable to a company in the preparation of balance
sheet, statement of changes in equity and statement of profit and loss
.ln addition, the consolidated financial statements shall disclose the
information as per the requirements specified in the applicable Indian
Accounting Standards notified under the Companies (lndian
Accounting Standards) Rules 2015, including the following, namely:
(i) Profit or loss attributable to 'non-controlling interest' and to
'owners of the parent' in the statement of profit and loss shall be
presented as allocation for the period Further, 'total
comprehensive income' for the period attributable to 'non-
controlling interest' and to 'owners of the parent' shall be
presented in the statement of profit and loss as allocation for
the period. The aforesaid disclosures for 'total comprehensive
income' shall also be made in the statement of changes in
equity In addition to the disclosure requirements in the Indian
Accounting Standards, the aforesaid disclosures shall also be
made in respect of 'other comprehensive Income
(ii) 'Non-controlling interests' in the Balance Sheet and in the
Statement of Changes in Equity, within equity, shall be
presented separately from the equity of the 'owners of the
parent'.
(iii) Investments accounted for using the equity method.
2. In Consolidated Financial Statement, the following shall be disclosed
by the way of additional information

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GN on Division II - Ind AS Schedule III to the Companies Act 2013

Name of the Net Asset Share in Share in other Share in total

entity in the i.e. total profit or comprehensive comprehensive
Group assets loss income income
minus total
liabilities

consolidated other
consolidated profit
consolidated net

comprehensive

comprehensive
As % of total
As % of

As % of

As % of
Amount

Amount

Amount

Amount
income

income
or loss
assets

Parent
Subsidiaries
Indian
1.
2.
3.
.
.
Foreign
1.
2.
3.
.
.
Non-
Controlling
Interest in
all
subsidiaries
Associates
(Investment
as per the
equity
method )

200
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Indian
1.
2.
3.

Foreign
1.
2.
3.
.
.
Joint
Venture
(Investment
as per the
equity
method)
Indian
1.
2.
3.
.
.
Foreign
1.
2.
3.
.
.
Total
3. All subsidiaries, associates and joint venture (whether Indian or
Foreign) will be covered under consolidated financial statement.

201
GN on Division II - Ind AS Schedule III to the Companies Act 2013

4. An entity shall disclose the list of subsidiaries or associates or joint

venture which have not been consolidated in the consolidated
financial statement along with the reason of not consolidating.

202
 Annexure B
Analytical Ratios
1. Current Ratio
The current ratio indicates a company’s overall liquidity position. It is
widely used by banks in making decisions regarding the advancing of
working capital credit to their clients.
Current Assets
Current Ratio = ____________________
Current Liabilities
2. Debt – Equity Ratio
Debt-to-equity ratio compares a Company’s total debt to
shareholders equity. Both of these numbers can be found in a
Company’s balance sheet.
Total Debt
Debt –Equity Ratio = ________________________________
Shareholder’s Equity
3. Debt Service Coverage Ratio
Debt Service coverage ratio is used to analyse the firm’s ability to pay-
off current interest and instalments.
Earnings available for debt service
Debt Service Coverage Ratio = _____________________________
Debt Service
Earning for Debt Service = Net Profit after taxes + Non-cash operating
expenses like depreciation and other amortizations + Interest + other
adjustments like loss on sale of Fixed assets etc.
Debt service = Interest & Lease Payments + Principal Repayments
“Net Profit after tax” means reported amount of “Profit / (loss) for the
period” and it does not include items of other comprehensive income.
4. Return on Equity (ROE):
It measures the profitability of equity funds invested in the
Company. The ratio reveals how profitability of the equity-holders’
GN on Division II - Ind AS Schedule III to the Companies Act 2013

funds have been utilized by the Company. It also measures the

percentage return generated to equity-holders. The ratio is
computed as:
Net Profits after taxes – Preference Dividend (if any)
ROE = _______________________________________
Average Shareholder’s Equity
5. Inventory Turnover Ratio
This ratio also known as stock turnover ratio and it establishes the
relationship between the cost of goods sold during the period or
sales during the period and average inventory held during the
period. It measures the efficiency with which a Company utilizes
or manages its inventory.
Cost of goods sold OR sales
Inventory Turnover ratio = _______________________________
Average Inventory
Average inventory is (Opening + Closing balance / 2)
When the information opening and closing balances of inventory
is not available then the ratio can be calculated by dividing COGS
OR Sales by closing balance of Inventory.
6. Trade receivables turnover ratio
It measures the efficiency at which the firm is managing the
receivables.
Net Credit Sales
Trade receivables turnover ratio =___________________
Avg. Accounts Receivable
Net credit sales consist of gross credit sales minus sales return.
Trade receivables includes sundry debtors and bills receivables.
Average trade debtors = (Opening + Closing balance / 2)
When the information about credit sales, opening and closing
balances of trade debtors is not available then the ratio can be
calculated by dividing total sales by closing balances of trade
receivables.

204
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

7. Trade payables turnover ratio

It indicates the number of times sundry creditors have been paid
during a period. It is calculated to judge the requirements of cash for
paying sundry creditors. It is calculated by dividing the net credit
purchases by average creditors.
Net Credit Purchases
Trade payables turnover ratio = _____________________
Average Trade Payables
Net credit purchases consist of gross credit purchases minus purchase
return
When the information about credit purchases, opening and closing
balances of trade creditors is not available then the ratio is calculated
by dividing total purchases by the closing balance of trade creditors.
8. Net capital turnover ratio
It indicates a company's effectiveness in using its working capital.
The working capital turnover ratio is calculated as follows: net sales
divided by the average amount of working capital during the same
period.
Net Sales
Net capital turnover ratio = ____________________
Working Capital
Net sales shall be calculated as total sales minus sales returns.
Working capital shall be calculated as current assets minus current
liabilities.
9. Net profit ratio
It measures the relationship between net profit and sales of the
business.
Net Profit
Net Profit Ratio = ______________________
Net Sales
Net profit shall be after tax.
Net sales shall be calculated as total sales minus sales returns.

205
GN on Division II - Ind AS Schedule III to the Companies Act 2013

10. Return on capital employed (ROCE)

Return on capital employed indicates the ability of a company’s
management to generate returns for both the debt holders and the
equity holders. Higher the ratio, more efficiently is the capital being
employed by the company to generate returns.
Earning before interest and taxes
ROCE = ___________________________________________
Capital Employed
Capital Employed = Tangible Net Worth + Total Debt + Deferred Tax
Liability
11. Return on investment
Return on investment (ROI) is a financial ratio used to calculate
the benefit an investor will receive in relation to their investment
cost. The higher the ratio, the greater the benefit earned. The one
of widely used method is Time Weighted Rate of Return (TWRR)
and the same should be followed to calculate ROI. It adjusts the
return for the timing of investment cash flows and its formula /
method of calculation is commonly available. However, the same
is given below for quick reference:
ROI = {MV(T1) – MV(T0) – Sum [C(t)]}
_________________________
{MV(T0) + Sum [W(t) * C(t)]}
where,
T1 = End of time period
T0 = Beginning of time period
t = Specific date falling between T1 and T0
MV(T1) = Market Value at T1
MV(T0) = Market Value at T0
C(t) = Cash inflow, cash outflow on specific date
W(t) = Weight of the net cash flow (i.e. either net inflow or net
outflow) on day ‘t’, calculated as [T1 – t] / T1
Companies may provide ROI separately for each asset class
(e.g., equity, fixed income, money market, etc.).

206
 Annexure C
Illustrative list of disclosures required under the Companies Act 2013
1. Section 69 - Transfer of certain sums to capital redemption
reserve account.
Where a company purchases its own shares out of free reserves or
securities premium account, a sum equal to the nominal value of the
shares so purchased shall be transferred to the capital redemption
reserve account and details of such transfer shall be disclosed in the
balance sheet.
2. Section 129 - Financial Statements
(5) Without prejudice to sub-section (1), where the Financial Statements
of a company do not comply with the accounting standards referred to
in sub-section (1), the company shall disclose in its Financial
Statements, the deviation from the accounting standards, the reasons
for such deviation and the financial effects, if any, arising out of such
deviation.
3. Section 131 - Voluntary revision of Financial Statements or
Board’s report
(1) If it appears to the directors of a company that—
(a) the Financial Statements of the company; or
(b) the report of the Board, do not comply with the provisions of
section 129 or section 134 they may prepare revised Financial
Statements or a revised report in respect of any of the three
preceding financial years after obtaining approval of the Tribunal
on an application made by the company in such form and manner
as may be prescribed and a copy of the order passed by the
Tribunal shall be filed with the Registrar:
Provided that the Tribunal shall give notice to the Central Government
and the Income tax authorities and shall take into consideration the
representations, if any, made by that Government or the authorities
before passing any order under this section:
Provided further that such revised Financial Statements or report shall
not be prepared or filed more than once in a financial year:
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Provided also that the detailed reasons for revision of such Financial
Statements or report shall also be disclosed in the Board's report in
the relevant financial year in which such revision is being made.
4. Section 135 - Corporate Social Responsibility
(2) The Board's report under sub-section (3) of section 134 shall disclose
the composition of the Corporate Social Responsibility Committee.
5. Section 182 - Prohibitions and restrictions regarding political
contributions (as amended)
(3) Every company shall disclose in its profit and loss account the total
amount contributed by it under this section during the financial year to
which the account relates.
6. Section 183 - Power of Board and other persons to make
contributions to national defence fund, etc.
(2) Every company shall disclose in its profit and loss account the total
amount or amounts contributed by it to the Fund referred to in sub-
section (1) during the financial year to which the amount relates.
7. Section 186 - Loan and investment by company
(4) The company shall disclose to the members in the Financial
Statements the full particulars of the loans given, investment made or
guarantee given or security provided and the purpose for which the
loan or guarantee or security is proposed to be utilised by the recipient
of the loan or guarantee or security.
8. Section 272 - Petition for winding up
(4) The Registrar shall be entitled to present a petition for winding up
under subsection (1) on any of the grounds specified in sub-section (1)
of section 271, except on the grounds specified in clause (b), clause
(d) or clause (g) of that sub-section:
Provided that the Registrar shall not present a petition on the ground
that the company is unable to pay its debts unless it appears to him
either from the financial condition of the company as disclosed in its
balance sheet or from the report of an inspector appointed under
section 210 that the company is unable to pay its debts:
Provided further that the Registrar shall obtain the previous sanction of
the Central Government to the presentation of a petition:

208
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Provided also that the Central Government shall not accord its
sanction unless the company has been given a reasonable opportunity
of making representations.

209
 Annexure D
List of Indian Accounting Standards notified as on date:

Ind AS Description
Ind AS 101 First-time Adoption of Indian Accounting Standards
Ind AS 102 Share-based Payment
Ind AS 103 Business Combinations
Ind AS 104 Insurance Contracts
Ind AS 105 Non-current Assets Held for Sale and Discontinued
Operations
Ind AS 106 Exploration for and Evaluation of Mineral Resources
Ind AS 107 Financial Instruments: Disclosures
Ind AS 108 Operating Segments
Ind AS 109 Financial Instruments
Ind AS 110 Consolidated Financial Statements
Ind AS 111 Joint Arrangements
Ind AS 112 Disclosure of Interests in Other Entities
Ind AS 113 Fair Value Measurement
Ind AS 114 Regulatory Deferral Accounts
Ind AS 115 Revenue from Contracts with Customers
Ind AS 116 Leases
Ind AS 1 Presentation of Financial Statements
Ind AS 2 Inventories
Ind AS 7 Statement of Cash Flows
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
Ind AS 10 Events after the Reporting Period
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment
Ind AS 19 Employee Benefits
Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
Ind AS 21 The Effects of Changes in Foreign Exchange Rates
Ind AS 23 Borrowing Costs
Ind AS 24 Related Party Disclosures
Ind AS 27 Separate Financial Statements
Ind AS 28 Investments in Associates and Joint Ventures
Ind AS 29 Financial Reporting in Hyperinflationary Economies
Ind AS 32 Financial Instruments: Presentation
Ind AS 33 Earnings per Share
Ind AS 34 Interim Financial Reporting
Ind AS 36 Impairment of Assets
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
Ind AS 38 Intangible Assets
Ind AS 40 Investment Property
Ind AS 41 Agriculture

211
 Annexure E
General Circular No. 39/2014 dated: 14th October, 2014
To
All Regional Directors,
All registrars of Companies,
All Stakeholders
Subject: Clarification on matters relating to Consolidated Financial
Statements.
Sir,
Government has received representations from stakeholders seeking
clarifications on the manner of presentation of notes in Consolidated
Financial Statements (CFS) to be prepared under Schedule III to the Act.
These representations have been examined in consultation with the Institute
of Chartered Accountants of India (ICAI) and it is clarified that Schedule III to
the Act read with the applicable Accounting Standards does not envisage
that a company while preparing its CFS merely repeats the disclosures made
by it under stand-alone accounts being consolidated. In the CFS, the
company would need to give all disclosures relevant for CFS only.
2. This issues with the approval of the competent authority.
 Annexure F
Illustrative Standalone Financial Statements
Balance Sheet as at ________
Particulars Note Figures Figures at
No. at the the end of
end of previous
current reporting
reporting period
period
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment
(b) Capital work-in-progress
(c) Investment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under
development
(g) Biological Assets other than
bearer plants
(h) Financial Assets
(i) Investments
(ii) Loans
(iii) Trade receivables
(iv) Others (to be specified)
(i) Deferred tax assets (net)
(j) Other non-current assets
(2) Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(iii) Cash and cash equivalents

(iv) Bank balances other than (iii)
above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Assets held-for-sale / Assets
included in disposal group(s) held-
for-sale
Total Assets
(1) EQUITY AND LIABILITIES
Equity
(a) Equity Share capital
(b) Instruments entirely equity in
nature
(c) Other Equity
LIABILITIES
Non-current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables
(A) Total outstanding dues of
Small Enterprises and Micro
enterprises
(B) Total outstanding dues of
creditors other than small
enterprises and micro
enterprises.
(iii) Other financial liabilities (other
than those specified in item
(b), to be specified)
(b) Provisions
(c) Deferred tax liabilities (Net)

214
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(d) Other non-current liabilities

(2) Current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables
(A) Total outstanding dues of
Micro enterprises and Small
Enterprises
(B) Total outstanding dues of
creditors other than micro
enterprises and small
enterprises.
(iii) Other financial liabilities (other
than those specified in item
(c))
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
Liabilities classified as held for sale /
Liabilities included in disposal group
held-for-sale
Total Equity and Liabilities
Statement of Changes in Equity for the year ended
______________
A. Equity Share Capital
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the Equity Share balance at the equity share the end of
beginning of Capital due beginning of capital during the current
the current to prior the current the current reporting
reporting period errors reporting year period
period period

215
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the Equity Share balance at the equity share the end of
beginning of Capital due beginning of capital during the
the previous to prior the previous the previous previous
reporting period errors reporting year reporting
period period period

B. Instruments entirely equity in nature ^

a. Compulsorily Convertible Preference Shares
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the current
the current preference the current preference reporting
reporting shares due reporting shares during period
period to prior period the period
period errors

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the
the previous preference the previous preference previous
reporting shares due reporting shares during reporting
period to prior period the period period
period errors

216
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

b. Compulsorily Convertible Debentures

(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the current
the current debentures the current debentures reporting
reporting due to prior reporting during the period
period period errors period period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the
the previous debentures the previous debentures previous
reporting due to prior reporting during the reporting
period period errors period period period

c. [Instrument] (Any other instrument entirely equity in nature)

(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the [Instrument] balance at the [Instrument] the end of
beginning of due to prior beginning of during the the current
the current period errors the current period reporting
reporting reporting period
period period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the [Instrument] balance at the [Instrument] the end of
beginning of due to prior beginning of during the the previous
the previous period errors the previous period reporting
reporting reporting period
period period

217
 C. Other Equity

GN on Division II - Ind AS Schedule III to the Companies Act 2013

(1) Current reporting period
Share Equity Reserves and Surplus Debt Equity Effectiv Reval Exchange Other Mon Tot
applicat compo instrument instrume e uation difference items of ey al
ion nent of s through nts portion Surpl s on Other recei
money compo Other through of us translatin Compreh ved
pending und Comprehe Other Cash g the ensive agai
allotme financi nsive Compreh Flow financial Income nst
nt al Income ensive Hedge statement (specify shar
instru Income s s of a nature) e
218

ments foreign warr

operation ant

Capit Securit Other Retai

al ies Reserv ned
Rese Premiu es Earni
rve m (specif ngs
y
nature)

Balance at
the
beginning of
the current
 reporting
period

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Changes in
accounting
policy or
prior period
errors

Restated
balance at
the
219

beginning of
the current
reporting
period

Total
Comprehen
sive Income
for the
current year

Dividends

Transfer to
 GN on Division II - Ind AS Schedule III to the Companies Act 2013
retained
earnings

Any other
change (to
be
specified)

Balance at
the end of
the current
`220

reporting
period
 (2) Previous reporting period

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Share Equity Reserves and Surplus Debt Equity Effectiv Reval Exchang Other Mon Tot
applicat compo instrument instrume e uation e items of ey al
ion nent of s through nts portion Surpl differenc Other recei
money compo Other through of us es on Compreh ved
pending und Comprehe Other Cash translati ensive agai
allotme financi nsive Compreh Flow ng the Income nst
nt al Income ensive Hedge financial (specify shar
instru Income s stateme nature) e
ments nts of a warr
221

foreign ant
operatio
n

Capit Securit Other Retai

al ies Reserv ned
Rese Premiu es Earni
rve m (specif ngs
y
nature)

Balance at
the
beginning of
 the previous

GN on Division II - Ind AS Schedule III to the Companies Act 2013

reporting
period

Changes in
accounting
policy or
prior period
errors

Restated
`222

balance at
the
beginning of
the previous
reporting
period

Total
Comprehen
sive Income
for the
previous
year
 Dividends

Transfer to

GN on Division II - Ind AS Schedule III to the Companies Act 2013

retained
earnings

Any other
change (to
be
specified)

Balance at
the end of
223

the previous
reporting
period

Note: Remeasurment of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated
at fair value through profit or loss shall be recognised as a part of retained earnings with separate disclosure of such items
along with the relevant amounts in the Notes or shall be shown as a separate column under Reserves and Surplus.
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Statement of Profit and Loss for the year ended _______

Particulars Note Figures for Figures for
No. the current the
reporting previous
period reporting
period
I Revenue From Operations
II Other Income
III Net gain on de-recognition of
financial assets at amortized
cost
IV Net gain on reclassification of
financial assets**
V Total Income (I + II + III+ IV)
VI EXPENSES
Cost of materials consumed
Excise Duty
Purchases of Stock-in-Trade
Changes in inventories of
finished goods,
Stock-in-Trade and work-in-
progress
Employee benefits expense
Finance costs
Depreciation and amortization
expense
Impairment losses
Net loss on de-recognition of
financial assets at amortized
cost
Net loss on reclassification of
financial assets**
Other expenses
Total expenses (VI)

224
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

VII Profit/(loss) before exceptional

items and tax (V- VI)
VIII Exceptional Items
IX Profit/(loss) before tax(VII+VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI Profit (Loss) for the period from
continuing operations (IX-X)
XII Profit/(loss) from discontinued
operations
XIII Tax expense of discontinued
operations
XIV Profit/(loss) from Discontinued
operations (after tax) (XII – XIII)
XV Profit/(loss) for the period
(XI+XIV)
XVI Other Comprehensive Income
A (i) Items that will not be
reclassified to profit or loss
(ii) Income tax relating to items
that will not be reclassified to
profit or loss
B (i) Items that will be
reclassified to profit or loss
(ii) Income tax relating to items
that will be reclassified to profit
or loss
XVII Total Comprehensive Income
for the period (XV+
XVI)(Comprising Profit/(Loss)
and Other Comprehensive
Income for the period)
XVIII Earnings per equity share (for

225
GN on Division II - Ind AS Schedule III to the Companies Act 2013

continuing operation):
(1) Basic
(2) Diluted
XIX Earnings per equity share (for
discontinued operation):
(1) Basic
(2) Diluted
XX Earnings per equity share(for
discontinued & continuing
operations)
(1) Basic
(2) Diluted
** Difference arising on reclassification of financial assets at the
reclassification date

`226
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

Illustrative Consolidated Financial Statements

Consolidated Balance Sheet as at _______

Particulars Note Figures as at Figures as at
No. the end of the end of
current the previous
reporting reporting
period period
(1) ASSETS
Non-current assets
(a) Property, Plant and
Equipment
(b) Capital work-in-progress
(c) Investment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under
development
(g) Biological Assets other
than bearer plants
(h) Investments accounted
for using the equity
method
(i) Financial Assets
(i) Investments
(ii) Loans
(iii) Trade receivables
(iv) Others (to be specified)
(j) Deferred tax assets (net)
(k) Other non-current assets
(2)
Current assets

227
GN on Division II - Ind AS Schedule III to the Companies Act 2013

(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash
equivalents
(iv) Bank balances other
than (iii) above
(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Assets held-for-sale / Assets
included in disposal group(s)
held-for-sale
Total Assets
(1) EQUITY AND LIABILITIES
Equity
(a) Equity Share capital
(b) Instruments entirely
equity in nature
(c) Other Equity
(d) Non-controlling
interests
Liabilities
Non-current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities

`228
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(ii) Trade payables

(iii) Other financial liabilities
(other than those
specified in item (b), to
be specified)
(b) Provisions
(c) Deferred tax liabilities
(2) (Net)
(d) Other non-current
liabilities
Current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade payables
(iii) Other financial liabilities
(other than those
specified in item (c)
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities
(Net)
Liabilities classified as held
for sale / Liabilities included
in disposal group held-for-
sale
Total Equity and Liabilities

229
GN on Division II - Ind AS Schedule III to the Companies Act 2013

Consolidated Statement of Changes in Equity for the year ended ______

A. Equity Share Capital
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the Equity Share balance at the equity share the end of
beginning of Capital due beginning of capital during the current
the current to prior the current the current reporting
reporting period errors reporting year period
period period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the Equity Share balance at the equity share the end of
beginning of Capital due beginning of capital during the
the previous to prior the previous the previous previous
reporting period errors reporting year reporting
period period period

B. Instruments entirely equity in nature

a. Compulsorily Convertible Preference Shares
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the current
the current preference the current preference reporting
reporting shares due reporting shares during period
period to prior period the period
period errors

`230
 GN on Division II - Ind AS Schedule III to the Companies Act 2013

(3) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the
the previous preference the previous preference previous
reporting shares due reporting shares during reporting
period to prior period the period period
period errors

b. Compulsorily Convertible Debentures

(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the current
the current debentures the current debentures reporting
reporting due to prior reporting during the period
period period errors period period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the compulsorily balance at the compulsorily the end of
beginning of convertible beginning of convertible the
the previous debentures the previous debentures previous
reporting due to prior reporting during the reporting
period period errors period period period

231
GN on Division II - Ind AS Schedule III to the Companies Act 2013

c. [Instrument] (Any other instrument entirely equity in nature)

(1) Current reporting period
Balance at Changes in Restated Changes in Balance at
the [Instrument] balance at the [Instrument] the end of
beginning of due to prior beginning of during the the current
the current period errors the current period reporting
reporting reporting period
period period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at
the [Instrument] balance at the [Instrument] the end of
beginning of due to prior beginning of during the the previous
the previous period errors the previous period reporting
reporting reporting period
period period

`232
 C. Other Equity
(1) Current reporting period
Share Equity Reserves and Surplus Debt Equity Effe Revalu Excha Other Mon Attributa Non- Tota
applic compo instrume instrume ctive ation nge items of ey ble to contr l
ation nent nts nts porti Surplu differe Other recei owners olling
mone of through through on of s nces Compreh ved of the inter
y compo Other Other Cas on ensive agai parent est
pendi und Compreh Compreh h transl Income nst
ng financi ensive ensive Flow ating (specify shar
allotm al Income Income Hed the nature) e
ent instru ges financi warr
ments al ant
233

state
ments
of a
foreig
n
operat
ion

Capit Secur Other Retai

al ities Rese ned
Reser Premi rves Earni
ve um (spec ngs
ify
natur
e)
 Balance

GN on Division II - Ind AS Schedule III to the Companies Act 2013

at the
beginnin
g of the
current
reporting
period

Changes
in
accounti
ng policy
or prior
period
234

errors

Restated
balance
at the
beginnin
g of the
current
reporting
period

Total
Compreh
ensive
Income
for the
 current
year

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Dividend
s

Transfer
to
retained
earnings

Any
other
change
(to be
235

specified
)

Balance
at the
end of
the
current
reporting
period
 (2) Previous reporting period

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Share Equity Reserves and Surplus Debt Equity Effectiv Reval Exchang Other Mon Tot
applicat compo instrument instrume e uation e items of ey al
ion nent of s through nts portion Surpl differenc Other recei
money compo Other through of us es on Compreh ved
pending und Comprehe Other Cash translati ensive agai
allotme financi nsive Compreh Flow ng the Income nst
nt al Income ensive Hedge financial (specify shar
instru Income s stateme nature) e
ments nts of a warr
foreign ant
operatio
236

Capit Securit Other Retai

al ies Reserv ned
Rese Premiu es Earni
rve m (specif ngs
y
nature)

Balance at
the
beginning of
the previous
reporting
 period

Changes in

GN on Division II - Ind AS Schedule III to the Companies Act 2013

accounting
policy or
prior period
errors

Restated
balance at
the
beginning of
the previous
237

reporting
period

Total
Comprehen
sive Income
for the
previous
year

Dividends

Transfer to
retained
earnings
 Any other

GN on Division II - Ind AS Schedule III to the Companies Act 2013

change (to
be
specified)

Balance at
the end of
the previous
reporting
period

Note: Remeasurment of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated
at fair value through profit or loss shall be recognised as a part of retained earnings with separate disclosure of such items
238

along with the relevant amounts in the Notes or shall be shown as a separate column under Reserves and Surplus.
 Consolidated Statement of Profit and Loss for the year ended _______
Particulars Note No. Figures for Figures for

GN on Division II - Ind AS Schedule III to the Companies Act 2013

the current the
reporting previous
period reporting
period
I Revenue from Operations
II Other Income
III Net gain on de-recognition of financial assets at
amortized cost
239

IV Net gain on reclassification of financial assets**

V Total Income (I + II + III+ IV)

VI EXPENSES
Cost of materials consumed
Excise Duty
Purchases of Stock-in-Trade
Changes in inventories of finished goods,
Stock-in-Trade and work-in-progress
Employee benefits expense
 Finance costs

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Depreciation and amortization expense
Impairment losses
Net loss on de-recognition of financial assets at
amortized cost
Net loss on reclassification of financial assets**
Other expenses
Total expenses (VI)
VII Profit/(loss) before share of profit/(loss) of an
associate / a joint venture and exceptional items (V -
240

VI)
VIII Share of profit/(loss) of an associate / a joint venture
IX Profit/(loss) before exceptional items and tax (VII +
VIII)
X Exceptional Items
XI Profit/(loss) before tax(IX+X)
XII Tax expense:
(1) Current tax
(2) Deferred tax
XIII Profit (Loss) for the period from continuing
operations (XI - XII)
 XIV Profit/(loss) from discontinued operations

GN on Division II - Ind AS Schedule III to the Companies Act 2013

XV Tax expense of discontinued operations

XVI Profit/(loss) from Discontinued operations (after tax)

(XIV -XV)
XVII Profit/(loss) for the period (XV +XVI)
XVIII Other Comprehensive Income
A (i) Items that will not be reclassified to profit or loss
(ii) Income tax relating to items that will not be
241

reclassified to profit or loss

B (i) Items that will be reclassified to profit or loss
(ii) Income tax relating to items that will be
reclassified to profit or loss
XIX Total Comprehensive Income for the period
(XVII+XVIII) / (Comprising Profit (Loss) and Other
Comprehensive Income for the period)
Attributable to:
Owners of the parent
Non-controlling interests
Of the Total Comprehensive Income above,
 Profit for the year attributable to:

GN on Division II - Ind AS Schedule III to the Companies Act 2013

Owners of the parent
Non-controlling interests
Of the Total Comprehensive Income above,
Other comprehensive income attributable to:
Owners of the parent
Non-controlling interests
XX Earnings per equity share (for continuing operation):
(1) Basic
(2) Diluted
242

XXI Earnings per equity share (for discontinued

operation):
(1) Basic
(2) Diluted
XXII Earnings per equity share(for discontinued &
continuing operations)
(1) Basic
(2) Diluted
**Difference arising on reclassification of financial assets at the reclassification date
 Glossary
Act The Companies Act, 2013
Ind AS Schedule III Division II to Schedule III to the Act
Ind AS Indian Accounting Standards
Companies Ind AS Companies (Indian Accounting Standards) Rules,
Rules 2015 as amended from time to time
Ind AS Framework Conceptual Framework for Financial Reporting
under Indian Accounting Standards
Non Ind AS Accounting Standards
Companies AS Rules Companies (Accounting Standards) Rules, 2006
as amended from time to time
FVTPL Fair Value through Profit or Loss
FVOCI Fair Value through other Comprehensive Income
SEBI Securities and Exchange Board of India
SEBI (LODR) SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
GAAP Generally Accepted Accounting Principles
MSMED The Micro, Small and Medium Enterprises
Development Act, 2006
CENVAT Central Value Added Tax
GST Goods and Services Tax
MAT Minimum Alternate Tax
CFS / SFS Consolidated Financial Statements / Standalone
Financial Statements
 “Materiality (TP), Risk Assessment and Internal Control”
Audit Risk
Meaning: Risk of expressing an inappropriate audit opinion (when FS are materially misstated).
Components of Audit Risk-
Audit Risk has two components:
(a) ROMM: Risk that F.S. contain a material misstatement; &
(b) Detection risk: Risk that the auditor will not be able to detect such misstatement.
Components of ROMM-
1. Inherent Risk
▪ Susceptibility of an assertion to a misstatement (that could be material, Individually or when
aggregated with other misstatements), assuming that there are no related controls.
▪ Inherent risk is addressed at – F.S. level and Assertion level.

2. Control Risk
▪ Risk that entity’s internal control system will not PDC misstatement (that could be material,
individually or when aggregated with other misstatements)
▪ Some control risk will always exist because of inherent limitations of any internal control
system.
Detection Risk
▪ Risk that auditor will not detect a misstatement that exists (that could be material, either
individually or when aggregated with other misstatements).
▪ Detection risk bears an inverse relationship to the ROMM.
Relationship between Components of Audit Risk: (Understand only)
▪ The relationship can be defined as:
Audit Risk = ROMM × Detection Risk
▪ ROMM: ROMM is anticipated risk before start of the audit. It has two components. The
relationship can be defined as:
ROMM= Inherent risk × Control risk
▪ Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
procedures applied.
▪ Combined level of Inherent Risk and Control Risk is inversely related with Detection Risk.
▪ Audit Materiality is also inversely related with Audit Risk.
▪ AR = IR × CR × DR
Assessment of Audit Risk and related responses to assessed risks
▪ The objective of the audit is to reduce the audit risk to an acceptably low level (GAJAB)
▪ Auditors are required to assess the ROMM at two levels:
(a) Overall F.S. level (relate pervasively to the F.S. as a whole) (potentially affect many
assertions)
(b) Specific assertions at ABCD.
Assertions evaluated by Auditor to consider different types of Potential Misstatements
Class of Transaction occurred during the year
▪ Occurrence – transactions that have been recorded have occurred during the year.

1
 ▪ Completeness – transactions have been recorded completely.
▪ Accuracy – transactions have been recorded accurately.
▪ Cut-off – transactions have been recorded in correct accounting period.
▪ Classification – transactions have been properly classified into capital and revenue.
Account Balances at period end
▪ Existence – assets and liabilities shown in the balance sheet exists.
▪ Rights and obligations – rights of the entity have been shown as assets and the obligations
have been shown as liabilities.
▪ Completeness – assets and liabilities have been recorded completely.
▪ Valuation– assets and liabilities are included in the F.S. at appropriate amounts.
Presentation and Disclosure
▪ Occurrence - disclosed transactions have occurred
▪ Rights and obligations – disclosed transactions that belongs to the entity.
▪ Completeness – disclosures in the financial statements are complete.
▪ Classification– financial information is appropriately presented and disclosures are clearly
expressed.
▪ Accuracy – financial and other information are disclosed fairly and at appropriate amounts.
Steps for Risk Identification (kuch bhi likh diya)
1. Assess the significance of the assessed risk, impact of its occurrence and also revise the
materiality accordingly for the specific account balance.
2. Determine likelihood for assessed risk to occur and its impact on our auditing procedures.
3. Document the assertions that are affected.
4. Consider impact of risk on each of assertions (completeness, existence, accuracy, validity,
valuation & presentation) relevant to ABCD.
5. Identify degree of Significant risks that would require separate attention and response by the
auditor. Planned audit procedures should directly address these risks.
6. Enquire and document the management’s response.
7. Consider the nature of the internal control system in place and its possible effectiveness in
mitigating the risks involved. Ensure the existence and effectiveness of controls:
8. Consider any unique characteristics of the risk.
9. Consider existence of any particular characteristics (inherent risks) in ABCD that need to be
addressed.

Risk Based Audit Approach

Meaning –
✓ Analyse audit risks,
✓ sets materiality thresholds - based on audit risk analysis
✓ develops audit programm that allocate a larger portion of audit resources to high risk areas.
Note- Here, main focus is to reduce the impact of assessed risk to an acceptable level before
rendering an opinion on the financial statements. (thankyou)
Audit Risk Analysis
▪ Auditor should perform an analysis of the audit risks, before undertaking specific audit
procedures.
▪ Risk assessment is a subjective process.

2
General Steps in conduct of Risk Based Audit
Auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
misstatements whether caused by fraud or errors exist in the F.S. This involves 3 key steps:
(a) Assessing ROMM in the F.S. (Risk Assessment) (RAP);
(b) Designing & performing further audit procedures that respond to assessed risks (Risk Response);
(c) Issuing an appropriate audit report based on the audit findings (Reporting).
Risk Assessment (RAP)
In this phase, auditor assesses ROMM. Aspects involved are:
(1) Performing client acceptance or continuance procedures;
(2) Performing RAPs to understand the business and identify inherent and control risks;
(3) Identifying significant risks that require special audit consideration.
(4) Identifying relevant internal control procedures;
(5) Communicating any Significant weaknesses (deficiency) in DIM of internal control to
management and TCWG;
(6) Planning the overall engagement;
(7) Assessing ROMM in the F.S.;
(8) Making an assessment of ROMM at F.S. level and at assertion level. (thankyou)
Risk Response (FAP)
▪ In this phase, auditor designed & perform further audit procedures that respond to assessed
ROMM.
▪ Audit procedures designed to address the assessed risks could include a mixture of:
(1) Tests of control; and
(2) Substantive procedures such as TOD and SAPs.
Matters the auditor should consider when planning the audit procedures
1. Assertions that cannot be addressed by substantive procedures alone.
2. Existence of internal control that, if tested, could reduce the need/scope for other substantive
procedures.
3. Potential for SAPs that would reduce need for other types of procedures.
4. Need to incorporate element of unpredictability in procedures performed.
5. Need to perform further audit procedures to address the potential for management override of
controls or other fraud scenarios.
6. Need to perform specific procedures to address “significant risks” that have been identified.
Reporting (only for understanding) (not imp for exam)
▪ This is the final phase of audit which requires assessment of audit evidences obtained and
determine whether they are sufficient and appropriate to reduce the ROMM in the F.S. to an
acceptably low level.
▪ It is important at this stage to determine:
(1) If there had been a change in the assessed level of risk;
(2) Whether conclusions drawn from work performed are appropriate; and
(3) If any suspicious circumstances have been encountered.
▪ When all procedures have been performed and conclusions reached:
(a) Audit findings should be reported to management and TCWG; and
(b) An audit opinion should be formed, & a decision made on appropriate wording for the
auditor’s report.

3
4.3 – Internal Control System – Nature, Scope, Objectives, and Structure
Definition (bachpan)
The process designed, implemented and maintained (DIM)
▪ by TCWG, management and other personnel
▪ to provide reasonable assurance (coz of inherent limitations)
▪ about the achievement of an entity’s objectives with regard to
➢ reliability of financial reporting,
➢ effectiveness and efficiency of operations,
➢ safeguarding of assets, and
➢ compliance with applicable laws and regulations.
Objectives of Internal Control relating to Accounting System (read only)
(a) Transactions are executed in accordance with managements authorization;
(b) All transactions are promptly recorded in an appropriate manner.
(c) Assets are safeguarded from unauthorised access, use or disposition; and
(d) The recorded assets are compared with the existing assets at reasonable intervals.
Control Objectives of Accounting Control System (maha powder)
Basic accounting control objectives sought to be achieved by accounting control system are:
1. Whether all transactions are recorded;
2. Whether recorded transactions are real;
3. Whether all recorded transactions are properly valued:
4. Whether all transactions are recorded timely;
5. Whether all transactions are properly posted:
6. Whether all transactions are properly classified and disclosed;
7. Whether all transactions are properly summarized.
Limitations of Internal Control System (bachpan)
(a) Management’s consideration that a control should be cost-effective.
(b) The fact that the most controls do not tend to be directed at transactions of unusual nature.
(c) Potential for human error.
(d) Possibility of circumvention of controls through collusion with parties outside the entity or with
employees of entity.
(e) Possibility that a person responsible for exercising control could abuse that authority.
(f) Manipulations by management with respect to transactions or estimates and judgments required
in the preparation of financial statements.
Structure of Internal Control (ghar pe)
Internal Control structure in an organisation is referred to as the policies and procedures established
by the entity to provide reasonable assurance that the objectives are achieved.
Most of these policies and procedures cover:
Segregation of duties
▪ Transaction processing are allocated to different persons in such a manner that no one person
can carry through the completion of a transaction from start to finish or the work of one person
is made complimentary to the work of another person.
▪ The purpose is to minimize the occurrence of fraud and errors and to detect them on a timely
basis, when they take place.

4
 ▪ The following functions are segregated:
(a) authorization of transactions;
(b) execution of transactions;
(c) physical custody of related assets; and
(d) maintenance of records and documents.
Authorisation of Transactions
▪ Authorization may be general or specific with reference to a single transaction.
▪ It is necessary to establish procedures which provide assurance that authorizations are issued by
persons acting within the scope of their authority, and that the transactions conform to the terms
of the authorizations.
Adequacy of records and documents (read once, easy hai khud bana sakte ho)
Accounting controls should ensure that:
(a) Transactions are executed in accordance with management’s authorization.
(b) Transactions & other events are promptly recorded at correct amounts.
(c) Transactions should be classified in appropriate accounts and in the appropriate period to which
it relates.
(d) Transaction should be recorded in a manner so as to facilitate preparation of F.S. in accordance
with applicable Ass, other accounting policies & practices and relevant statutory requirements.
(e) Recording of transaction should facilitate maintaining accountability for assets.
(f) Assets and records are protected from unauthorized access, use disposition.
(g) Records of assets such as sufficient description of assets, its location should also be maintained
so that the assets could be physically verified periodically.
Accountability and safeguarding of assets
▪ The process of accountability of assets commences from acquisitions of assets its use and final
disposal.
▪ Safeguarding of assets requires appropriate maintenance of records, their periodic reconciliation
with the related assets.
Independent checks
▪ Independent verification of control systems, designed and implemented by the management,
involves periodic or regular review by independent persons to ascertain whether the control
procedures are operating effectively or not.

4.4 – Components of Internal Control

5 Components (read once, easy hai khud bana sakte ho, sab padha hua hai)
Control Environment
Control environment sets the tone of an organization, influencing the control consciousness of its
people and Control environment includes the following elements:
(1) Communication and enforcement of integrity and ethical values: The communication of
entity policies on integrity and ethical values may include the communication of behavioral
standards to personnel through policy statements and codes of conduct and by example.
(2) Commitment to competence: Competence is the knowledge and skills necessary to accomplish
tasks that define the individual’s job.
(3) Participation by TCWG: Importance of the responsibilities of TCWG is recognised in codes of
practice and other laws and regulations or guidance produced for the benefit of TCWG.

5
(4) Management’s philosophy & operating style: Management’s philosophy & operating style
encompass a broad range of characteristics.
(5) Organisational structure: Establishing a relevant organizational structure includes considering
key areas of authority and responsibility and appropriate lines of reporting.
(6) Assignment of authority and responsibility: The assignment of authority and responsibility
may include policies relating to appropriate business practices, knowledge and experience of key
personnel, and resources provided for carrying out duties.
(7) Human resource policies and practices: Human resource policies and practices often
demonstrate important matters in relation to the control consciousness of an entity.
Communication and enforcement of integrity and ethical values
▪ Communication and enforcement of integrity and ethical values are essential elements that
influence the effectiveness of the design, administration and monitoring of controls.
▪ The effectiveness of controls cannot rise above the integrity and ethical values of the people
who create, administer, and monitor them.
▪ Integrity and ethical behaviour are the product of the entity’s ethical and behavioural standards,
how they are communicated, and how they are reinforced in practice.
▪ The enforcement of integrity and ethical values includes, for example, management actions to
eliminate or mitigate incentives or temptations that might prompt personnel to engage in
dishonest, illegal, or unethical acts.
▪ The communication of entity policies on integrity and ethical values may include the
communication of behavioural standards to personnel through policy statements and codes of
conduct and by example.
Entity’s Risk Assessment Process
Entity’s risk assessment process forms the basis for how management determines risks to be
managed. If process is appropriate, it assists auditor in identifying ROMM.
Risk can arise or change due to below mentioned circumstances:
1. Changes in operating environment: Changes in the regulatory or operating environment can
result in changes in competitive pressures and significantly different risks.
2. New personnel: New personnel may have a different focus on or understanding of internal
control.
3. New or revamped information systems: Significant & rapid changes in information systems
can change risk relating to internal control.
4. Rapid growth: Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
5. New technology: Incorporating new technologies into production processes or information
systems may change the risk associated with internal control.
6. New business models, products or activities: Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control.
7. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes
in supervision and segregation of duties that may change the risk associated with internal control.
8. Expanded foreign operations: Expansion or acquisition of foreign operations carries new and
often unique risks that may affect internal control, e.g., additional risks from foreign currency
transactions.
9. New accounting pronouncements: Adoption of new accounting principles may affect risks in
preparing F.S.

6
Control Activities relevant to Audit
Control activities are the policies and procedures that help ensure that management directives are
carried out and may pertain to following:
1. Performance Reviews: Such control activities include:
▪ reviews and analyses of actual performance versus budgets, forecasts and prior period
performance;
▪ relating different sets of data - operating or financial - to one another, together with
analyses of relationships and investigative & corrective actions;
▪ comparing internal data with external sources of information; &
▪ review of functional or activity performance.
2. Information processing: Two broad groups of information systems control activities are
application controls and general IT-controls.
3. Physical controls: Controls that encompass:
▪ physical security of assets;
▪ authorisation for access to computer programs and data files, and
▪ periodic counting and comparison with amounts shown on control records.
4. Segregation of Duties: Assigning different people the responsibilities of authorising
transactions, recording transactions, and maintaining custody of assets.
Information System and Communication
Information system consists of infrastructure (physical and hardware components), software, people,
procedures, and data.
Information system relevant to financial reporting objectives, includes the accounting system,
consists of the procedures and records that:
(a) Identify and record all valid transactions.
(b) Describe on a timely basis the transactions in sufficient detail to permit proper classification of
transactions for financial reporting.
(c) Measure the value of transactions in a manner that permits recording their proper monetary value
in the financial statements.
(d) Determine the time period in which transactions occurred to permit recording of transactions in
the proper accounting period.
(e) Present properly the transactions and related disclosures in the financial statements.
Monitoring of Controls
Monitoring of controls is a process to assess the effectiveness of internal control performance over
time. It involves assessing effectiveness of controls on a timely basis and taking necessary corrective
actions.
Important Constituents of Accounting Controls
Internal Checks and Internal Audit are two important constituents of Accounting Controls.
Internal Check System
▪ Checks on the day-to-day transactions which operate continuously as part of the routine system
whereby the work of each person is either proved independently or is made complimentary to
the work of another.
Objectives of Internal Check System
(a) To detect error and frauds with ease.
(b) To avoid & minimize possibility of commission of errors and fraud.

7
(c) To increase the efficiency of the staff working within the organisation.
(d) To locate the responsibility area or the stages where actual fraud and error occurs.
(e) To protect the integrity of the business by ensuring that accounts are always subject to proper
scrutiny and check.
(f) To prevent & avoid the misappropriation or embezzlement of cash and falsification of accounts.
Considerations for efficient System of Internal Check
(a) Clarity of Responsibility: Responsibility of different persons engaged in various operations of
business transactions should be properly identified.
(b) Division of Work: Segregation of work should be made in such a manner that the free flow of
work is not interrupted and also helps to determine that the work of one person is complementary
to the other.
(c) Standardization: Process of accounting should be standardized by creating suitable policies
commensurate with the nature of the business, so as to strengthen the system of internal check.
(d) Appraisal: Periodic review should be made of the chain of operations and workflow.
General Conditions pertaining to Internal Check
(1) No single person should have an independent control over any important aspect of the business.
(2) Duties of staff should be changed from time to time without any previous notice so that the same
officer does not, without a break, perform the same function for a considerable length of time.
(3) Every member of the staff should be encouraged to go on leave at least once in a year.
(4) Persons having physical custody of assets must not be permitted to have access to the books of
account.
(5) To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash
register, should be employed.
(6) Budgetary control may be introduced, it would enable management to review from time to time
the progress of trading activities.
(7) Financial and administrative powers should be distributed judiciously among different officers
and the manner in which these are actually exercised should be reviewed periodically.
(8) Procedures should be laid down for periodical verification & testing of different sections of
accounting records to ensure that they are accurate.
Internal Audit
An independent appraisal function established within an organization to examine and evaluate its
activities as a service to the organization. Scope of the internal audit is determined by the
management.
4.5 – Review of the System of Internal Controls
Manual and Automated Elements in Internal Controls
▪ An entity’s system of internal control contains manual elements and often contains automated
elements. Use of manual or automated elements affects the manner in which transactions are
initiated, recorded, processed, and reported.
▪ An entity’s mix of manual and automated elements in internal control varies with the nature and
complexity of the entity’s use of IT.
▪ Manual elements in internal control may be more suitable where judgment and discretion are
required, for example:
(a) Large, unusual or non-recurring transactions.
(b) Circumstances where errors are difficult to define, anticipate or predict.

8
 (c) In changing circumstances that require a control response outside the scope of an existing
automated control.
(d) In monitoring the effectiveness of automated controls.
Review of Internal Control System (IC)
▪ Review of IC consists mainly of inquiries of personnel at various organisational levels; together
with reference to documentation such as procedures, manuals and flow-charts, to gain
knowledge about the controls which the auditor has identified as significant.
▪ Auditor’s preliminary evaluation of IC should be made on assumption that controls operate
generally as described and that they function effectively. Purpose of preliminary evaluation is to
identify particular controls on which auditor intends to rely and to test through compliance
procedures.
▪ Review of ICs should be undertaken as a distinct phase of audit before finalisation of audit
programme.
▪ If auditor, because of his continuing relationship with his client, is already aware of the features
and efficacy of internal controls, he may just review the changes that have taken place in the
intervening period. However, a comprehensive review in such cases must be made at an interval
of, say, 3 years.
▪ Review of the internal control system enables the auditor:
(a) to formulate his opinion as to the reliance he may place on the system itself; and
(b) to locate the areas of weakness in the system so that the audit programme and the NTE of
substantive & compliance procedures can be adjusted to meet the situation.
4.6 – Internal Control Assessment & Evaluation
Standard Operating Procedures (SOPs)
1. Enterprise Risk Management: Organisation having robust processes to identify & mitigate
risks across the entity & its periodical review will assist in early identification of weaknesses in
internal control and taking effective control measures. In such entities, surprises of failures in
controls are likely to be few.
2. Segregation of Job Responsibilities: It is an important element of control which ensures that no
two commercial activities should be conducted by same person.
3. Job Rotation in Sensitive Areas: In key commercial functions, job rotation is regularly
followed to avoid degeneration of controls.
4. Documents of delegation of Financial Powers: Document on delegation of powers allows
controls to be clearly operated without being dependant on individuals.
5. IT based Controls: In an IT Environment, it is much easier to embed controls through the
system instead of being human dependant. Failure rate for IT embedded controls is likely to be
low, is likely to have better audit trail & is thus easier to monitor.
Techniques of evaluation of Internal control
Internal Control Questionnaire
▪ It is a set of questions framed in an organised manner, about each functional area, which has as
purpose evaluation of the effectiveness of control and detection of its weakness if any.
▪ It usually consists of several separate sections devoted to areas such as purchases, sales, trade
receivables, trade payables etc.
▪ Questions are framed to dispense with requirement of detailed answer to each question. One
general question is broken down into a number of questions and sub-questions to provide a just

9
 ‘Yes’, ‘No’ or ‘Not applicable’ form of reply.
▪ Questions are also framed in such a manner that generally a “No” answer will reflect weakness
in the control system.
▪ Scheme of questions should be consistent, sequential, logical, and if possible corroborative.
Assumptions presumed about elements of good control while using standardized internal
control questionnaire
1. Certain procedures in general used by most business concerns are essential in achieving reliable
internal control.
2. Extensive division of duties and responsibilities within the organisation.
3. Separation of accounting function with the custodial function.
4. No single person is entrusted with the responsibility of completing a transaction all by himself.
5. There should always be evidence to identify the person who has done the work whether
involving authorisation, implementation or checking.
6. The work performed by each one is expected to come under review of another in the usual
course of routine.
7. There is proper documentation and recording of the transactions.
Check List
▪ It is a series of instructions or questions on internal control which the auditor must follow or
answer.
▪ A check list is more in the nature of a reminder to the auditor about the matters to be checked
for testing the internal control system.
▪ While a questionnaire is basically a set of questions put to the client, a check list which may be
in a form of instructions, questions or just points to be checked may be meant for the auditor’s
own staff.
Illustrative Check List for Cash
Have you checked that the cashier:
(1) is not responsible for opening the incoming mails;
(2) does not authorise any of the ledgers;
(3) does not authorise any expenditure or receipt;
(4) does not sign cheques;
(5) takes his annual leave regularly;
(6) balances the cash book everyday;
(7) verifies physical cash balance with the book figure daily at the end
(8) prepares monthly bank reconciliation statement;
(9) holds no other funds or investment;
(10) holds no unnecessary balance in hand;
(11) does not pay money without looking into compliance with prop procedure and due
authorisation; and has tendered proper security or has executed a fidelity bond?
(12) has tendered proper security or has executed a fidelity bond?
Check List vs Internal Control Questionnaire (ICQ)
Check list in question form is hardly different from questionnaire. Basic distinction between ICQ and
check list are as under:
(a) ICQ incorporates a large number of detailed questions but check list generally contains questions
relating to main control objective wit the area under review.

10
(b) In ICQ, questions are usually answered by executives. However, in a check list, same are
required to be answered by auditor staff.
(c) ‘No’ in ICQ indicate a weakness but significance of that weakness is not revealed. However, in
check list, a specific statement is required where an apparent weakness may prove to be material
in relation to the accounts as a whole.
Flow Chart
1. It is a graphic presentation of internal controls in the organisation and is normally drawn up to
show controls in each section or sub-section.
2. It provides the most concise and comprehensive way for reviewing t internal controls and the
evaluator’s findings.
3. A flow chart is a diagram full with lines and symbols and if judicious use of them can be made, it
is probably an effective way of present the state of internal controls in the client’s organisation.
4. A properly drawn up flow chart can provide a neat visual picture of whole activities of the
section or department involving flow documents and activities. More specifically it can show-
▪ at what point a document is raised internally or received f external sources;
▪ the number of copies in which a document is raised or received;
▪ the intermediate stages set sequentially through which the document and the activity pass;
▪ distribution of the documents to various sections, department or operations;
▪ checking authorisation and matching at relevant stages;
▪ filling of the documents; and
▪ final disposal by sending out or destruction.

4.7 – Reporting to Clients on Internal Control Weaknesses

Letter of weakness
Auditor shall communicate material weaknesses in internal control identified during the audit on a
timely basis to management This communication should be, preferably, in writing through a letter of
weakness. Important points with regard to such a letter are as follows:
(a) It lists down the area of weaknesses in the internal control system and recommends suggestions
for improvement.
(b) It should clearly indicate that this letter covers only weaknesses which have come to the attention
of the auditor during his evaluation of internal control for the purpose of determining NTE of
further audit procedures.
(c) Letter should clearly indicate that his examination of internal control has not been designed to
determine the adequacy of internal control for management.
(d) This letter serves as a significant means for management and governing body for the purpose of
improving the system and its strict implementation.
(e) The letter may also serve to minimize legal liability in the event of a major defalcation or other
loss resulting from a weakness in internal control.
SA 330, “The Auditor’s Responses to Assessed Risks (identified in RAP)” (FAP)
This SA deals with the auditor’s responsibility to design and implement responses to the ROMMs
identified and assessed by the auditor in accordance with SA 315.
Auditor’s Procedures Responsive to the Assessed ROMM
Auditor shall design and perform further audit procedures that are responsive to assessed ROMM at
the assertion level. In designing these procedures, auditor shall:
(a) Consider reasons for assessment of ROMM at assertion level for ABCD, including:

11
 (i) likelihood of material misstatement due to the particular characteristics of ABCD ; and
(ii) When the risk assessment takes into account the relevant controls, thereby requiring the
auditor to obtain audit evidence to determine whether the controls are operating effectively;
and
(b) Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
Tests of Controls
Auditor shall design and perform tests of controls to obtain SAAE as to operating effectiveness of
relevant controls when:
(a) he expects that the controls are operating effectively
(b) substantive procedures alone cannot provide SAAE
Nature of tests of controls
In designing and performing tests of controls, the auditor shall:
(a) Perform other audit procedures in combination with inquiry to obtain audit evidence about
operating effectiveness of controls, including:
▪ How controls were applied at relevant times during the audit.
▪ The consistency with which they are applied.
▪ By whom or by what means they were applied.
(b) Determine whether controls to be tested depend upon other controls (indirect controls) and if so,
whether it is necessary to obtain audit evidence supporting the effective operation of those
indirect controls.
Matters to be considered in determining the extent of tests of controls
(i) Frequency of performance of control by the entity during the period.
(ii) Length of time during the audit period that the auditor is relying on the operating effectiveness of
the control.
(iii) Expected rate of deviation from a control.
(iv) Extent to which audit evidence is obtained from tests of other controls related to the assertion.
Timing of Tests of Controls
The auditor shall test controls for the particular time, or throughout the period for which the auditor
intends to rely on those controls.
Using audit evidence obtained during an interim period (Bakwaas)
When the auditor obtains audit evidence about the operating effectiveness of controls during an
interim period, the auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to the interim
period; and
(b) Determine the additional audit evidence to be obtained for the remaining period.
Relevant factors in determining additional audit evidence to be obtained about controls that
were operating during period remaining after an Interim period (bakwaas)
(i) Significance of the assessed ROMM at the assertion level.
(ii) Specific controls that were tested during interim period and significant changes to them since
they were tested, including changes in info system, processes & personnel.
(iii) Degree to which audit evidence about operating effectiveness of controls was obtained.
(iv) Length of the remaining period.
(v) Extent to which auditor intends to reduce further substantive procedures based on the reliance of
controls.

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(vi) Control environment.
Using audit evidence obtained in previous audits
▪ If auditor plans to use audit evidence from a previous audit, he shall establish continuing
relevance of that evidence by obtaining audit evidence about whether significant changes in
those controls have occurred subsequent to previous audit. If there have been changes, auditor
shall test the controls in the current audit.
▪ If there have not been such changes, auditor shall test controls at least once in every third audit,
and shall test some controls in each audit to avoid the possibility of testing all the controls on
which the auditor tend to rely in a single audit period with no testing of controls in the
subsequent two audit periods.
Factors warranting re- test of controls (IMP)
Auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is a
matter of professional judgment. In addition, the length of time between retesting such controls is
also a matter of professional judgment.
Factors that may warrant a re-test of controls are:
(a) A deficient control environment.
(b) Deficient monitoring of controls.
(c) Deficient general IT-controls.
(d) A significant manual element to the relevant controls.
(e) Personnel changes that significantly affect the application of the control.

Frameworks of Internal Controls

COSO Framework
COSO Framework is designed to be used by organisations to assess the effectiveness of the system of
internal control to achieve objectives as determined by management. The Framework lists three
categories of objectives as below:
(a) Operations Objectives: Operation objectives are related to the effectiveness and efficiency of
the entity’s operations, including operational and financial performance goals, and safeguarding
of assets.
(b) Reporting Objectives: Reporting objectives are related to internal and external financial and
non-financial reporting to stakeholders, which would encompass reliability, timeliness,
transparency, or other terms as established by regulators, standard setters, or the entity’s policies.
(c) Compliance objectives: Compliance objectives are related to the entity’s compliance with
applicable laws and regulations.
Components and Principles prescribed by COSO Framework
Committee of Sponsoring Organisations of the Treadway Commission (COSO) framework includes
17 principles representing the fundamental concepts associates with its five components.
These components and the associate principles are:
Components Principles
Control 1. Demonstrates commitment to integrity and ethical values
Environment 2. Exercises oversight responsibility
3. Establishes structure, authority, and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability

13
 Risk Assessment 6. Specifies suitable objectives
7. Identifies and analyses risk
8. Assesses fraud risk
9. Identifies and analyses significant change
Control Activities 10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys through policies and procedures
Information and 13. Uses relevant information
Communication 14. Communicates internally
15. Communicates externally
Monitoring 16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicate deficiencies
CoCo Framework
Criteria of Control (CoCo) framework was developed by the Canadian Institute of Chartered
Accountants with the objective of improving organisational performance and decision making with
better controls, risk management, and corporate governance.
The framework emphasizes that control involves the entire organization but begins on an individual
level, with the employee.
The CoCo framework includes 20 criteria for effective control in four areas of an organization:
▪ Purpose (Direction)
▪ Commitment (Identity and Values)
▪ Capability (Competence)
▪ Monitoring and Learning (Evolution)
In order to assess whether controls exist and are operating effectively, each criterion would be
examined to identify the controls that are in place to address them.
COBIT Framework
▪ COBIT stands for Control Objectives for Information and Related Technology. It is a
framework created by the ISACA (Information Systems Audit and Control Association) for IT
governance and management. It is meant to be a supportive tool for managers and allows
bridging the crucial gap between technical issues, business risks and control requirements.
▪ Business managers are equipped with a model to deliver value to the organisation and practice
better risk management practices associated with the IT processes.
▪ It is a control model that guarantees the integrity of the information system. Today, COBIT is
used globally by all managers who are responsible for the IT business processes. It is a
thoroughly recognized guideline that can be applied to any organisation across industries.
▪ Overall, COBIT ensures quality, control and reliability of information systems in organisation,
which is also the most important aspect of every modern business.
▪ This framework guides an organization on how to use IT resources (Le., applications.
information, infrastructure, and people) to manage IT domains, processes, and activities to
respond to business requirements, which include compliance, effectiveness, efficiency,
confidentiality, integrity, availability, and reliability.
Turnbull Report
Combined Code of the Committee on Corporate Governance (the Code) published by the London
Stock Exchange and agreed by the Institute of Chartered Accountants in England & Wales. The key
principles of the Code are:

14
(1) Board should maintain a sound system of internal control to safeguard shareholders’ investment
and the company’s assets.
(2) Directors should, at least annually, conduct a review of effectiveness of group’s system of
internal control and should report to shareholders that they have done so. Review should cover
all controls, including financial, operational and compliance controls and risk management.
(3) Companies which do not have an internal audit function should from time to time review the
need for one.
SOX-Sec. 404
SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly-traded companies
must establish internal controls and procedures for financial reporting and must document, test and
maintain those controls and procedures to ensure their effectiveness.
The purpose of SOX is to reduce the possibilities of corporate fraud by increasing the stringency of
procedures and requirements for financial reporting.
The SEC rules and PCAOB (NFRA types) standard require that:
▪ Management performs a formal assessment of its controls over financial reporting.
▪ Management includes in its annual report an assessment of Internal Controls over Financial
Reporting.
▪ The external auditors provide two opinions as part of a single integrated audit of the company:
1. An independent opinion on the effectiveness of the system of Internal Controls over
Financial Reporting.
2. The traditional opinion on the financial statements.

15
 Non-compliance with Laws and Regulations (NOCLAR)
(a) Meaning of NOCLAR
NOCLAR comprises of acts of omission or commission (manipulating), intentional or
unintentional, which are contrary to the prevailing laws or regulations committed by:
▪ A client/professional accountant’s employing organisation;
▪ TCWG/Management of a client or employing organisation;
▪ Other individuals working for or under the direction of a client/employing
organisation.
(b) Examples of laws and Regulations (ghar pe)
▪ Fraud, corruption and bribery.
▪ Money laundering, terrorist financing and proceeds of crime.
▪ Securities markets and trading
▪ Banking and other financial products and services.
▪ Data protection.
▪ Tax and pension liabilities and payments.
▪ Environmental protection.
▪ Public health and safety.
(c) Applicability of NOCLAR (LBH)
Applicability of NOCLAR has been restricted to:
▪ Audits assignment of entities listed in India having NW ≥ 250 Cr. (In case of
members in practice) and
▪ Senior Professional Accountants (KMP), being employees of listed entities.
(Senior Professional Accountants in service are directors, officers or senior employees able to exert
significant influence over, and make decisions regarding, the acquisition, deployment and control of
the employing organization’s human, financial, technological, physical and intangible resources).
NOTE
▪ NOCLAR will be applicable if a professional accountant is made aware of
noncompliance or suspected non-compliance in the course of providing a
professional service to a client. He is not required to investigate, nor responsible for
ensuring complete compliance.
▪ A professional accountant is expected to apply knowledge and expertise, and exercise
professional judgment. However, he is not expected to have a level of knowledge of
laws and regulations greater than that which is required to undertake the engagement.
▪ Matters that are personal misconduct unrelated to business activities of the client not
covered.
▪ Disclosure of the matter would be precluded if contrary to law or regulation.
(d) Responsibility of the senior professional accountants in service relating to NOCLAR
Senior Professional Accountants in service are directors, officers or senior employees able
to exert significant influence over, and make decisions regarding, the acquisition,
deployment and control of the employing organization’s human, financial, technological,
physical and intangible resources. (again time pass)
1
 Steps to be taken in responding :
(1) Obtaining an Understanding of the Matter: If, during the course of carrying out
professional activities, a senior professional accountant becomes aware of any
information relating to NOCLAR or suspected NOCLAR, he/she should obtain an
understanding of the relevant matter.
(2) Addressing the Matter: If the senior Chartered Accountant identifies or suspects
that non-compliance has occurred or might occur, he shall, discuss the matter with
the immediate superior, if any.
(3) Determining whether further action is needed: Senior Chartered Accountant shall
assess appropriateness of the response of the superiors, if any, and TCWG.
Further action that the senior professional accountant might take includes:
▪ Informing the management of the parent entity of the matter, if the employing
organisation is a member of a group,
▪ Disclosing matter to an appropriate authority as specified under respective law,
or
▪ Resigning from the employing organisation.
(4) Seeking Advice: Senior Chartered Accountant might consider consulting internally;
Obtaining legal advice to understand the accountant’s options and the professional
or legal implications of taking any particular course of action; or consulting on a
confidential basis with the Institute.
(5) Determining Whether to Disclose the Matter to an Appropriate Authority:
Disclosure of the matter to an appropriate authority would be precluded if doing so
would be contrary to law or regulation.
(e) Documentation Requirements in NOCLAR (time pass)
Revised Code require professional accountants to document the following:
▪ How management/TCWG have responded to the matter.
▪ Course of action the accountant considered, the judgments made and decisions that
were taken, having regard to the reasonable and informed third party test.
▪ How accountant is satisfied that responsibility of public interest has been fulfilled.

2
 NOCLAR vs. SA 250
BASIS NOCLAR SA 250

Applicability NOCLAR is applicable on SA 250 is applicable only on Audit

professional accountants in engagements
service and in practice.

Scope NOCLAR if further ahead of SA SA 250 deals with auditor’s

250, as it takes into account non- responsibility for: (objective likh diya)
compliance that causes (a) Laws having direct effect on
substantial harm resulting in determination of material
serious consequences in amounts and disclosures in the
financial or non financial F.S. and
terms. (b) Laws & regulations that do not
have direct effect on determination
of the amounts and disclosures in
the F.S., but compliance with
which may be fundamental to the
operating aspects of the business.
Coverage NOCLAR is related to effect of SA 250 does not define stakeholders.
noncompliance on investors,
creditors, employees as also the
general public.

3
 PROFESSIONAL ETHICS
First Schedule (Part I - Professional Misconduct in relation to Members in Practice)
(a) Clause 1
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Allows any person to practice in his name as a Chartered Accountant,
 Unless such person is also a Chartered Accountant in practice, and
 Is in partnership with, or employed by himself.
(b) Clause 2
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Pays or allows or agrees to pay or allow,
 Directly or indirectly,
 Any share, commission or brokerage in
 Fees or profits of his professional business to any person,
Other than
(1) A member of the Institute, or
(2) Partner, or
(3) Retired partner, or
(4) Legal representative of deceased partner, or
(5) Member of any other professional bodies, or
(6) With such other persons having prescribed qualifications.
 For the purpose of rendering such professional services from time to time in or outside India.
NOTE:
 Sharing of profits by Widow or legal representative of deceased partner: Widow or legal
representative of deceased partner can continue to receive a share of profits in the firm provided the
partnership agreement provides the same.
 Sale of Goodwill: In case of sole proprietorship, the Council of ICAI has resolved that the sale /
transfer of goodwill shall be permitted in respect of cases:
(1) ICAI‟s permission to practice in the deceased‟s firm name is sought within a year of death. (In
such a case, name of the firm is kept in abeyance till one year from the date of death).
(2) In case there exist a dispute as to the legal heir of the deceased proprietor, information as to the
existence of the dispute is received by the Institute within a year of the death. (In such a case,
name of the firm is kept in abeyance till one year from the date of settlement of dispute).
Consideration towards sale of goodwill should be determined in lump sum amount, though
payment may be made in parts. Consideration determined as a percentage of future realisations
is not permitted.
 In case of a partnership firm when all the partners die at the same time, the above council decision
would also be applicable.
 Persons with prescribed qualifications (Regulation 53A): CS, Cost Accountant, MBA, Actuary,
Bachelor in Architecture Bachelor in Law, and Engineers.

1
(c) Clause 3
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 accepts or agrees to accept
 any part of the profits of the professional work
 of a person who is not a member of the Institute.
However, such a restriction does not apply in respect of following:
 Member of any other professional bodies (as specified in Clause 2), or
 With such other persons having prescribed qualifications (as specified in Clause 2).
NOTE:
Referral fees amongst members: It is not prohibited for a member in practice to charge Referral Fees,
being the fees obtained by a member in practice from another member in practice in relation to referring
a client to him.
(d) Clause 4
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Enters into partnership in or outside India
 With any person other than the following:
(1) C.A. in practice, or
(2) Member of any other professional body having prescribed qualifications, or
(3) A person, who because of his residence abroad would not be entitled to be registered as
member under Clause (v) of Sec. 4(1), or
(4) A person whose qualifications are recognised by CG or Council for the purpose of
permitting such partnerships.

(e) Clause 5
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Secures any professional business
 Through the services of a person who is not an employee or not his partner or
 By means which are not open to a CA.

(f) Clause 6
A CA in Practice is deemed to be guilty of professional Misconduct if he:
 Solicits clients or professional work
 Either directly or indirectly,
 By Circular, Advertisement, Personal communication or Interview or by any means.

However, solicitation is relaxed in following cases:

(1) Securing professional work from another CA in practice.
(2) Responding to tenders or enquiries issued by various users of professional services.
.

Council Guidelines W.R.T. Permitted and Prohibited forms of Solicitation

(1) Advertisement & note in press
(i) As a general rule a member can‟t advertise.
.

2
 (ii) However, a member may advertise change in partnership, address of practice and
telephone numbers provided it contains a bare statement of facts and area of distribution
and number of insertions in newspaper should be limited.
.

(iii) A Member is permitted to give classified advertisements in journal/newsletter of institute

for sharing professional work or seeking partnership or salaried employment of
accountancy nature provided it contains only CA‟s name, address, tel. No., fax or e-mail
address and address of social Networking sites.
.

(iv) Mere factual position of experience and area of specialisation, relevant to seek response
to the advertisement, are permissible.
.

(2) Empanelment for allotment of professional

(i) In respect of organisations, where a panel of CA‟s exists, a member is free to request to
place his name on the panel.
.

(ii) Roving enquiries for existence of such panel is not permitted.

.

(iii) It is permissible to quote fees on enquiries being received from such organisations, which
maintains such panel.
.

(iv) Printed or Xerox copies of scale of fees in reply to enquiries is not permitted.
.

(3) Responding to Tenders

(i) It is not prohibited to the members to respond to tenders and requests made by users of
professional work.
.

(ii) This is however subject to conditions that may be issued by the Council.
.

(iii) ICAI issue following guidelines for compliance by the members:

 A member in practice shall not respond to any tender in areas of services which are
exclusively reserved for CAs, such as audit and attestation.
 However, such restriction shall not be applicable where minimum fee of assignment
is prescribed in the tender document itself or where the areas are open to other
professionals along with the CAs.
 “Minimum fee” for this purpose should be such that it commensurate with size, value,
volume, manpower requirement and nature of work.
.

(iv) EMD / Security Deposit: Council is of the view that while interference with the
practices prevailing for requirement of EMD/Deposit is not required. However, on
having received complaint/ instance of exorbitant EMD/Deposit, the Ethical Standards
Board may look into the matter on case-to-case basis.
.

(4) Publications of Books

 It is not permissible for a member to mention in a book or an article published by him, or a
presentation made by him, any professional attainment(s), whether of the member or the
firm with which he is associated.
 However, he may designation “Chartered Accountant” as well as name of firm.
.

(5) Issue of Greeting Cards Or Invitations

Member is permitted to use designation “Chartered Accountant” as well as name of firm in:

3
  Greeting cards,
 Invitations for marriages and religious ceremonies and any invitation for opening or
inauguration of office, or
 Letters regarding change in office premises or telephone numbers
Provided these are sent only to clients, relatives and friends of the members concerned.
.

(6) Advertisement for Celebrations

 To advertise the events organised by a Firm of CAs is not permitted.
 However, considering need of interpersonal socialisation / relationship of the members
through such get together occasions, advertisement for Silver, Golden, Diamond, Platinum
or Centenary celebrations of the CA Firms may be published in newspaper or newsletter.
.

(7) Sponsoring Activities

(i) Member in practice or a Firm of CAs is not permitted to sponsor an event. However, such
member or Firm may sponsor an event conducted by a Programme Organising Unit
(PoU) of the ICAI, provided such event has prior approval of Continuing Professional
Education (CPE) Directorate of the ICAI.
.

(ii) Members sponsoring activities relating to Corporate Social Responsibility may mention
their individual name with the prefix “CA”. However, the mention of Firm name or CA
Logo is not permitted.
(8) Advertisement of Teaching activities
.

(i) An advertisement of Coaching/teaching activities by a member in practice may amount

to indirect solicitation, as well as solicitation by any may therefore be violative of the
provisions of Clause (6).
.

(ii) Hence, members are advised to abstain from advertising their association with Coaching
/ teaching activities through hoardings, posters, banners and by any other means, failing
which they may be liable for disciplinary action.
.

(iii) Subject to the above prohibition, such members may put, outside their Coaching /
teaching premises, sign board mentioning the name of Coaching/teaching Institute,
contact details and subjects taught therein only.
.

(9) Sharing Firm Profile

It is not permitted to share Firm profile with a prospective Client unless it is in response to a
proposed client‟s specific query, and otherwise not prohibited to be used by the client.
.

(10) Television or Movie Credits

While sharing name of the member or Firm of CAs for inclusion in Television or Movie
Credits, it must be taken care of that exhibition of name is not made differently as compared
to other entries in the credits.
.

(11) Roving enquiries

It is not permissible for a member to address letters, e-mails or circulars specifically to
persons who are likely to require services of a CA since it would tantamount to advertisement.
.

4
(12) Seeking work from Professional Colleagues
Issue of an advertisement or a circular by a CA, seeking work from professional colleagues on
any basis whatsoever except as provided above would be in violation of this clause.
.

(13) Scope of representation u/s 140(4) of Companies Act, 2013

 Representation should not be used to secure needless publicity and soliciting for his
continuance as an auditor.
 However, it may set out in a dignified manner how he has been acting independently
through his term of office and his willingness to continue as an auditor if reappointed by
shareholders.
.

(14) Acceptance of Original professional Work

 Acceptance of original work emanating from a client introduced by another member is not
permitted.
 However, if any professional work of such client comes to him directly, it should be his
duty to ask the client that he should come through the other member dealing generally
with his original work.
.

(15) Public Interviews

 While giving any interview or otherwise furnishing details about themselves or their firms
in public interviews or to the press or at any forum, the members should ensure that, it
should not result in publicity.
 Due care should be taken to ensure that such interviews or details about the members or
their firms are not given in a manner highlighting their professional attainments.
 Any detail which is given must, in addition to meeting the above requirements, be given
only as a response to a specific question, and of factual nature only.
.

(16) Advertisements Under Box Numbers

Members / Firms are prohibited from inserting advertisements for soliciting clients or
professional work under box numbers in the newspapers.
.

(17) Educational Videos

While videos of educational nature may be uploaded on the internet by members, no reference
should be made to the CA Firm wherein member is a partner / proprietor. Further, it should not
contain any contact details or website address.

Guidelines for Website

CAs and/or CAs Firms would be free to create their own website, subject to following
requirements:
 No standard format of the Website is being given, to provide independence to the Members.
 Ensure that websites run on a “pull” model and not a “push” model of the technology.
 Ensure that none of the information contained in Website be circulated on their own or
through E-mail or by any other mode or technique except on a specific “pull” request.
 Soliciting people to visit the website by means of any circular or any other advertisement or
any other material of any kind whatsoever is not permitted. However, website address may
be mentioned on the professional stationery and e-mail.

5
  The following information may be displayed on the Firms/Members‟ Websites:
(i) Member/Trade/Firm name.
(ii) Year of establishment.
(iii) Member/Firm‟s address (both H.O. and Branches), tel. No.(s), fax No.(s) & e-mail
ID(s).
(iv) Nature of services rendered (to be displayable only on specific “pull” request)
(v) Partners details like name, year of qualification, other qualification(s), tel. No.(s),
address, e-mail, area of Experience (to be displayable only on specific “pull” request).
(vi) Details of employees like name, designation, area of experience (to be displayable
only on specific “pull” request)
(vii) Job vacancies for the CA/firm of Chartered Accountants (including articleship).
(viii) No. of articled assistants. (to be displayable only on specific “pull” request).
(ix) Nature of assignments handled (to be displayable only on specific “pull” request).
(x) Name of clients and fee charged cannot be given.
NOTE:
Disclosure of names of clients and / or fees charged, on website is permissible only where it is
required by a regulator, provided that such disclosure is only to the extent of requirement of the
regulator and is made only till such period that the member works under the purview of such
Regulator. Ensure that below such disclosure it is mentioned in italics, that “This disclosure is in
terms of the requirement of [name of the regulator] having jurisdiction in [name of the country /
area where such regulator has jurisdiction] vide [Rule / Directive etc. under which the disclosure is
required by the Regulator].
 Display of Passport style photograph is permitted.
 Members may include articles, professional information, bulletin boards, professional
updation and other matters of larger importance or of professional interest on the website.
 Educational videos on topics of professional relevance are permissible.
 Chat rooms can be provided which permit chatting amongst members of the ICAI and
between Firms and its clients. The confidentiality protocol would have to be observed.
 Firms can provide document management facility with distinct log in and password facility
to the clients to access copies of their documents on the Firm website.
 Firm can provide link of its page on Social Networking site. However, the members should
not solicit people to visit or like their respective page(s) on such social Networking site.
 The members/firms can provide on line advice to their clients who specifically request for
the advice whether free of charge or on payment.
 The details in the Website should be so designed that it does not amount to soliciting client
or professional work.
 Website should ensure adequate secrecy of the matters of the clients handled through
Website.
 No Advertisement in the nature of banner or any other nature will be permitted.

6
  Website should be befitting the profession of Chartered Accountants and should not contain
any information or material which is unbecoming of a Chartered Accountant.
 Website may provide a link to the Website of ICAI, its Regional Councils and Branches and
also the Website of Govt./Govt. Departments/Regulatory authorities/other Professional
Bodies.
 Website address should be as near as possible to individual name/trade name, firm name of
the CA in practice or firm of CAs in practice. But it should not amount to soliciting clients
or professional work or advertisement of attainments or services.
 Website should mention the information which is not at material variance from the
information as per the ICAI‟s records.

(g) Clause 7
A CA In Practice shall be deemed to be guilty of professional Misconduct if he:
 Advertises his professional attainments or services,
OR
 Uses any designation or expressions other than the Chartered Accountant on professional
documents, visiting cards, letter heads or sign boards.
However, recognised degree of university or title indicating membership of ICAI or other recognised
institution may be used.
Guidelines for Advertisement
(1) Advertisement through write-up: is allowed subject to guidelines issued by the Council.
Guidelines for Write-up
(A) Meaning of Write-up
“Write-up” means writing of particulars according to information given in the Guidelines
setting out services rendered by the Members or firms.
(B) Conditions to be Complied with
The write-up shall comply with the following conditions:
 It shall be honest and truthful.
 There shall be no exaggerated claims for the services offered by the member or the
Firm.
 It must not make any unsubstantiated comparisons to the work of others.
 It should not be of a nature that may bring the profession into disrepute.
 It should not contain testimonials or endorsements or the fees charged.
 It should not contain any information about achievements / awards (except the awards
given by the C.G. or S.G. or Regulatory bodies) or any other position held, or
accreditation(s) granted by any organisation.
 Monogram of any kind or use of any kind of catch words is not permissible.
 Membership No. / FRN is mandatory to be mentioned in the write-up.
 It should not be of font size exceeding 14.

7
  It must not be violative of any provisions of CA Act, 1949, CA Regulations, 1988,
Code of Ethics, 2020 or any Guideline of the Council.
(C) Information to be Contained in Write-ups
(I) For Members
 CA………….. Name
 Membership No. with Institute
 Age
 Date of becoming ACA
 Date of becoming FCA
 Date from which COP held
 Recognised qualifications
 Languages known
 Telephone / Mobile / Fax No.
 Professional Address
 Website
 E-mail
 CA Logo
 Passport style photograph
 Details of Employees (Nos.:)
A. Chartered Accountants -
B. Other Professionals -
C. Articles / Audit Assistants
D. Other Employees
 Names of the employees and their particulars on the lines allowed for a member
as stated above.
 Services provided
 Position held as Director or Managing Director in a Management Consultancy
Company registered with the Institute.
(II) For Firms
 Name of the Firm..............................Chartered Accountants
 Firm Registration No. with Institute
 Year of establishment.
 Professional Address(s) registered with the Institute (both Head Office and
Branches)
 Working Hours
 Tel. No.(s) / Mobile No. / Fax No.(s)
 E-mail

8
  No. of partners
 Name of the proprietor / partners and their particulars on the lines allowed for a
member as stated above including passport style photograph.
 CA Logo
 Details of Employees (Nos. -)
A. Chartered Accountants -
B. Other professionals -
C. Articles/Audit Assistants
D. Other employees
 Names of the employees of the firm and their particulars on the lines allowed for a
member as stated above.
 Services provided
 Affiliation with a Network registered with the Institute
NOTE: The write-up may have the Signature, Name of the Member / Name of the
Partner signing on behalf of the firm, Place and Date.
(2) Other Designations:
 Use of words like Income-tax Consultant, Corporate Lawyer, Cost Consultant or
Management Consultant is not allowed.
 Use of designation like „Member of Parliament‟, in addition to that of CA is not permissible.
 Member empanelled as Insolvency Professional or Registered Valuer can mention
“Insolvency Professional” or “Registered Valuer” respectively on his visiting card.
(3) Permission to mention qualifications of certain Institutions: Members are permitted to
indicate membership of a recognised foreign Institute of Accountancy on visiting cards, e.g.
South African Institute of Chartered Accountants (SAICA), Institute of Certified Public
Accountants (CPA Ireland) and ICAEW.
(4) Date of Setting up of practice: Date of setting up of practice or date of establishment of the
firm on the letter heads and other professional documents etc. should not be mentioned.
(5) Practice as Advocate: Persons eligible otherwise, subject to permission may practice as
advocates but can‟t use designation “Chartered Accountant” and “Advocate” simultaneously.
(6) Practice as Company Secretary/Cost Management Accountant: Members of the Institute in
practice who are otherwise eligible may also practice as CS and/or Cost Accountants.
Such members shall, however, not use designation of the aforesaid Institute/s simultaneously
with the designation “Chartered Accountant”.
It is clarified that in event of the permission being granted to a member in practice to also hold
COP of sister Institute (s)/Bar Council, such member be treated as a member in full-time
practice.
(7) Mention of Firm name except on Professional Documents: It is not proper to use designation
„Chartered Accountant‟ except on professional documents, visiting cards, letter heads or sign
boards.

9
(8) Notice in the Press relating to the Success in an Examination: Notice in press relating to
success in an examination of an individual candidate, should not contain any element of
undesirable publicity either in relation to the articled/audit assistant or an employee or the
member or the firm with whom he was served.
(9) Reports and Certificates: Ensure that extent & manner of publication of certificates are limited
to what is necessary to enable the report or certificate to serve its proper purpose. Members
should use letterhead of their Firm for issuing reports and certificates.
(10) Appearance of Chartered Accountants on Electronic Media (including Internet): Members
may appear on television, films and Internet and agree to broadcast in the Radio or give lectures
at forums and may give their names and describe themselves as Chartered Accountants.
Special qualifications or specialised knowledge directly relevant to the subject matter of the
programme may also be given. Firm name may also be mentioned, however, any exaggerated
claim or any kind of comparison is not permissible.
(11) Important Appointments or views of Public Importance: Publicity is permitted for
appointments to positions of local or national importance or for the views of members on
matters of similar importance. Mention of the membership of the Institute is desirable in such
cases. However, reference to the professional firm of the member should not be given.
(12) Organising Training Courses, Seminars etc. for his staff: A CA in practice holding training
courses, seminars etc. for his staff may also invite the staff of other CAs and clients to attend the
same. However, undue prominence should not be given to the name of the CA in any booklet or
document issued in connection therewith.
(13) Writing Articles or Letters to the Press: Members writing articles or letters on subjects
connected with profession may give their names & use description Chartered Accountants.
(14) Size of Sign Board: Members should exercise their own discretion and good taste while
keeping in mind the appropriate visibility and illumination of Sign Board. However, use of glow
signs or lights on large-sized boards as is used by traders or shop-keepers is not permissible.
Member can have a name board at the place of his residence with the designation of a Chartered
Accountant, provided it is a name plate or name board of an individual member and not of firm.
(15) Public Announcements with details of Directors: Name of CA acting as director in the
company is permissible to appear in the prospectus of the company; however a description
regarding his expertise, specialisation and knowledge in any particular field is not permitted.
It is advisable for a member that as soon as he is appointed as a director on Board of a
Company, he should specifically invite the attention of the management of the Company to the
aforesaid provisions and should request that before any such prospectus or public
announcements or public communication mentioning the name of the member concerned, is
issued, the material pertaining to the member concerned should, as far as practicable be got
approved by him.

10
 (16) Network Firms and Networking Guidelines:
(i) Definitions
(A) Network
 A larger structure that is aimed at:
 Co-operation; and
 Profit / cost sharing or shares common ownership, control or management,
common quality control policies & procedures, common business strategy, use of a
common brand name, or a significant part of professional resources.
(B) Network Firm
Means a firm or Entity that belongs to a Network.
(ii) Concept of Network
 A larger structure aimed only at facilitating referral of work, will not be considered as
network.
 Judgment as to whether the larger structure is a network shall be made in light of
whether a reasonable and informed third party would be likely to conclude that entities
are associated in such a way that a network exists.
 Where larger structure is aimed at co-operation and it is clearly aimed at profit or cost
sharing among the entities within the structure, it is deemed to be a network. However,
sharing of immaterial costs does not in itself create a network.
 Where the larger structure is aimed at cooperation and the entities within the structure
share common ownership, control or management, it is deemed to be a network.
 Where the larger structure is aimed at co-operation and the entities within the structure
share common quality control policies and procedures, it is deemed to be a network.
 Where the larger structure is aimed at co-operation and the entities within the structure
share a common business strategy, it is deemed to be a network.
.

 Where the larger structure is aimed at co-operation and the entities within the structure
share the use of a common brand name, it is deemed to be a network.
.

 Where the larger structure is aimed at co-operation and entities within the structure
share a significant part of professional resources, it is deemed to be a network.
Professional resources include:
 Common systems that enable firms to exchange information such as client data,
billing and time records;
 Partners and staff;
 Technical departments that consult on technical or industry specific issues,
transactions or events for assurance engagements;
 Audit methodology or audit manuals; and
 Training courses and facilities.
.

 Determination of whether professional resources shared are significant shall be made

based on the relevant facts and circumstances. Where the shared resources are limited to

11
 common audit methodology or audit manuals, with no exchange of personnel or client
or market information, it is unlikely that the shared resources would be significant.
(iii) Forms of the Network
 A network can be constituted as a mutual entity which will act as a facilitator for the
constituents of the Network. In such a case the Network itself will not carry out any
professional practice.
 A network can be constituted as a partnership firm subject to condition that total
number of partners does not exceed 20.
 A network can be constituted as a LLP subject to the provision of the CA Act and Rules.
 A network can be constituted as company subject to the guidelines prescribed by ICAI
for corporate form of practice.
 Network Firms shall consist of sole Practitioner / proprietor, partnership or any such
entity of professional accountants as may be permitted by the Act.
 A firm is allowed to join only one network.
 Firms having common partners shall join only one Network.

(iv) Approval of Name of Network amongst firms registered with Institute

 Network may have distinct name which should be approved by the Institute. To
distinguish a “Network” from a “firm” of Chartered Accountants, the words “&
Affiliates” shall be used after the name of the network and the words “& Co.” / “&
Associates” shall not be used.
 Provisions of Regulation 190 of the CA Regulations, 1988 shall be applicable to the
name of Network. However, even if a name is approved and subsequently it is found
that the same is undesirable then, the said name may be withdrawn at any time by the
Institute.
 Institute shall approve or reject the name and intimate the same to Network within a
period which shall not be later than 30 days from the date of receipt of the said Form.
 Mere approval of the name of the Network shall not entitle the Network to carry on
practice in its own name.
(v) Registration of Network with entities in India
 After the name is approved, Institute shall reserve such name for a period of three (3)
months from the date of approval.
 Network shall get itself registered with the Institute within the period of 3 months,
failing which the name assigned shall stand cancelled on the expiry of the said period.
 Registration of Network with Institute is mandatory.
 If different Indian firms are networked with a common Multinational Accounting Firm,
they shall be considered as a part of network.
(vi) Listing of Network with entities outside India
 Duly authorised representative(s) of Indian Member firm (s) / Member constituting
Network with entities outside India shall file a declaration with the Institute for Listing

12
 of such Network within 30 days from the date of entering into the Network
arrangement.
 Proprietary / individual members, partnership firms as well as members in LLP or any
such other entity of members as may be permitted by the Act, shall be permitted to join
such network with entities outside India provided that they are allowed to join only one
network and firms having common partners shall join only one such network.
(vii) Change in Constitution of Registered Network
In case of change in the constitution of registered Network on account of any entry into or
exit constitution of from the Network, the network shall communicate the same to the
Institute within a period of thirty (30) days from the date of change in the constitution.
(viii) Ethical Compliance
Once relationship of network arises, it will be necessary to comply with all applicable
ethical requirements prescribed by Institute in general and the following requirements in
particular:
 If one firm of the network is the statutory auditor of an entity then the associate or the
said firm directly / indirectly shall not accept the internal audit or book-keeping or
such other professional assignments which are prohibited for the statutory auditor
firm.
 The guidelines of ceiling on Non-audit fees is applicable in relation to a Network as
follows:
 For a Network firm who is doing statutory audit, it shall be the same as mentioned
in the said notification; and
 For other firms of the same Network collectively, it shall be 3 times of the fee
payable for carrying out the statutory audit of the same undertaking/company.
 In cases where rotation of firms is prescribed, no member firm of the network can
accept appointment as an auditor in place of any member firm of the network which is
retiring.
 Network may advertise to the extent permitted by the Advertisement Guidelines
issued by Institute.
 Firms constituting the network are permitted to use the words “Network Firms” on
their professional stationary.
(ix) Consent of Client
Effect of registration of network with Institute will be deemed to be a public notice of the
network and therefore consent of client will be deemed to be obtained.
(x) Framework of Internal Byelaws of Network
Network shall formulate operational bye-laws. Bye-laws may contain the following clauses
on which the affiliates of the network may enter into a written agreement among
themselves:
 Appointment of a Managing Committee, from among the managing partners of
member firms of network and terms and conditions under which it should function.

13
 The minimum and maximum number of members of Managing Committee shall also
be agreed upon.
 Administration of the network.
 Contribution of membership fees to meet cost of the administration.
 Identifying a partner of any of the member firms of the network to be responsible for
the assignment (engagement partner).
 Dispute settlement procedures through arbitration and conciliation.
 Development of training materials for members of the network.
 Issue of News-letters for staff and clients.
 Development of software for different types of assignments.
 Development and maintenance of data bases relevant for different types of
assignments.
 Library.
 Appointment of a technical director to whom references can be made.
 Determining the methodology for drawing resources from each member firm.
 Determining compensation to member firms for resources to be drawn from them.
 Peer review of the member firms.
(17) Use of logo: Use of logo / monogram of any kind / form / style / design / colour etc. whatsoever
on any display material or media e.g. paper stationery, documents, visiting cards, magnetic
devices, internet, sign board, be prohibited.
(18) Common CA Logo: Common logo is prescribed by ICAI. Any other logo is not permissible.
Use of CA logo in the stamp is permissible, subject to CA logo guidelines.
(h) Clause 8
A member in practice shall be deemed to be guilty of professional misconduct if he
 accept a position as Auditor
 previously held by another chartered accountant or certified auditor without
 first communicating with him in writing.

NOTE:
 Professional reasons for not accepting Audit:
(i) Non-compliance of provisions of Secs. 139 and 140 of Companies Act, 2013.
(ii) Non-payment of undisputed audit fee (except sick unit). Provision for Audit fees in
accounts signed by auditor and the client shall be considered as undisputed.)
(iii) Issuance of a qualified Report.
In first two cases, acceptance of audit amounts to professional misconduct. In (iii) case, member
may accept audit if he thinks that attitude of retiring auditor wasn‟t proper and justified. But if
report was qualified for good & valid reasons, non-acceptance would be a healthy practice.

14
 Fees pending due to non-availability of Previous Auditor: Where the Previous Auditor is not
available for accepting payment of undisputed audit fees, and it is not otherwise possible to
transfer the payment to him electronically, the Incoming Auditor may advise the client to
purchase DD Draft of the amount equivalent to undisputed Audit Fees of retiring auditor, and
may accept the Audit assignment after verifying the same.
 Course of action in case of change of Auditorship: Object of the incoming auditor, in
communicating with the retiring auditor is to ascertain from him whether there are any
circumstances which warrant him not to accept the appointment.
 Duty of Retiring Auditor: On the request of the Incoming Auditor to the retiring auditor for
providing known information regarding any facts or other information of which, in the opinion
of the retiring auditor, the Incoming auditor needs to be aware before deciding whether to accept
the engagement, the retiring auditor shall provide the information diligently.
 Positive Evidence of Delivery required: Members should communicate with a retiring auditor
in such a manner as to retain in their hands positive evidence of the delivery of the
communication to the addressee.
In opinion of the Council, the following would in the normal course provide such evidence:
(i) Communication by a letter sent through “Registered Acknowledgement due”, or
(ii) By hand against a written acknowledgement, or
(iii) Acknowledgement of the communication from retiring auditor‟s vide e-mail address
registered with the Institute or his last known official e-mail address, or
(iv) Unique Document Identification Number (UDIN) generated on UDIN portal (subject to
separate guidelines to be issued by the Council in this regard)
 Certificate of posting not a conclusive proof of communication: Mere posting of a letter
under certificate of posting is not sufficient to establish communication.

 Premises found Locked: The communication received back by the Incoming Auditor with
“Office found Locked” written on the Acknowledgement Due shall be deemed as having been
delivered to the retiring auditor.
 Firm not found at the given Registered address: If the Communication sent by the Incoming
auditor is received back with remarks “No such office exists at this address”, and the address of
communication is the same as registered with the Institute on the date of dispatch, the letter will
be deemed to be delivered, unless the retiring auditor proves that it was not really served and that
he was not responsible for such non-service.
 Special Audit under Income-tax Act, 1961: It would be a healthy practice if a Tax Auditor
appointed for conducting special audit under the Income-tax Act, 1961 communicates with the
member who has conducted the Statutory Audit.
 Communication required for all kinds of audit: The requirement for communicating with the
previous auditor being a Chartered Accountant in practice would apply to all types of Audit vis.,
Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit or any other kind of
audit.

15
  Communication in case of Assignments done by other professionals: A Communication is
mandatorily required for all types of Audit/Report where the previous auditor is a Chartered
Accountant. In case of assignments done by other professionals not being Chartered
Accountants, it would also be a healthy practice to communicate.
 Lack of time in acceptance of Government Audits: In case of audit of government Companies,
banks or their branches, if appointment is made well in time to enable the obligation cast under
this clause to be fulfilled, such obligation must be complied with before accepting the audit.
However, in case the time schedule given for the assignment is such that there is no time to wait
for the reply from the outgoing auditor, incoming auditor may give a conditional acceptance of
the appointment and commence the work which needs to be attended to immediately after he has
sent the communication to the previous auditor in accordance with this clause.
In his acceptance letter, he should make clear to the client that his acceptance is subject to
professional objections, if any, from the previous auditors and that he will decide about his final
acceptance after taking into account the information received from the previous auditor.
(i) Clause 9
A CA in practice shall be deemed to be guilty of professional misconduct if he:
 accepts an appointment as auditor of a company,
 without ascertaining whether requirements of Sec. 225 of Companies Act, 1956 (Sec. 139 & 140
of Companies Act, 2013 read with Sec. 141),
 in respect of such appointment have been duly complied with.
Aspects to be verified by Incoming Auditor to ascertain whether Company has complied with
the provisions of Sec. 140 of the Companies Act
 Whether a member of the Company has given special notice of the resolution as required u/s
140(4) of the Companies Act, 2013. The notice shall be sent by members to the company not
earlier than 3 months but at least 14 days before the date of the meeting at which the resolution is
to be moved, exclusive of the day on which the notice is given and the day of the meeting. A true
copy of this notice should be obtained by the incoming auditor.
 Whether special notice has been sent to all the members of the Company as required u/s 115 of
Companies Act, 2013 at least 7 days before the date of the General Meeting.
 Whether special notice has been sent to the retiring auditor as required u/s 140(4).
 Whether representation received from the retiring auditor has been sent to the members of the
Company as required u/s 140(4).
 Whether representation received from retiring auditor has been considered at general meeting
and resolution proposed by the special notice has been properly passed at the general meeting.
(j) Clause 10
A CA in Practice shall be deemed to be guilty of professional misconduct if he:
 charges or offers to charge,
 accepts or offers to accept
 in respect of any professional employment,
 fee which is based on a % age of profits or

16
  which are contingent upon findings, or results of such employment,
except as permitted under regulations.
NOTE:
 Fees will not be treated as contingent if fixed by a court or other public authority.
 Regulation 192 (Restriction on Fees): In respect of below mentioned cases fees may be fixed as
specified below:
(i) In the case of receiver or liquidator: On the basis of percentage of realisation or
disbursement of assets.
(ii) In the case of co-operative society: On the basis of percentage of paid-up capital or
working capital or gross / net income or profits.
(iii) In the case of valuer for purposes of direct taxes and duties: On the basis of percentage
of value of property valued.
(iv) In the case of management consultancy services: on the basis of percentage which may
be contingent upon the findings, or results of such work;
(v) In the case of certain fund-raising services: On the basis of a percentage of the fund
raised;
(vi) In the case of debt recovery services: On the basis of percentage of the debt recovered.
(vii) In the case of services related to cost optimisation: On the basis of percentage of benefit
derived; and
(viii) Any other service or audit: Following activities decided by Council for this clause:
 Acting as Insolvency Professional
 Non-Assurance Services to Non-Audit Clients
(k) Clause 11
A CA in practice shall be deemed to be guilty of professional misconduct if he :
 engages in any Business or occupation
 other than the profession of chartered accountant
 Unless permitted by Council so to engage.
However, a member may become director (not being M.D. or Whole-time director) in a company
provided he or any of his partner is not interested in such company as an auditor.
NOTE:
(i) Regulation 190A: A CA in practice is not entitled to engage in any other business or
occupation other than the profession of accountancy except with the permission of the Council.
Accordingly, the various occupations have been specified for which general permission is
granted and the occupations for which specific and prior approval of council is required.
.

Occupations for which permission has been granted generally:

 Employment under C.A. in practice or firms of such CAs.
 Private tutorship.
 Authorship of Books / Articles.

17
  Holding of Life Insurance Agency license for limited purpose of Renewal Commission.
 Attending class and appearing for any exams.
 Holding of public elective offices such as MP or MLA.
 Honorary office of charitable - educational or other non-commercial institute.
 Notary public, Justice of peace, Special Executive Magistrate and like.
 Part time tutorship under coaching organisation of institute.
 Valuation of paper, acting as paper setter, head-examiner or moderator for any exam.
 Editorship of professional journal.
 Acting as Surveyor / Loss Assessor under Insurance Act.
 Acting as Recovery Consultant in the Banking Sector.
 Owning agricultural land and carrying out agricultural activity.
Occupations for which specific and Prior approval is required:
 Full time / Part time employment in Business concerns provided he / his relative do not
hold substantial interest in such concerns. The Term relative means Husband, wife, brother
or sister or any lineal ascendant or descendent.
 Full time / Part time employment in non-business concern.
 Office of Managing Director / Whole-time Director of a body corporate provided that the
member and / or any of his relatives do not hold substantial interest in such concern.
 Interest in family business concerns.
 Interest in any educational institute.
 Part time / Full time lectureship for courses other than ICAI Examinations.
 Part time / Full time tutorship under any educational institution other than coaching
organisation of institute.
 Editorship of journals other than professional journals.
 Any other Business / Occupation for which Executive Committee considers that permission
may be granted.
(ii) Acquiring interest in family business: A member of the Institute can acquire interest in
family business in any of the following manner:
 as a proprietary firm
 as a partnership firm
 in the name and style of Hindu Undivided Family as its Karta or a member.
It would be necessary for the members to provide evidence that interest in the family business
concern devolved on him as a result of inheritance/succession/partition of the family business.
It is also necessary for the member to show that he was not actively engaged in carrying on the
said business and that the family business concern in question was not created by himself.
(iii) General permission (for private tutorship, and part-time tutorship under Coaching
organisation of the Institute) and specific permission (for part-time or full-time tutorship
under any educational institution other than Coaching organisation of the Institute) is

18
 subject to the condition that the direct teaching hours devoted to such activities taken together
should not exceed 25 hours in a week in order to be able to undertake attest functions.
(l) Clause 12
A CA in practice shall be deemed to be guilty of professional misconduct if he allows:
 a person not being a member of the institute in practice or
 a member not being his partner
 to sign on his behalf or on behalf of his firm,
 any Balance Sheet, P&L A/C, Report or Financial Statements
NOTE:
 The Financial Statements and the Reports referred to in this clause means the financial statements
and reports as ultimately finalised and submitted to the outside authorities.
 Council has clarified that power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated and such delegation will not
attract provisions of this clause. Examples of such instances are:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Sec. 288 of Income-tax
Act.
(x) Any other matter incidental to the office administration and routine work involved.

First Schedule (Part II - Professional Misconduct in relation to Members in Service)

(a) Clause 1
A CA in service is guilty of professional misconduct if he:
 Pays or allows or agrees to pay
 Directly or indirectly to any person
 Any share in the emoluments of the employment undertaken by him.
(b) Clause 2
A CA in service is guilty of professional misconduct if he: Accepts or agrees to accept
 Any part of fees, profits or gains from
 A lawyer, a CA or broker engaged by such company, firm or person or
 Agent or customer of such company, firm or person
 By way of commission or gratification.

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 First Schedule (Part III - Professional Misconduct in relation to Members Generally)
(a) Clause 1
A CA is deemed to be guilty of professional misconduct if he not being a fellow of the Institute but
acts as a fellow of the Institute.
(b) Clause 2
A CA is deemed to be guilty of professional misconduct if he:
 does not supply the information called for, or
 does not comply with the requirements asked for by
 The Institute, Council or any of its committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the appellate authority.
(c) Clause 3
A CA is deemed to be guilty of professional misconduct if he:
 while inviting professional work from another chartered accountant or
 while responding to tenders or enquiries
 while advertising through a write up or anything as provided for in clauses (6) and (7) of Part I of
this schedule,
 gives information knowing it to be false.

First Schedule (Part IV - Other Misconduct in relation to Members Generally)

(a) Clause 1
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he is held guilty of any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months.
(b) Clause 2
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he in the opinion of the Council, brings disrepute to the profession or the Institute as a
result of his action whether or not related to his professional work.

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 SDG AND ESG ASSURANCE
Meaning of Sustainability and Sustainable Development Sustainability
(a) Sustainability
 Sustainability is related to development of products, goods and services that involves meeting
our present needs without compromising ability of future generations to fulfil their needs.
 Sustainability as a concept recognises that environment is exhaustible resource. Hence, it is
important to use environment & its resources rationally and protect it for the good of the
Earth, environment, humanity and all living things.
(b) Sustainable Development
 Development that strives to meet the needs of developing countries seeking to achieve a more
sustainable world.
 It addresses the needs of the present moment without compromising current and future
generations to meet their own sustainable lifestyles.
 It can be applied to corporate policy in business world as it encompasses three pillars of
sustainability, i.e., Environment, Social and Governance.
Three Pillars of Sustainability – ESG
(1) Environment (E)
 Environment stands for corporate climate policies, energy use, waste, pollutions, natural
resource conservation and treatment of animals.
 It includes the natural resources that every entity absorbs for its functioning like that of
coal, electricity, water and so on.
(2) Social (S)
It addresses the relationships the entity has and reputation it fosters with people and
institutions in the communities where it is doing business & value chain involved.
(3) Governance (G)
Internal system of practices, controls and procedures entity adopts in order to govern itself,
make effective investment decisions, comply with the law and meet the needs of all
stakeholders.
NOTE
 ESG reporting is all about disclosure of information, data, metrics that explain the added
value in these three areas.
 ESG reporting can be both quantitative and qualitative in nature.
 Qualitative reports tend to describe a company‟s strategy or policy around the relevant
topics, while a quantitative approach includes metrics, and key performance indicators
(KPIs) linked to each area in order to measure progress against goals and report on
achievements.

Sustainable Development Goals (SDG)

17 SDGS
GOAL 1 : No Poverty
GOAL 2 : Zero Hunger
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 GOAL 3 : Good Health and Well-being
GOAL 4 : Quality Education
GOAL 5 : Gender Equality
GOAL 6 : Clean Water and Sanitation
GOAL 7 : Affordable and Clean Energy
GOAL 8 : Decent Work & Economic Growth
GOAL 9 : Industry, Innovation & Infrastructure
GOAL 10 : Reduced Inequality
GOAL 11 : Sustainable Cities and Communities
GOAL 12 : Responsible Consumption & Production
GOAL 13 : Climate Action
GOAL 14 : Life Below Water
GOAL 15 : Life on Land
GOAL 16 : Peace, Justice & Strong Institutions
GOAL 17 : Partnerships to achieve the Goal

Global Trends in Sustainable Reporting

(a) Meaning of Sustainable Reporting
 Entity‟s practice of reporting publicly on its economic, environmental, and/or social impacts,
& hence its contributions – positive or negative towards goal of sustainable development.
 Sustainability reporting refers to information that an entity provides about their performance
to outside world on a regular basis in a structured way.
 It is the comprehensive mechanism of measuring & disclosing sustainability data with
performance indicators and management disclosures.
(b) Benefits of Sustainable Reporting
 Help stakeholders to understand organizations performance vis a vis sustainability and
impacts. Reporting process emphasizes link between financial & non-financial performance.
 Help entities to focus on long-term value creation, by addressing ESG issues. Since investors
are recognising that environmental & social issues provide both risks & opportunities in
respect of their investments and seeking disclosures on environmental & social performance
of businesses, they can use ESG performance of companies to make investment decisions.
 Investing in social and environmental issues will not only improve own business continuity of
companies but also put them in a better position with their B2B (Business to Business)
customers as well as enable them to acquire new ones.
(c) Global Trends in Sustainable Reporting / Frameworks for Reporting
(1) Global Reporting Initiative (GRI)
 Helps organizations to report on economic, environmental & social impacts.
 General disclosures which are required to be reported under this standard are Economic,
Environment and Social.
 Report is addressed to all the stakeholders of the entity.
(2) Carbon Disclosure Project (CDP)
 Captures environmental performance data which is related to GHG emissions, water,
forests, and supply chain.

2
  Major details required to be reported are climate change, Forest and Water security.
 This report is addressed to all the investors, buyers, and other stakeholders of the entity.
(3) International Integrated Reporting Framework
 IIRC has established guiding principles and content elements in order to allow the
companies to produce integrated reports.
 Report consists of Organisational overview, Governance structure. Business model,
risks & opportunities, strategy, performance, outlook etc.

Integrated Reporting (6 Capitals)

(a) Financial Capital
 Funds available to the organization for use in production of goods or provision of services.
 Raised through financing such as debt, equity or grants; or generated through operations or
investments.
(b) Manufactured Capital
 Seen as human-created, production-oriented equipment and tools.
 Available for use in production of goods or provision of services.
 Includes buildings, equipment, infrastructure (such as roads, ports, bridges and waste
treatment plants).
(c) Natural capital
 Includes water, land, minerals and forests, biodiversity, and ecosystem health.
 Natural capital is an input to the production of goods or the provision of services.
(d) Human Capital
People‟s skills, experience, capacity and motivations to innovate, including their:
 Alignment with and support of organization‟s governance framework & ethical values such as
its recognition of human rights.
 Ability to understand and implement an organization‟s strategy.
 Loyalties and motivations for improving processes, goods & services including their ability to
lead and to collaborate.
(e) Social Capital
(i) Institutions and relationships established within and between each community, group of
stakeholders and other networks to enhance individual and collective well-being.
(ii) Includes:
 Common values and behaviour.
 key relationships, the trust and loyalty that an organization has developed and strives to
build and protect with customers, suppliers, and business partners.
 an organization‟s social license to operate.
(f) Intellectual Capital
This accounts for the intangibles associated with brand and reputation, in addition to patents,
copyrights, organizational systems and related procedures.

3
Illustration 1:
Babu Ltd. (a listed company) has been preparing and disclosing its sustainability report based
upon internationally accepted reporting framework of “Integrated Reporting” on a voluntary
basis even some years before BRSR reporting became mandatory. Even after BRSR reporting
became mandatory, it is cross referencing disclosures made under such reporting to disclosures
sought under BRSR. The key thrust of “Integrated Reporting” is how company creates value
over short, medium and long term. Following further information is provided in respect of the
above company:
(i) It has increased the number of customers using digital customer mobile app of the
company from 2 lakhs users to 4 lakhs users. There is 100% increase in digital collection. It
has benefitted customers of the company and resulted in use of digital methods for business
operations of the company.
(ii) It has increased the number of beneficiaries under its flagship CSR programmes from
previous 10000 to 75000. It has provided value for communities and provided sustainable
livelihood to them.
Discussing above information, identify which of the capitals of “Integrated Reporting” are being
referred to at (i) and (ii) respectively?
Solution: The information at (i) states that company has increased the number of customers using
digital mobile app. Besides, it has led to 100% increase in digital collection. Therefore, it involves use
of technology for deriving business benefits. It has invested in innovation deriving business benefits
from digitization. The capital referred to at (i) is “Intellectual Capital”.
Increase in number of beneficiaries under flagship CSR programmes providing value for communities
and sustainable livelihood is an example of relationships established within and between each
community, group of stakeholders and other networks to enhance individual and collective well-being.
The capital referred to at (ii) is “Social & Relationship Capital.”

Legal Framework of ESG in India

(a) NGRBC
MCA formulated the National Guidelines on Responsible Business Conduct (NGRBC) in 2019.
(b) BRSR
 As per Reg. 34(2) of SEBI (LODR) Regulations (as amended), annual report of top 1,000
listed entities based on market capitalization shall contain a business responsibility report.
 SEBI introduced new reporting requirements on ESG parameters called the Business
Responsibility and Sustainability Report (BRSR).
 BRSR seeks disclosures from listed entities on their performance against 9 principles of the
„NGRBC‟ & reporting under each principle is divided into essential & leadership indicators.
 Essential indicators are required to be reported on a mandatory basis while the reporting of
leadership indicators is on a voluntary basis. Listed entities should endeavour to report the
leadership indictors also.
 BRSR is intended towards having quantitative and standardized disclosures on ESG
parameters to enable comparability across companies, sectors and time.

4
 Business Responsibility & Sustainability Report (BRSR)
(a) Reporting Questionnaire
Reporting questionnaire is divided into three sections:
(i) Section A – General Disclosures:
It contains details of the listed companies, its products, services, operations, employee related
details, its holding, subsidiary, associate companies etc.
(ii) Section B – Management and Process disclosures:
It contains questions related to policy and management processes, governance, leadership
and oversight.
(iii) Section C – Principle-wise performance disclosures:
In contains reporting over Key Performance Indicators (KPIs) in alignment with the nine
principles of the NGRBC.
The section classifies KPIs into two categories:
 Essential indicators (Mandatory disclosures): This would include data on training
programs conducted, environmental data on energy, emissions, water, waste
management etc.
 Leadership indicators (Optional disclosures): It would include life cycle
assessments, details of conflict management policy, additional data on biodiversity,
energy consumptions, supply chain managements etc

(b) Nine Principles of NGRBC

(1) Principle 1 – Ethics, Transparency and Accountability
(i) Business decisions should be open to disclosure and accessible to the relevant
interested parties.
(ii) Essence of the core elements:
 Governing structure should develop policies, procedures and practices for their
offices, factories and work areas ensuring that ethics is not compromised.
 Information relating to policies, procedures and practices along with the
performance should be made available to stakeholders.
 In case of adverse effects, more care has to be taken for transparent disclosures.
 Entities in the value chain should be encouraged to adopt these principles by the
governance structure.
 Entities should proactively respond to the outside entities that violate the 9
principles of the BRSRs.
(2) Principle 2 – Safe and Sustainable Goals and Service
(i) Make sure that goods, services and the operations result in better life for the
consumers and end-users.
(ii) Essence of the core elements:
 Production methods and technologies are to be devised in such a way so as to
minimize the resource usage to make it sustainable.
 Entities are responsible to educate and make aware their consumers and clients
about their rights.

5
  Entities should take measures that reduce the over exploitation of nature‟s
resources by consuming sustainably and encourage methods to reduce, reuse &
recycling of resources.
(3) Principle 3 – Promote well-being of all employees including those in the value chain
(i) Entity shall take all initiatives for the benefit of its employees from the point of view
of their dignity, health, well-being.
(ii) Essence of the core elements:
 Ensure compliance with all regulatory requirements as far as employees are
concerned.
 Respect dignity of employee as a human being and should not restrict their
freedom of associations, unions and other participatory mechanism for collective
bargaining of their rights and redressal of issues they face at the workplace.
 Prevent all kinds of child labour, bonded labour& any other forms of involuntary
labour.
 Work-life balance of the employees is not compromised.
 Ensure timely payment of the worker‟s wages and compensation.
 Payment of the wages has to be as per the living wages, that can take care of
basic needs and provide economic security to the employees.
 Create a workplace and work environment that is safe, hygienic, and comfortable
for people to work.
 Ensure skill development, career development and training of the workforce.
 Creation of a workplace which is free of harassment and violence.
(4) Principle 4 – Respect for stakeholders’ interests and responsiveness
(i) Consider the interests and perspectives of all stakeholders, including shareholders,
employees, customers, suppliers, and the communities in which they operate and
should also be responsive to stakeholder concerns and feedback.
(ii) Essence of the core elements:
 Entities have to be transparent & communicate with stakeholders about the
impacts of their operations and business decisions on people and the nature.
 Policies, decisions, and impact of the operations of the organisation to the
stakeholders have to be disclosed transparently with no ambiguity on the extent
of the issues.
 Systematically determine context of their operation and identify their interested
parties.
 Fairly share benefits to the stakeholders or give an opportunity to them to benefit
from the operations in an equitable manner.
(5) Principle 5 – Respect and promote human rights
(i) Companies should respect & promote human rights, including rights to freedom of
expression, association, and privacy. Human rights violations in operations and value
chains should be prevented and addressed.
(ii) Essence of the core elements:
 Entities should have clear understanding of human rights and various ways by
which human rights can be violated from the perspective of the Constitution of
6
 India, national laws and policies and the content of International Bill of Human
Rights.
 Integrate human rights element into the policies, procedures and practices.
 Recognize and respect human rights of all relevant stakeholders and groups
within and beyond the workplace, including that of communities, consumers &
marginalized groups.
(6) Principle 6- Protection and restoration of Environment
(i) Environmental responsibility – a basic requirement for economic prosperity &
sustainability.
(ii) Essence of Core elements:
 Policies, procedures and practices are in place to assess & rectify impacts to
environment.
 Natural & manmade resources to be used in an optimum manner to ensure
sustainability.
 Measure performance relating to prevention of pollution, destruction of forests ,
waste generation, energy use, land use, etc.
 Contribute towards climate change resilience in line with India‟s commitment to
various international mechanisms.
 Explore the comparison of its activities with industry best practices to reduce,
reuse and recycle/recover materials, resources.
 Look out for avenues by which they can improve their performance towards
various environmental responsibilities.
(7) Principle 7 – Influence on Public and Regulatory Policy
(i) Businesses operate within framework of statutory & legislative policies of governing
authority.
(ii) Essence of Core elements:
 Core elements of BRSR to be met holistically when the organisation go ahead
with their contributions to policy formulation and policy advocacy.
 Collective associations such as trade groups and industry chambers have to be
utilized when moving ahead with policy advocacy and formulation.
 Role in policy advocacy should be in such a way that it encourages fair
competition and prevents human rights abuses.
(8) Principle 8 – Promote Inclusive Growth and equitable development
(i) Create economic opportunities for all including marginalized communities & also to
development of local communities and support social and economic empowerment.
(ii) Contribute Essence of Core elements:
 Entities should have systems in place to identify and address impacts of their
activities on social, cultural and economic aspects of the people.
 Review, measure and track the adverse impacts of the activities on the society
and environment and make action plans to mitigate them adequately.
 Make efforts to bring up creative products, technologies and business concerns
that help the marginalized communities to have well-being & a better quality of
life.
7
  When designing the CSR activities, entities should review local and regional
development priorities to help the marginalized groups and communities.
 Ensure that business induced displacement or relocation of communities does not
happen and in unavoidable cases, make sure to have mutually, agreed,
participative and informed negotiations to provide fair compensation to the
affected people.
 All forms of intellectual property and traditional knowledge should get deserved
respect and efforts should be made to ensure that benefits derived from their
knowledge are shared equitably.
(9) Principle 9- Provide value to the consumers in a responsible manner
(i) The primary purpose of any business is to create or provide useful products and
services to the customer in exchange of reasonable profits.
(ii) Essence of Core Elements:
 Put efforts to reduce negative impacts of the products and services on consumers,
natural environment and society at large.
 When conceptualizing, designing and marketing the products, entity should not
in any manner prevent the freedom of choice and fair competition.
 Entities should transparently and accurately disclose all kinds of adverse impacts
to the user, planet, society, on the biodiversity from their products.
 When handling customer data, right to privacy of customer needs to be
maintained.
 Inform the customers on the safe and responsible ways of usage, reuse, recycling
and disposal of their products and ways to eliminate over-consumption.
 When advertising the products, ensure that misleading and confusing
information is not exposed to the customers.
 Make available transparent & accessible grievance redressal and feedback
management system for their customers to raise their voices or to seek
clarifications.
 Entities, when engaged in providing essential goods & services, should enable
universal access in a non-discriminatory and responsible manner.
(c) Assurance in BRSR
 SEBI has currently started reporting of BRSR with top 1,000 listed companies. But in due
course, remaining listed companies would also need to comply with provisions of BRSR
 BRSR is expected to be used as a single means for disclosing sustainability related
information in India. This would be the main document which the stakeholders, investors
would review and do industry analysis. Hence, assurance in this reporting becomes more
critical.
 ESG audit would be a process that would help the companies to evaluate the environmental
and social risks for the Company‟s products, services, operations etc.
 Conducting an ESG audit helps businesses look at their supply-chain risks, risk management
capabilities and transparency with shareholders.

8
 Standard on Sustainability Assurance Engagements (SSAE)
(i) ICAI has issued Standard on Sustainability Assurance Engagements (SSAE) 3000
“Assurance Engagements on Sustainability Information”. SSAE 3000 deals with assurance
engagements on an entity‟s sustainability information. This is an umbrella standard
applicable to all assurance (Reasonable or limited) engagements on Sustainability
information.
(ii) The intended users of this Standard include:
 Assurance providers providing assurance on sustainability information.
 Entities seeking to engage a professional auditor.
 Regulators, investors, and other users of Sustainability Reporting data.
(iii) The effective date of application of SSAE 3000 is as follows:
 Voluntary basis for assurance reports covering periods ending on 31 st March 2023.
 Mandatory basis for assurance reports covering periods ending on or after 31 st March
2024.
(iv) ICAI has also issued SAE 3410, “Assurance Engagements on Greenhouse Gas Statements”
which deals with assurance engagements to report on an entity‟s GHG statement..

Methodology to provide assurance on BRSR

(i) Step 1: Preliminary Review of ESG report, parameters
(ii) Step 2: On-site Assessment/Verification of ESG Report
(iii) Step 3: Issuance of Assessment Report and Assessment Statement
(iv) Step 4: Review of the responses and clarifications on the findings
(v) Step 5: Submission of findings of the onsite assessment and document review
(vi) Step 6: Preparation of Assessment/Verification report including final results of Assessment.
(d) Social Audit Standards (SASs)
 Sustainability Reporting Standards Board (SRSB) of ICAI has issued SASs so as to provide
Social Auditor with the necessary guidance in relation to independent impact assessment
engagement of Social Enterprises engaged in various areas and audit steps and procedures
that should be applied while conducting the social impact assessment.
 Standards sets out the minimum requirements to be followed while conducting impact
assessment. Laws or regulations may establish additional requirements which should be
followed, as applicable.

Role of Auditor – Consideration of Climate Related Risks in an Audit of F.S.

(a) To obtain Reasonable Assurance
Role of auditor is to obtain reasonable assurance about whether the F.S. as a whole are free from
material misstatement, whether due to fraud or error, to enable auditor to report whether the F.S.
are prepared and presented fairly, in all material respects, in accordance with the applicable FRF.
(b) Consideration of Climate Related Risks in Understanding the Entity
 In developing understanding of an entity, auditor should include consideration of climate
related risks and how these risks may be relevant to the audits.

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  Climate-related risks could be more relevant in certain sectors or industries, e.g., banks &
insurance, energy, transportation, materials and buildings, agriculture & food products.
 Stakeholders are seeking information from auditor‟s reports about how climate-related risks
were addressed in the audit. Hence, auditor need to be aware of and may face, increasing
pressure for transparency about climate matters in auditor‟s reports.
(c) Auditor’s Report
 Auditor‟s report is a key mechanism of communication to users about the audit that was
performed.
 In addition to audit opinion, it provides information about auditor‟s responsibilities and
when required, an understanding of the matters of most significance in the audit and how
they were addressed.
 In some circumstances, it may warrant inclusion of an EOM paragraph to draw attention to
disclosures that are of fundamental importance to users‟ understanding of F.S.
 Auditor should determine whether entity has appropriately disclosed relevant climate related
information in F.S. in accordance with the applicable FRF e.g., Ind-AS or Ass, when
relevant before considering climate-related matters in the auditor‟s report.
(d) Reading the Other Information
To comply with the requirements of SA 710, auditor should read other information for
consistency with information disclosed in F.S. & information that is publicly communicated to
stakeholders outside the F.S., such as management report narratives in the annual report.

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