CA Inter Audit For Nov 2020 by Neeraj Arora PDF

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1. Nature, Scope and Objective

2. Audit Strategy, Audit Planning & Audit programme
3. Audit Documentation and Audit Evidence
4. Risk Assessment And Internal Control
5. Fraud And Responsibilities Of The Auditor In This Regard
6. Audit in Automated Environment
7. Audit Sampling
8. Analytical Procedure
9. Audit of Items of Financial Statements (Notes will be provided Later on in pdf format)
10. The Company Audit
11. Audit Report
12. Audit of Bank
13. Audit of Different Type of Entities (Notes will be provided Later on in pdf format)
14. Other SAs
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Nature, Scope and Objective of Audit

ICAI
The Institute of Chartered Accountants of India (ICAI) is the national professional accounting body of India.
● It was established on 1 July 1949 as a statutory body under the Chartered Accountants Act, 1949 enacted by the
Parliament (acting as the provisional Parliament of India) to regulate the profession of Chartered Accountancy
in India.
● ICAI is the second largest professional Accounting & Finance body in the world.
● ICAI is the only licensing and regulating body of the financial audit and accountancy profession in India.
Emblem of ICAI
Rules and Regulation For Accounting and Auditing

● __________________________
● __________________________
Why we need Rules for Accounting and Auditing

● _________________________
● _________________________
● _________________________
Practical Subject
“Auditing is, perhaps, one of the most practical-oriented subjects in the C.A. curriculum. This paper aims to provide
knowledge of generally accepted auditing procedures and of techniques and skills needed to apply them in audit
engagements. A good knowledge of the subject would provide a strong foundation to students while pursuing the
Chartered Accountancy course. A good understanding of the theoretical concepts, particularly, in the context of auditing
standards would make practical training an enriching and enjoying experience. While studying this paper, students are
advised to integrate the knowledge acquired in other subjects, specifically, accounting and corporate laws in a
meaningful manner. Such learning would only help a student to become a better professional.”
Lines Taken From ICAI Study Mat - www.icai.org

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A brief About Audit

● Genesis
● The person who conducts audit is known as auditor
● General Meaning
○ Evaluation Process
○ Undertaken to establish
○ Adherence to certain norms
● कोई भी काम उसके बनाए गए त रके से हुआ है या नह ं, इसे चेक करने को ह ऑ डट कहते है ।
● As a Chartered Accountant we are concerned with mostly with Financial Audit (Audit of Financial Information)
● Why we need Audit of Financial Information
○ ___________________________
○ ___________________________
○ ___________________________
● Standards on Auditing 200 (SA 200) - Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing


Meaning of Audit
An Audit is
● independent examination of
● Financial information of
● any entity, whether profit oriented or not , and irrespective of its size or legal form, when such an examination is
conducted
● with a view to expressing an opinion thereon.



Overall Objectives of Auditor

In conducting an audit of financial statements, the overall objectives of the auditor are
● To obtain reasonable assurance about

○ whether the financial statements as a whole
○ are free from material misstatement,
■ whether due to fraud or error,
○ thereby enabling the auditor to express an opinion on
■ whether the financial statements are prepared,
■ in all material respects,
■ in accordance with an applicable financial reporting framework; and
● To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s
findings.
Reasonable Assurance
● A high, but not absolute, level of assurance.

For auditor's opinion, reasonable Assurance is an absolute level of assurance (T/F)

Misstatement
A difference between
● the amount, classification, presentation, or disclosure
○ of a reported financial statement item
● and the amount, classification, presentation, or disclosure
○ that is required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud.

● The distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the financial statements is intentional or unintentional.
● Fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers to unintentional mistakes
in financial information.
Fraud is more difficult detect than error (True or False)

Statement is true, fraud is more difficult to detect than error. This is because fraud generally involves sophisticated and
carefully organized schemes to conceal it such as forgery deliberate failure to record transactions, intentional
misrepresentations to the auditor.


The risk not detecting a material misstatement from fraud is higher than risk of not detecting one resulting from error (T/F)
Material
Misstatements, including omissions, are considered to be material
● if they, individually or in the aggregate,
● could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements;


Concept of true and fair view

The concept of true and fair is a fundamental concept in auditing.
The phrase “true and fair” in the auditor’s report signifies that the auditor is required to express his opinion
as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly
and fairly represented in the accounts under audit. (jo usney paya, accounts mein bhi wo hi dikh raha hai)
This requires that the auditor should examine the accounts with a view to
● verify that all assets, liabilities, income and expenses are stated at amounts
○ which are in accordance with accounting principles and policies which are relevant.
● and no material amount, item or transaction has been omitted.
What constitutes a ‘true and fair’ view is a matter of an auditor’s judgment in the particular circumstances of a case. In
more specific terms, to ensure true and fair view, an auditor has to see:
1. That the assets are neither undervalued or overvalued, according to the applicable accounting principles,
2. No material asset is omitted;
3. The charge, if any, on assets are disclosed;
4. Material liabilities should not be omitted;
5. The profit and loss account and balance sheet discloses all the matters required to be disclosed;
6. Accounting policies have been followed consistently; and
7. All unusual, exceptional or non-recurring items have been disclosed separately.
Types of audit
Auditis not legally obligatory for all types of business organisations or institutions. On this basis audits may be of two
broad categories i.e., audit required under law and voluntary audits.
Audit required under law
Organisations which require audit under law are the following -

● companies governed by the Companies Act;
● banking companies;
● other statutory bodies required by their regulators or by specific Act.
Voluntary Audit
In the voluntary category are the audits of the accounts of
● proprietary entities,
● partnership firms,
● Hindu undivided families, etc.


● In respect of such accounts, there is no basic legal requirement of audit.

● Many of such enterprises as a matter of internal rules require audit.
● Some may be required to get their accounts audited on the directives of Government for various purposes like
sanction of grants, loans, etc.
● But the important motive for getting accounts audited lies in the advantages that follow from an independent
professional audit.
● This is perhaps the reason why large numbers of proprietary and partnership business get their accounts
audited.
Auditing is legally obligatory for all types of business organisation (True or False)
Statement is false - Not obligatory for all, for example proprietorship entities, partnership firm etc.
Types of Opinion
● Clean Opinion
● Modified Opinion
○ Qualified Opinion
○ Adverse
○ Disclaimer of Opinion
Those charged with governance

The person(s) or organisation(s) with responsibility for
● overseeing the strategic direction of the entity and
● obligations related to the of the entity


Management
● The person(s) with executive responsibility for conduct of entity's operation
Pre- Conditions for an audit

In order to establish whether the preconditions for an audit are present, the auditor shall:
● Determine whether the financial reporting framework is acceptable; and
● Obtain the agreement of management that it acknowledges and understands its responsibility:
○ For the preparation of the financial statements in accordance with the applicable financial reporting
framework;
○ For the internal control as management considers necessary; and
○ To provide the auditor with:
■ Access to all information such as records, documentation and other matters;
■ Additional information that the auditor may request from management for the purpose of the
audit; and
■ Unrestricted access to persons within the entity from whom the auditor determines it necessary
to obtain audit evidence.
Internal Control
The Process designed, implemented and maintained by
➔ Those charged with governance
➔ Management
➔ Other personnel
To Provide Reasonable Assurance with regard to
● Reliability of financial reporting
● Effectiveness & Efficiency of operations
● Safeguarding of assets
● Compliance with applicable law & regulations
Test Checking
Application of Audit Procedures to less than 100% of the Transaction. It is also known as Sampling.
Judgement
The ability to make considered decisions or come to sensible conclusions.
Judgement from audit point of view

● Necessary for decision making
● Comes from experience
● May differ from person to person
● Can also be formed after consultation


Audit Procedures
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing
➔ Risk assessment procedures; and
➔ Further audit procedures, which comprise:
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures, including tests of details and substantive analytical procedures.
➔ The audit procedures described below may be used as
◆ risk assessment procedures,
◆ tests of controls or
◆ substantive procedures,
◆ Depending on the context in which they are applied by the auditor.
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
7. Enquiry






Professional Skepticism
The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do you agree
with the statement?
As per SA 200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with
Standards on Auditing",
● Professional skepticism is 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.
This includes
● Questioning
○ contradictory audit evidence and जो मला
○ the reliability of documents and जो दखा
○ responses to inquiries and जो कहा,
○ other information obtained from management and those charged with governance. बाक़ बात पीने बाद
● (Critical assessment of audit evidence) Checking whether audit evidence obtained by auditor is sufficient and
appropriate as per the circumstance.
Why Professional Skepticism?

(Risk को कम करना चाहते है !) कौन से Risk को - Overlooking and Over Generalising क़े Risk को
● Maintaining professional skepticism throughout the audit is necessary to reduce the risks of
○ overlooking unusual circumstances,
○ Over generalising when drawing conclusions.
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism
throughout the audit,
● considering the potential for management override of controls and (कह ं मैन मट override तो नह ं कर रह कं ो ज़
को)
● recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting
fraud. (एरर तो पकड़ सकते है ले कन ॉड नह ं)
● assessing the risks of material misstatement due to fraud and in designing procedures to detect such
misstatement. (ROMM को असेस करने के लए और MST को डटे ट करने के लए )
Therefore, we do agree with the statement.


Inherent Limitations of Audit - SA 200

Limitations of Audit: As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing", the objectives of an audit, is to enable an auditor to express an opinion on
such financial statements.
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 process of auditing, however, is such that it suffers from certain limitations, i.e. the limitation which cannot be
overcome irrespective of the nature and extent of audit procedures. The limitations of an audit arise from:
1. The Nature of Financial Reporting
● The preparation of financial statements involves judgment by management.

● In addition, many financial statement items involve subjective decisions or assessments or a degree of
uncertainty.
● Consequently, some financial statement items are subject to an inherent level of variability which cannot
be eliminated by the application of additional auditing procedures.
2. The Nature of Audit Procedures
● There are practical and legal limitations on the auditor's ability to obtain audit evidence. For example:
○ There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor.
○ Fraud may involve sophisticated and carefully organized schemes designed to conceal it. The
auditor is neither trained as nor expected to be an expert in the authentication of documents.
○ An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is not
given specific legal powers, such as the power of search, which may be necessary for such an
investigation.
3. Timeliness of Financial Reporting and the Balance between Benefit and

Cost
● The relevance of information, and thereby its value, tends to diminish overtime,
● and there is a balance to be struck between the reliability of information and its cost.
● There is an expectation by users of financial statements that the auditor will form an opinion on the
financial statements within a reasonable period of time and at a reasonable cost


4. Other Matters that Affect the Limitations of an Audit
● In the case of certain assertions or subject matters, the potential effects of the limitations on the
auditor's ability to detect material misstatements are particularly significant. Such assertions or subject
matters include:
○ Fraud, particularly fraud involving senior management or collusion.
○ The existence and completeness of related party relationships and transactions.
○ The occurrence of non-compliance with laws and regulations.
○ Future events or conditions that may cause an entity to cease to continue as a going concern.
Because of the limitations of an audit, there is an unavoidable risk that some material misstatements of the financial
statements may not be detected, even though the audit is properly planned and performed in accordance with SAs.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less-than
persuasive audit evidence.


Auditor’s responsibility for failure to detect fraud and errors

As per SA 240 the responsibility for the prevention and detection of fraud and error rests with the management through
the implementation of an adequate system of internal control. Such a system reduces but does not eliminate the
possibility of fraud and error.
In other words primarily auditor is not responsible for prevention, detection and correction of misstatements.
Moreover because of Inherent limitations of auditing it is impossible for auditor to detect all misstatements whether
due to fraud or error.
However, if there are doubtful situation that some material misstatement exist, auditor should extend his procedure to
confirm/dispel the doubt.
The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not
by itself indicate a failure to conduct an audit in accordance with SAs.
“ If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may not
come to light,
● It will not be construed as failure of audit,
● provided the auditor was not negligent in carrying out his normal work”
Auditor WILL NOT BE considered as negligent

● If he has carried his work in accordance
○ with SA’s and
○ applicable law and regulations.
Whether the auditor has performed an audit in accordance with SAs and law and regulations is determined by the
● audit procedures performed in the circumstances, the
● sufficiency and appropriateness of the audit evidence obtained as a result thereof
● and the suitability of the auditor’s report based on an evaluation of that evidence in light of the overall
objectives of the auditor.
All this can be checked by AUDIT DOCUMENTATION.



Assertion
Example on Assertion
Plant and Machinery (at cost) ₹ 4,00,000
Less: Depreciation till the end of ₹ 1,40,000

previous year
Depreciation for the year ₹ 26,000 ₹ 1,66,000
₹ 2,34,000
The assertions are as follows:

● the firm owns the plant and machinery;
● the historical cost of plant and machinery is ₹ 4 lacs;
● the plant and machinery physically exists;
● the asset is being utilised in the business of the company productively;
● total charge of depreciation on this asset is ₹ 1,66,000 to date on which ₹ 26,000 relates to the year in respect of
which the accounts are drawn up; and
● the amount of depreciation has been calculated on recognised basis and the calculation is correct.
● The above assertions are implicit
Explicit assertions are made when otherwise the reader will be left with an incomplete picture; it may even be
misleading.
● Secured Loans ₹ 4,00,000
● The description does not give us a complete picture. We do not know:
○ the name of the lender, if it is relevant;
○ the nature of security provided; and
○ the rate at which interest in payable.
Negative assertions are also encountered in the financial statements and the same may be expressed or implied.
For example, if it is stated that there is no contingent liability it would be an expressed negative assertion;
On the other hand, if in the balance sheet there is no item as “building”, it would be an implied negative assertion that
the entity did not own any building on the balance sheet date


Aspects to be covered in Audit

The principal aspect to be covered in an audit concerning final statements of account are the following:
1. An examination of the system of accounting and internal control to ascertain whether it is appropriate for the
business and helps in properly recording all transactions.
2. Reviewing the SYSTEM and procedures.
3. Checking of the ARITHMETICAL ACCURACY of the books of accounts.
4. Verification of the authenticity and validity of transactions in the books of accounts
5. Ascertaining that a proper distinction has been made between items of capital and of revenue nature
6. Comparison of the balance sheet and profit and loss account or other statements with the underlying record.
7. Verification of the title, existence and value of the assets appearing in the balance sheet.
8. Verification of the liabilities stated in the balance sheet.
9. Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
10. Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
11. Reporting to the appropriate person/body.


What are the advantages of an independent audit?
Advantages of an Independent Audit

The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to
understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of considerable
value even to those enterprises and organisations where audit is not compulsory, these advantages are given below
1. It safeguards the financial interest of persons who are not associated with the management of the entity,
whether they are partners or shareholders.
2. It acts as a moral check on the employees from committing defalcations or embezzlement.
3. Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining the
purchase consideration for a business.
4. These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of damage
suffered by property, by fire or some other calamity.
5. An audit can also help in the detection of wastages and losses to show the different ways by which these might
be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control
measures.
6. Audit ascertains whether the necessary books of account and allied records have been properly kept and helps
the client in making good deficiencies or inadequacies in this respect.
7. As an appraisal function, audit reviews the existence and operations of various controls in the organisations and
reports weaknesses, inadequacies, etc., in them.
8. Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
9. Government may require audited and certified statements before it gives assistance or issues a license for a
particular trade.



SA 210 - Agreeing the terms of Audit Engagement


Agreement on Audit Engagement Terms
It is important, both for the auditor and client, that each party should be clear about the nature of the engagement. It
must be reduced to writing and should exactly specify the scope of the work.
The audit engagement letter is sent by the auditor to his client.
According to SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree the terms of the audit
engagement with management or those charged with governance, as appropriate.
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:


Recurring Audits
Question
It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to send new
letter". Explain those situations where new engagement letter is to be sent. (M.imp)
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be
revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, in
the following situations it is appropriate to revise the terms of the audit engagement or to remind the entity of existing
terms


Limitation on Scope Prior to Audit Engagement Acceptance
● If
○ management or those charged with governance
○ impose a limitation on the scope of the auditor’s work
○ in the terms of a proposed audit engagement
○ such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the
financial statements,
■ the auditor
■ shall not accept such a limited engagement as an audit engagement,
■ unless required by law or regulation to do so.
Acceptance of a change in engagement
If, prior to completing the audit engagement,

● the auditor is requested to change the audit engagement
● to an engagement that conveys a lower level of assurance,
● the auditor shall determine whether there is
● Reasonable justification for doing so.
If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms
of the engagement in an engagement letter or other suitable form of written agreement.
The auditor should not agree to a change of engagement where there is no reasonable justification for doing so.
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:
➔ 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 those charged with governance, owners or regulators.
A request from the client for the auditor to change the engagement may result from-
● a change in circumstances affecting the need for the service,
● a misunderstanding as to the nature of an audit or related service originally requested.
● a restriction on the scope of the engagement, whether imposed by management or caused by circumstances.


Relationship of Auditing with other disciplines
Auditing and Accounting
Auditing and Law


Overview of Elements of System of Quality Control


Misc Topics Related To Standards
What are Standards on Auditing (SAs)?
SAs are Auditing Standards, which prescribe the way the auditing should be conducted. They can also be termed as
performance benchmarks for the auditors
Procedure for issuing SAs
Generally following procedure is followed for issuing the SAs

● Auditing and Assurance Standard Board (AASB) of the Institute of Chartered Accountants of India (ICAI)
determines the specific area in which the SAs need to be formulated.
● In preparation of SAs—
○ AASB is assisted by study groups constituted to consider specific subjects.
○ An exposure draft of the proposed SA is finalized by the AASB' of ICAI on the basis of work of the study
group.
○ The exposure draft of the proposed SA is published for comments by the members of the Institute (ICAI).
○ AASB finalizes the draft of the proposed SA after considering the comments received and submit to the
Council of the Institute (ICAI).
○ The Council considers the draft of the proposed SA and if necessary, modifies the same in consultation
with AASB. The SA is then issued under the authority of the Council of the Institute of Chartered
Accountants of India.
○ AASB of ICAI tries to integrate/harmonize the SAs to the extent possible in the light of the condition and
practices prevailing in India with ISAs (International Standards For Auditing) issued by IAASB
(International Auditing and Assurance Standards Board) of IFAC.
ICAI re-classified the existing auditing and assurance standards in 2008. The objective of re-classification is to converge
our existing auditing and assurance standards with International Standard on Auditing (ISA) issued by the International
Federation of Accountants (IFAC).
Question Standards collectively known as the Engagements Standards

issued by AASB under the authority of the council of ICAI - Discuss
The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council are
collectively known as the Engagement Standards:
● Standards on Auditing (SAs), to be applied in the audit of historical financial information.
● Standards on Review Engagement (SREs), to be applied in the review of historical financial information.
● Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with
subject-matters other than historical financial information.


● Standards on Related Services (SRSs), to be applied to engagements involving application of agreed upon
procedures to information, compilation engagements, and other related services engagements as may be
specified by the ICAI.
● Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to be applied for
all services covered by the Engagement Standards as described above.
Role of International Auditing & Assurance Standard Board (IAASB)

The IAASB functions as an independent standard-setting body under the auspices of IFAC . The objective of the IAASB is
to serve the public interest by setting high quality auditing standards and by facilitating the convergence of
international and national standards, thereby enhancing the quality and uniformity of practice throughout the world
and strengthening public confidence in the global auditing and assurance profession. The IAASB achieves this objective
by:
a) Establishing high quality auditing standards and guidance for financial statement audits that are generally
accepted and recognized by investors, auditors,governments, banking regulators , securities regulators and
other key stakeholders across the world;


b) Establishing high quality standards and guidance for other types of assurance services on both financial and
non-financial matters:
c) Establishing high quality standards and guidance for other related services;
d) Establishing high quality standards for quality control covering the scope of services addressed by the IAASB;
and
e) Publishing other pronouncements on auditing and assurance matters, thereby advancing public understanding
of the roles and responsibility of professional auditors and assurance service providers.
Objectives and Functions of AASB

❖ To review the existing and emerging auditing practices worldwide and identify areas in which standards on
Quality Control, Engagement Standards and Statements on Auditing need to be developed .
❖ To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these
may be issued under the authority of the Council of the Institute.
❖ To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions
and to undertake their revisions, if necessary.
❖ To develop Guidance Notes on issues arising out of any Standard , auditing issued pertaining to any specific
industry or on generic issues, so that those may be issued under the authority of the Council of the Institute.
❖ To review the existing Guidance Notes to assess their relevance in the changed circumstances and the
undertake their revision , if necessary.
❖ To formulate General Clarifications , where necessary , on issues arising from Standards.
❖ To formulate and issue Technical Guides , practice Manuals Studies and other papers under its own authority for
guidance of professional accountants in the case felt appropriate by the Board.
Renumbering of Standards
Standard on Quality Control (SQC) 01-99
Standard on Auditing (SA) 100-999
Standard on Review Engagement (SRE) 2000-2699
Standard on Assurance Engagement (SAE) 3000-3699
Related Services (SRS) 4000-4699
Classification of SAs
Introductory matters 100-199
General Principles and Responsibilities 200-299
Risk Assessment and Response to Assessed Risk 300-499
Audit Evidence 500-599
Using work of Others 600-699


Audit conclusions and Reporting 700-799
Specialised Areas 800-899
List of Standards
General Principles and Responsibilities

1 SA200 (Revised) Overall objectives of the Independent Auditor and the conduct of the Audit in
Accordance with Standard on Auditing
2 SA210 (Revised) Agreeing the Terms of Audit Engagements
3 SA 220 (Revised) Quality Control for an Audit of financial statements
4 SA 230 (Revised) Audit Documentation
5 SA 240 (Revised) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements.
6 SA250 (Revised) Consideration of Laws and Regulations in an Audit of Financial Statements
7 SA 260 (Revised) Communication with those Charged with Governance
8 SA265 Communicating Deficiencies in Internal control to those Charged with

Governance and Management
9 SA299 (Revised) Joint Audit of financial statements
Risk Assessment and Responses to Assessed Risks

10 SA300 Planning an Audit of Financial Statements
11 SA315 Identifying and Assessing the Risk of material Misstatements through

understating the Entity and Its Environment
12 SA 320 Materiality in Planning and Performing an Audit
13 SA330 Response to Assessed Risks
14 SA 402 Audit consideration Relating to an Entity using a Service Organisation
15 SA450 Evaluation of Misstatements Identified during the Audit
Audit Evidence
16 SA500 (Revised) Audit Evidence
17 SA 501 (Revised) Audit Evidence-Specific Consideration for selected Items


18 SA 505 (Revised) External Confirmations
19 SA 510 (Revised) Initial Audit Engagement - Opening balances
20 SA 520 (Revised) Analytical Procedures
21 SA 530 (Revised) Audit Sampling
22 SA 540 (Revised) Auditing Accounting Estimates, Including fair value Accounting Estimates and
Related Disclosures
23 SA 550 (Revised) Related Parties
24 SA 560 (Revised) Subsequent Events
25 SA 570 (Revised) Going Concern
26 SA 580 (Revised) Written Representation
Using Work of Others

27 SA 600 Using the work of Other Auditors
28 SA 610 (Revised) Using the Work of Internal Auditors
29 SA 620 (Revised) Using the Work of an Auditor’s Expert
Audit Conclusions and Reporting

30 SA700 (Revised) Forming an Opinion and Reporting on Financial Statements
31 SA 701 Communicating key Audit Matters in the independent Auditor’s Report
32 SA 705 (Revised) Modifications to the opinion in the independent Auditor’s Report
33 SA 706 (Revised) Emphasis of Matter Paragraphs and other Matter Paragraphs in the
Independent Auditor’s Report
34 SA 710 (Revised) Comparative Information -Corresponding Figures and Comparative Financial

Statements
35 SA 720 (Revised) The Auditor’s responsibilities relating to Other Information


Statements and Guidance Notes
Statements
The Institute has, from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a number of matters. The ‘Statements’
have been issued with a view to securing compliance by members on matters which, in the opinion of the Council, are
critical for the proper discharge of their functions. ‘Statements’ therefore are mandatory.
Guidance Notes
Primarily designed to provide guidance to members on matters which may arise in the course of their professional
work and on which they may rely in the course of their professional work and on which they may desire assistance in
resolving issues which may pose difficulty.
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.
There are however a few guidance notes in case of which the Council has specifically stated that they should be
considered as mandatory on members while discharging their attest function.



Elements of a System of Quality Control
Standard on Quality Control (SQC) 1 & SA 220

The purpose of this Standard on Quality Control (SQC) is
● to establish standards and
● provide guidance
regarding a firm’s responsibilities for its system of quality control
● for audits and
● reviews of historical financial information, and
● for other assurance and
● related services engagements.
Additional standards and guidance on the responsibilities of firm personnel regarding quality control procedures for
specific types of engagements are set out in other pronouncements of the Auditing and Assurance Standards Board
(AASB) issued under the authority of the Council. For example, Standard on Auditing (SA) 220, “Quality Control for an
Audit of Financial Statements”, establishes standards and provides guidance on quality control procedures for audits of
historical financial information.
The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and
its personnel comply with professional standards and regulatory and legal requirements, and that reports issued by the
firm or engagement partner(s) are appropriate in the circumstances.


A system of quality control consists of policies designed to achieve the objectives and the procedures necessary to
implement and monitor compliance with those policies.
Some Definitions
Engagement partner
the partner or other person in the firm who is a member of the Institute of Chartered Accountants of India and is in full
time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of
the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.
The firm’s system of quality control should include policies and procedures addressing each of the following elements:
(a) Leadership responsibilities for quality within the firm.
(b) Ethical requirements.
(c) Acceptance and continuance of client relationships and specific engagements.
(d) Human resources.
(e) Engagement performance.
(f) Monitoring.
Leadership Responsibilities for Quality on Audits


Ethical Requirements Relating to an Audit of Financial Statements
Ethical requirements are provided in the code of ethics for professional accountant issue by The International Ethics
Standards Board for Accountants (IESBA)
The Code establishes the following as the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.
Standard on Quality Control (SQC) 1 sets out the responsibilities of the firm for establishing policies and procedures
regarding compliance with relevant ethical requirements.
SA 220 sets out the engagement partner’s responsibilities with respect to relevant ethical requirements. These include
evaluating whether members of the engagement team have complied with relevant ethical requirements.
Independence
Independence of the auditor has not only to exist in fact, but also appear to so exist to all reasonable persons.
It is not possible to define “independence” precisely. Rules of professional conduct dealing with independence are
framed primarily with a certain objective. The rules themselves cannot create or ensure the existence of independence.
Independence is a condition of mind as well as personal character. It should not be confused with the superficial and
visible standards of independence which are sometimes imposed by law.
“Independence is: (a) Independence of mind – the state of mind that permits the provision of an opinion without being
affected by influences allowing an individual to act with integrity, and exercise objectivity and professional skepticism;
and
(b) Independence in appearance – the avoidance of facts and circumstances that are so significant that a third party
would reasonably conclude an auditor’s integrity, objectivity or professional skepticism had been compromised.”


Safeguards to Independence
The following are the guiding principles in this regard: -
1. For the public to have confidence in the quality of audit, it is essential that auditors should always be and
appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional skepticism, which
necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats to his
independence.
4. When such threats exist, the auditor should either desist from the task or put in place safeguards that eliminate
them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept the work


(Already Covered)
Acceptance and Continuance of Client Relationships and Audit Engagements
SQC 1 requires the firm to obtain information before accepting an engagement. Information such as the following assists
the engagement partner in determining whether the decisions regarding the acceptance and continuance of audit
engagements are appropriate
1. The integrity of the principal owners, key management and those charged with governance of the entity.
2. Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
3. Whether the firm and the engagement team can comply with relevant ethical requirements; and
4. Significant matters that have arisen during the current or previous audit engagement, and their implications for
continuing the relationship.
SA 220 - If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall communicate that information
promptly to the firm, so that the firm and the engagement partner can take the necessary action.
Human Resource (SQC -1 Text)

The firm should establish policies and procedures designed to provide it with reasonable assurance that it has sufficient
personnel with the capabilities, competence, and commitment to ethical principles necessary to perform its
engagements in accordance with professional standards and regulatory and legal requirements, and to enable the firm
or engagement partners to issue reports that are appropriate in the circumstances
Such policies and procedures address the following personnel issues:

(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence;
(e) Career development;
(f) Promotion;
(g) Compensation; and
(h) Estimation of personnel needs.
Addressing these issues enables the firm to ascertain the number and characteristics of the individuals required for the
firm’s engagements. The firm’s recruitment processes include procedures that help the firm select individuals of
integrity as well as the capacity to develop the capabilities and competence necessary to perform the firm’s work.


Engagement Performance
The firm should establish policies and procedures designed to provide it with reasonable assurance that engagements
are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or
the engagement partner issues reports that are appropriate in the circumstances.
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement performance.
This is often accomplished through written or electronic manuals, software tools or other forms of standardized
documentation, and industry or subject matter- specific guidance materials. Matters addressed include the following
● How engagement teams are briefed on the engagement to obtain an understanding of the objectives of their
work.
● Processes for complying with applicable engagement standards.
● Processes of engagement supervision, staff training and coaching.
● Methods of reviewing the work performed, the significant judgments made and the form of report being issued.
● Appropriate documentation of the work performed and of the timing and extent of the review.
● Processes to keep all policies and procedures current.
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 quality control are relevant, adequate, operating effectively and complied with
in practice.
The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of:
● Adherence to professional standards and regulatory and legal requirements;
● Whether the quality control system has been appropriately designed and effectively implemented;
● Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that
are issued by the firm or engagement partners are appropriate in the circumstances.
● Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the quality
control policies and procedures.


Key Terms -
SA 220
Engagement Quality Control Review (EQCR)

Process to evaluate judgment & conclusion of ET (Engagement Team) before report is issued.
EQC Reviewer (EQCRr)

● Partner or
● Other person
● External person
● Or a Firm
● To conduct review
Responsibilities of EP
● Leadership REQ Leadership responsibilities for quality on Audits- is of EP (Engagement Partner)
● Ethical REQ
○ EP shall remain alert for non-compliance of ethical requirement by ET member
○ In case of non-compliance determine appropriate action after consultation
● Independence
○ EP form conclusion with independent requirement
○ Identify circumstances of threat to independence
○ Take appropriate action to eliminate such threats
● Acceptance & continuance of client engagement & relationship
○ All procedure for acceptance followed
○ Got information that would have caused the firm to decline the AE (Audit Engagement) had that
information have been available earlier
○ Communicate information to firm for prompt action
● Assignment of engagement team
○ Competent or capable team
○ Performance as per professional/ legal requirements
○ Appropriate audit report
● Performance
○ Direction, supervision
○ of audit engagement in compliance with professional standards and regulatory & legal requirements, a
○ Appropriateness of audit report
● Review
○ In accordance with the firm’s review policy
○ Review on or before the date of audit report
○ Audit Documentation & Discussion with the engagement team.
○ Be Satisfied that Sufficient and appropriate evidence has been obtained to support
○ conclusions on which audit report will be based


Consultation-
● ET should take proper consultation on difficult matters
● It may be within the team or outside team
● EP shall ensure- consultation are agreed with person consulted
● Check conclusion have been implemented or not
EQCR
● EP shall ensure EQCRr has been appointed
● Discuss matters with EQCRr
● Audit Report shall be dated after EQCR is complete.
● EQCRr shall evaluate the following-
○ Significant matters discussed with EP
○ FS + Proposed AR
○ Selected Audit doc
○ Conclusion for AR
○ Independence
○ Consultation
Difference of opinion
● ET- Parties consulted
● EP- EQCR
● Follow firm policy for dealing and resolving matter


Question
Write a short note on“Quality control for audit work at firm level”.

Quality Control for Audit Work at Firm Level: SA 220 on Quality Control for an Audit of Financial Statements deals with the
specific responsibilities of the auditor regarding quality control procedures for an audit of financial statements. Quality control
systems, policies and procedures are the responsibility of the audit firm. Within the context of the firm’s system of quality
control, engagement teams have a responsibility to implement quality control procedures that are applicable to the audit
engagement and provide the firm with relevant information to enable the functioning of that part of the firm’s system of quality
control relating to independence.

The requirements are-
1. Leadership Responsibilities for Quality on Audits: The engagement partner shall take responsibility for the overall
quality on each audit engagement to which that partner is assigned.

2. Relevant Ethical Requirements: Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team. The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement.

3. Acceptance and Continuance of Client Relationships and Audit Engagements: The engagement partner shall be
satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit
engagements have been followed, and shall determine that conclusions reached in this regard are appropriate

4. Assignment of Engagement Teams: The engagement partner shall be satisfied that the engagement team, and any
auditor’s experts who are not part of the engagement team, collectively have the appropriate competence and
capabilities to perform the audit engagement in accordance with professional standards and regulatory and legal
requirements and enable an auditor’s report that is appropriate in the circumstances to be issued.

5. Engagement Performance: The engagement partner shall take responsibility for the direction, supervision and
performance of the audit engagement. He shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures and shall take responsibility for the engagement team undertaking appropriate
consultation on difficult or contentious matters. For audits of financial statements of listed entities, and those other
audit engagements, if any, for which the firm has determined that an engagement quality control review is required, the
engagement partner shall determine that an engagement quality control reviewer has been appointed. Further, if
differences of opinion arise within the engagement team, with those consulted or, where applicable, between the
engagement partner and the engagement quality control reviewer, the engagement team shall follow the firm’s
policies and procedures for dealing with and resolving differences of opinion.

6. Monitoring: The engagement partner shall consider the results of the firm’s monitoring process as evidenced in the
latest information circulated by the firm and, if applicable, other network firms and whether deficiencies noted in that
information may affect the audit engagement.

These notes are incomplete without our videos. Study from these notes at your own risk. We keep on updating our books, notes and videos. You should
always study from updated notes with our videos. Many concepts are there which are missing in these notes, some are obsolete. We have discussed
everything in our video classes. www.neerajaroraclasses.com Amendments and updates will taught in classes and videos. Extra notes and charts will
also be given.

Chapter 2- Audit Strategy, Audit Planning

& Audit programme
SA 300 “Planning an Audit of Financial Statements”
Scope
This Standard on Auditing (SA) deals with the auditor’s responsibility to plan an audit of financial statements.
Objective
The objective of the auditor is to plan the audit so that it will be performed in an effective manner.
Involvement of Key Engagement Team Members

The engagement partner and other key members of the engagement team shall be involved in planning the audit,
including planning and participating in the discussion among engagement team members.
Audit Plan to Conduct an Effective Audit
Plans should be made to cover, among other things:

(a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit procedures to be performed; and
(d) coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
Benefits of Planning in the Audit of Financial Statements

Planning an audit involves
● establishing the overall audit strategy for the engagement and
● developing an audit plan.
Adequate planning benefits the audit of financial statements in several ways, including the following:

also be given.

DEVELOPMENT OF AUDIT PLAN
Description of Audit Plan
As per SA 300 “Planning an Audit of Financial Statement” the audit plan shall be include a description of:
❖ The nature, timing and extent of planned risk assessment procedures, as determined under SA 315.
❖ The nature , timing and extent of planned further audit procedures at the assertion level, as determined
under SA 330.
❖ Other planned audit procedures that are required to be carried out so that the engagement complies with
SAs.
● Planning of the auditor’s risk assessment procedures occurs early in the audit process.
● However, planning the nature, timing and extent of specific further audit procedures depends on the
outcome of those risk assessment procedures.
Knowledge of the Client’s Business

It is one of the important principles in developing an overall audit plan. In fact without adequate knowledge of
client’s business, a proper audit is not possible.
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and
Its Environment”, the auditor shall obtain an understanding of the following:

also be given.

1. Relevant industry, regulatory and other external factors including applicable financial reporting framework.
2. The nature of the entity, including:
a. Its operations;
b. Its ownership and governance structures;
c. The types of investments that the entity is making and plan to make: &
d. The way that the entity is structured and how it is financed.
3. The entity’s selection and application of accounting policies, including the reasons for changes thereto.
4. The entity’s objectives and strategies, and those related Business risks that may result in risks of material
Misstatement.
5. The measurement and review of the entity’s financial performance.
Changes to planning decisions During the Audit

● The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit.
○ As a result of unexpected events,
○ changes in conditions, or
○ the audit evidence obtained from the results of audit procedures,
● the auditor may need to modify the audit plan & planned nature, timing and extent of further audit
procedures, based on the revised consideration of assessed risks.
● This may be the case when information comes to the auditor’s attention that differs significantly from the
information available when the auditor planned the audit procedures.
● For example, audit evidence obtained through the performance of substantive procedures may contradict
the audit evidence obtained through tests of controls.
Planning is not a discrete phase of an audit, but rather a continual and

iterative process
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly
after (or in connection with) the completion of the previous audit and continues until the completion of the current
audit engagement.
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
The nature and extent of planning activities will vary according to the size and complexity of the entity, the key
engagement team members’ previous experience with the entity, and changes in circumstances that occur during
the audit engagement.
Planning includes the need to consider matters such as

● The analytical procedures to be applied as risk assessment procedures.
● Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how
the entity is complying with that framework.
● The determination of materiality.
● The involvement of experts.

also be given.

● The performance of other risk assessment procedures.
Direction, Supervision and Review

The auditor shall
● plan the nature, timing and extent of
● direction and supervision of engagement team members and
● the review of their work.
The nature, timing and extent of the direction and supervision of engagement team members and review of their
work vary depending on many factors, including:
● The size and complexity of the entity.
● The area of the audit.
● The assessed risks of material misstatement
● The capabilities and competence of the individual team members performing the audit work.
DOCUMENTATION OF AUDIT PLAN

The auditor shall document:
a. the overall audit strategy;
b. the audit plan; and
c. any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and
the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions considered necessary to properly
plan the audit and to communicate significant matters to the engagement team.
Audit Strategy
Audit strategy is concerned with
➔ designing optimised audit approaches
➔ that seek to achieve the necessary audit assurance
➔ at the lowest cost
➔ within the constraints of the information available.

also be given.

Relationship between the overall audit strategy and the audit plan
● Change in audit strategy will lead to change in audit plan and vice versa
● Audit plan in prepared after audit strategy and is more detailed. Audit strategy gives less detail but it forms
the basis of the planning
● The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and
that guides the development of the audit plan
● Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain
sufficient appropriate audit evidence.

also be given.

also be given.

Audit Programme
An audit program is
● detailed plan of work,
● prepared by the auditor,
● for carrying out an audit.
Basis
It provides a basis for the supervision and control of the audit work.
Consist
It consists of set of techniques and procedures; which auditor plans to apply in the given audit for forming an
opinion about the financial statements.
Framed
It is framed keeping in view the nature, size and composition of the business, assessment of internal control and
given scope of work.
Altered
Audit program may be altered while carrying out the work according to circumstances and situations

Review
There should be a periodic review of audit program to check its efficiency and effectiveness
Points to be considered in constructing an Audit Programme (ICAI Study

Material - www.icai.org)
1. Stay within the scope and limitation of the assignment.

2. Determine the evidence reasonably available and identify the best evidence for deriving the necessary
satisfaction.
3. Apply only those steps and procedures which are relevant
4. Consider all possibilities of misstatements whether due to error or fraud.
5. Co-ordinate the procedures to be applied to related items.
Developing the audit programme
1. Written Audit Program

2. Audit Objective
3. Instruction to Assistants
4. Reliance on IC
5. Timing of Audit Procedures
6. Planning of Audit

also be given.

also be given.

Advantages of Audit Programme

also be given.

Disadvantage
Some disadvantages are also there in the use of audit programmes but most of these can be removed by following
some concrete steps.
1. Mechanical Approach – The work may become mechanical and particular parts may be carried out without
understanding the whole concept.
2. Inflexibility - The program often becomes rigid & inflexible. There may be a change in nature of business or
the way business is carried out and we need to accordingly change the audit program.Assistants are not able
to change it as per requirements of specific case.
3. Lack of initiative - Hard & fast program hurts the initiative & judgmental skills of hard working assistants.
4. Shelter for inefficient assistants - They think that it contains exhaustive matters. They don't even think of
any unusual matter, which is not listed in program even if its presence can change audit approach. They
defend deficiencies in their work on the ground that no instruction in the matter is contained therein.

also be given.

SA 320 – Materiality in planning & performing an audit.

Example on materiality
● In a company having turnover of Rs. 50 Lakhs P.A. and a profit of Rs. 2 Lakhs
P.A. The damages paid of Rs. 1 Lakh may be material and therefore may require
separate disclosure because of its relative size. However, the same
information may not be material for a company having turnover of Rs. 100
Crore P.A. and profit of Rs. 15 Crore P.A.
● Violation of Law even of a very small amount will be considered as material.
● The auditor’s determination of materiality is a matter of professional
judgement and is affected by auditor’s perception of financial information
needs of the users of the financial statements.
Concept of Materiality

also be given.

The concept of materiality is applied by the auditor in

● planning and
● performing the audit, and
● in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any,
● on the financial statements and in forming the opinion in the auditor’s report.
In planning the audit, the auditor makes judgments about the size of misstatements
that will be considered material. These judgments provide a basis for:
● Determining the nature, timing and extent of risk assessment procedures;
● Identifying and assessing the risks of material misstatement; and
● Determining the nature, timing and extent of further audit procedures.
Other Points
● The materiality determined when planning the audit does not necessarily
establish an amount below which uncorrected misstatements, individually or in
aggregate, will always be evaluated as immaterial.
● The circumstances related to and nature of some misstatements may cause the
auditor to evaluate them as material even if they are below materiality. (For
example, Rs.1,000 incorrectly excluded from income may be material even
though it's a small percentage of overall income. Reason
_____________________________)

also be given.

● It is not practicable to design audit procedures to detect misstatements that
could be material solely because of their nature.
Relationship between materiality and audit risk

The auditor's' assessment of materiality, related to specific account balances and classes of
transactions, helps them decide such questions as what items to examine and whether to use sampling
and analytical procedures.
This enables auditors to select audit procedures that, in combination, can be expected to reduce audit risk to an
acceptably low level.
It also enables auditors to adopt an efficient and effective audit approach.
Auditor is required to obtain more reliable evidence in support of material items.

● Materiality depends on the size and the nature of the items judged in the particular set of circumstances..
● The audit should be planned so that audit risk is kept at an acceptably low level.
● There is an inverse relationship between Materiality and the degree of audit risk.
● Accordingly, if we have high risk in an organisation we should keep our materiality level low.
● Higher the materiality levels the lower the audit risk and vice-versa.
● Audit Risk has three components – Inherent risk (IR), Control Risk (CR) & Detection Risk.
● If a company is having low IR & CR then the chances are material misstatement are also low.
● Auditor will keep his materiality level high. So if Risk is less Materiality levels will be high.
● If Risk is high auditor will keep his materiality level low so that he can detect greater number of
misstatements.
Factors to be considered for determining materiality

1. Materiality of an item may be determined individually or in aggregate.
2. The materiality depends on the regulatory or legal considerations.
3. It has qualitative dimensions as well
4. Even INSIGNIFICANT items in terms of quality may be material in special circumstances.
5. Sometimes the materiality of an item in terms of quantity is described in law itself, For example, Schedule III
requires disclosure of items of expenditures which are in excess of 1 percent of the revenue from operations
or Rs. 1,00,000 whichever is higher.
Performance Materiality
● For purposes of the SAs,
● Performance materiality means
● the amount or amounts set by the auditor
● at less than materiality
● for the financial statements as a whole
● to reduce to an appropriately low level
● the probability
● that the aggregate of misstatements exceed materiality for the financial statements as a whole.

also be given.

● If, there is one or more particular item
● for which misstatements of lesser amounts than the materiality for the financial statements as a whole could
reasonably be expected
● to influence the economic decisions of users taken on the basis of the financial statements,
● the auditor shall also determine the materiality level or levels to be applied to those particular item.
● Performance materiality is also known as Tolerable misstatements

● A percentage based on risk at the financial statement level is multiplied by planning materiality to determine
tolerable misstatement, or performance materiality,
Revision as the Audit Progresses

Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular
classes of transactions, account balances or disclosures) may need to be revised as a result of a
● change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of
the entity’s business),
● new information, or
● a change in the auditor’s understanding of the entity and its operations as a result of performing further
audit procedures.
For example, if during the audit it appears that actual financial results are likely to be substantially different from
the anticipated period end financial results that were used initially to determine materiality for the financial
statements as a whole, the auditor revises that materiality.
Benchmarking
Meaning: Benchmarking is one recognized method through which an Auditor determines the materiality level.
Under this method, a percentage is often applied to a chosen benchmark, as a starting point in determining
materiality for the Financial Statements as a whole.
Factors: Factors that may affect the identification of an appropriate benchmark include –
a. Elements of the Financial Statement (e.g., Assets, Liabilities, Equity, Revenue, Expenses)
b. Whether there are items on which the attention of the users of the particulars Entity’s Financial Statement
tends to be focused (e.g., profit, revenue or net assets)
c. Nature of the Entity, where the Entity is at in its life cycle, and the industry and economic environment in
which the Entity operates
d. Ownership Structure and Financial Pattern (e.g., if an entity is financed more by Debt rather than Equity,
users may put more emphasis on Assets, and claims on them, than on the Entity’s Earning) and
e. The relative volatility of the benchmark.
Some examples of suitable benchmark depending upon various circumstances
Selection of Appropriate Benchmarks: Examples of benchmark that may be appropriate, include categories of
reported income such as PBT, Total Revenue, Gross Profit and Total Expenses, Total Equity or Net Asset Value.

also be given.

a. Profit Before Tax from continuing operations is often used for profit-oriented entities. In this regard if Profit
Before Tax from continuing operations is volatile, other benchmark may be more appropriate.
b. In an audit of the entities doing public utility programs/projects, Total Cost or Net Cost (Expenses less
Revenues) may be appropriate benchmarks for that particular program/project activity.
c. Where an entity has custody of the assets, assets may be an appropriate benchmark.

also be given.

Documenting the materiality

The audit documentation shall include the following amounts and the factors considered in their determination:
● Materiality for the financial statements as a whole;
● If applicable, the materiality level or levels for particular classes of transactions, account balances or
disclosures ;
● Performance materiality ; and
● Any revision in above as the audit progressed

study from updated notes with our videos. Many concepts are there which are missing in these notes, some are obsolete. We have discussed everything in our video
classes. www.neerajaroraclasses.com Amendments and updates will taught in classes and videos. Extra notes and charts will also be given.

Audit Documentation and Audit Evidence

SA 230 - Audit Documentation
The standard does not in any way limit the specific documentation requirements of other SA’s. In other words, if
other SAs prescribe more documentation requirements, those documentations are also to be maintained.
Nature and Purposes of Audit Documentation


Auditor’s responsibility for failure to detect fraud and
errors
As per SA 240 the responsibility for the prevention and detection of fraud and error rests with the management
through the implementation of an adequate system of internal control. Such a system reduces but does not eliminate
the possibility of fraud and error.
In other words primarily auditor is not responsible for prevention, detection and correction of misstatements.
Moreover because of Inherent limitations of auditing it is impossible for auditor to detect all misstatements whether
due to fraud or error.
However, if there are doubtful situation that some material misstatement exist, auditor should extend his procedure
to confirm/dispel the doubt.
The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does
not by itself indicate a failure to conduct an audit in accordance with SAs.
come to light,



○ with SA’s and

Form, Content and Extent of Audit Documentation
The form, content and extent of audit documentation depend on factors such as:
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 the audit procedures:
b) The results of the audit procedures performed, and the audit evidence obtained; and
c) Significant matters arising during the audit and the conclusions reached thereon,significant professional
judgements made in reaching those conclusions
Experience Auditor
● An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable
understanding of:
○ Audit processes;
○ SAs and applicable legal and regulatory requirements;
○ The business environment in which the entity operates; and
○ Auditing and financial reporting issues relevant to the entity’s industry.
Ownership of Audit Documentation

Standard on Quality Control (SQC) 1 provides that,
● unless otherwise specified by law or regulation,
● audit documentation is the property of the auditor.
He may at his discretion,

● make portions of, or extracts from, audit documentation available to clients,
● provided such disclosure does not undermine the validity of the work performed, or,
● in the case of assurance engagements, the independence of the auditor or of his personnel.
Examples of Audit Documentation (From ICAI Study Material)
Audit File
Assembly of final audit file

● The auditor’s shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report.


● SQC 1 “Quality Control for Firms that perform Audits and Review of Historical Financial Information, and
other Assurance and related services”, An appropriate time limit within which to complete the assembly of
the final audit file is ordinarily not more than 60 days after the date of the auditor’s report.
● The completion of the assembly of the final audit file after the date of the auditor’s report is an
administrative process that does not involve the performance if new audit procedures or the drawing of new
conclusions.
● Changes may , however be made to the audit documentation during the final assembly process if they are
administrative in nature. Examples of such changes include.
○ Deleting or discarding superseded documentation.
○ Sorting, collating and cross referencing working papers.
○ Signing off on completion checklists relating to the file assembly process.
○ Documenting audit evidence that the auditor has obtained, discussed and agreed with the relevant
members of the engagement team before the date of the auditor’s report.
Retention
SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The
retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor’s
report, or, if later, the date of the group auditor’s report.
Completion Memorandum or Audit Documentation Summary

The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes
known as a completion memorandum) that describes-
● the significant matters identified during the audit and
● how they were addressed.
● Such a summary may facilitate effective and efficient review and inspection of the audit documentation,
particularly for large and complex audits.
● It may also help the auditor to consider whether there is any individual relevant SA objective that the
auditor cannot achieve that would prevent the auditor from achieving the overall objectives of the auditor.
Audit Note Book
Meaning
● An Audit Notebook is a bound notebook


● in which a variety of matters observed during the course of audit are recorded.
● It is notebook containing points or queries that require
○ Clarification,
○ explanation and
○ investigation and
○ The manner in which they are finally settled.
● The audit notebook is maintained by the audit assistants
Content of Audit Note Book

a. Audit queries not cleared immediately, e.g. missing receipts, vouchers, etc.
b. Mistakes or irregularities observed during the course of audit, e.g. failure to comply with requirements of the
Companies Act, or the provisions of the Memorandum or Articles, a change in the basis of valuation of
Finished Stock and WIP or in computation of depreciation, failure to provide adequate depreciation, etc.
c. Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or
organisation.
d. Important information about the Company which is not apparent from the accounts.
e. Special points requiring consideration at the time of verification of final accounts.
f. Important matters for future reference.


Types of audit file

Permanent audit file
Permanent audit file should contain information which is Continuing Interest and relevance to succeeding
audits. The permanent file typically includes the following :
a) Information regarding legal and organisational structure of the entity.
b) Extracts or copies of important legal documents, agreements and minutes relevant to the audit
c) Record of study and evaluation of internal controls related to accounting system
d) Copies of audited of financial statements for previous years.
e) Analysis of significant ratios and trends.
f) Copies of management letters issued by the auditor, if any.
g) Record of communicating with the retiring auditor.
h) Notes regarding significant accounting policies.
i) Significant audit observations of earlier years.
Keywords Hooks
Continuing Interest and Permanent audit file should contain information, which is of continuing interest
relevance and relevance to succeeding audits.
Legal organisational structure
Legal documents
Internal Control
Previous Year
Trends
Management
Retire
Policies
Observation


Current audit file
Current audit file contains information relating to and relevant to the audit of current period. The information,
which may be contained in the current audit file, is given below:
a) Correspondence relating to acceptance of annual re-appointment.
b) Extracts of important matters in the minutes of the board meetings and general meeting as are relevant
to audit
c) Audit plan and audit programme.
d) Analysis of transactions and balances
e) Record of audit procedures and their results.
f) Evidence regarding the supervision and review of the work of assistants.
g) Copies of communication with other auditors (e.g. branch auditor), experts (e.g. lawyers, architects)
and other third parties (e.g. banks; debtors).
h) Copies of letters or notes concerning audit matters communicated to or discussed with client.
i) Management representations
j) Auditor's conclusions regarding significant matters.
k) Copies of financial statements being reported on and the related audit report.


SA 500 Audit Evidence
Information contained in the accounting records & other information

from ICAI Study Material


Factors to determine Sufficiency & Appropriateness
a. Degree of risk of misstatement.

b. The result of audit procedures i.e. any fraud & error detected by auditor.
c. Materiality of item.
d. Type of information available.
e. Experience gained during previous audit.
f. Trend shown by accounting ratios etc.
g. Size and Characteristics of the population
Audit Procedures to Obtain Audit Evidence
Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained by performing
➔ Risk assessment procedures; and
➔ Further audit procedures, which comprise:
◆ Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
◆ Substantive procedures, including tests of details and substantive analytical procedures.
➔ The audit procedures described below may be used as
◆ risk assessment procedures,
◆ tests of controls or
◆ substantive procedures,
● Depending on the context in which they are applied by the auditor.
1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
7. Enquiry
Inspection
● examining records or documents,
○ whether internal or external,
○ in paper form, electronic form, or other media, or
● a physical examination of an asset.
● Inspection of records and documents provides audit evidence
○ of varying degrees of reliability,
○ depending on their nature and source and,
● Example - Documentation related to authorisation
Observation
● Observation consists of witnessing a process or procedure being performed by others.
● For example, the auditor may observe the counting of inventories being performed by client's personnel.


External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written response to the
auditor from a third party ( the confirming party), in paper form, or by electronic or other medium.
Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
Re-performance
Re-performance involves the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
Analytical Procedures
● Analytical procedures consist of evaluations of financial information by a study of relationships among both
financial and non- financial data.
● Analytical Procedures refers to studying significant ratios and trends and investigating unusual fluctuations.
Inquiry


Types of Audit Evidence


Relevance and Reliability


Reliability of Audit Evidence: As per SA 500 "Audit Evidence", the reliability of information to be used as audit
evidence, and therefore of the audit evidence itself, is influenced by its
● source and
● its nature, (Direct, indirect, oral, written or original, photocopies) and
● the circumstances under which it is obtained,
● including the controls over its preparation and maintenance where relevant.
Generalisations about the reliability of various kinds of audit evidence are subject to important exceptions.
Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances
may exist that could affect its reliability.
For example, information obtained from an independent external source may not be reliable if the source is not
knowledgeable, or a management's expert may lack objectivity.
While recognising that exceptions may exist, the following generalisations about the reliability of audit evidence
may be useful
1. The reliability of audit evidence is increased when it is obtained from independent sources outside the
entity.
2. The reliability of audit evidence that is generated internally is increased when the related controls,
including those over its preparation and maintenance, imposed by the entity are effective.
3. Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the
application of a control).
4. Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than
evidence obtained orally (for example, a contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of the matters discussed).
5. Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles, or documents that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and maintenance.
6. Circumstance prevailing in the organisation can have severe impact on the reliability of the audit evidence.


SA 505 - External Confirmation

Question - Explain the process of external confirmation. Give some examples where external confirmation can be
used as audit evidence. (M. Imp)
According to SA 505 on
● External Confirmation,
● it is the process of obtaining and evaluating
● through a direct communication
● from a third party
● information about a particular item affecting assertions made by the management in the financial
statements.
When using external confirmation procedures, the auditor shall maintain control over external control requests,
including:
1. Selecting the items for which confirmations are needed. (कौन से आइटमस के लए )
2. Determining the information to be confirmed or requested; ( या)
3. Selecting the appropriate confirming party; ( कस से )
4. Designing the confirmation requests, including determining that requests are properly addressed and
contain return information for responses to be sent directly to the auditor; and (Properly Designed,
Addressed, return information)
5. Sending the requests, including follow-up requests when applicable, to the confirming party. ( जो और फोलो
उप रखो)
Examples of situations where external confirmations may be used include the following
● Bank balances and other information from bankers.
● Accounts receivable balances.
● Stocks held by third parties.
● Property title deeds held by third parties.
● Investments purchased but delivery not taken.
● Loans from lenders.
● Accounts payable balances.
● Long outstanding share application money.
● Terms of Agreement or transaction with the third parties
Question
The accountant of C Ltd. has requested you, not to send balance confirmations to a particular group of
debtors since the said balances are under dispute and the matter is pending in the Court. Comment.
External Confirmation Requests: 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 dispute with the debtors, etc.
The management, for example, might make such a request on the grounds that due to a dispute with the particular
debtor, the request for confirmation might aggravate the sensitive negotiations between the entity and the debtor.


In such cases, when an auditor agrees to management’s request not to seek external confirmation regarding a
particular debtor, the auditor should consider validity of grounds for such a request and assess management’s
integrity and obtain evidence to support the same.
The auditor should also ask the management to submit its request in a written form, detailing therein the reasons
for such a request.
The auditor agrees to management’s request not to seek external confirmation regarding a particular matter, the
auditor should document the reasons for agreeing to the management’s request and should apply alternative
procedures to obtain sufficient appropriate evidence regarding that matter.
While considering the validity of request, in case the auditor reaches at a conclusion that the same was not valid, he
may appropriately modify the report.
In the present case, the accountant of C Ltd. Has requested the auditor not to send balance confirmation requests to
a particular group of debtors due to dispute.
It appears to be a valid ground. The auditor shall accept their request but he must perform alternative procedures.
Such as
● Examine Sales invoice.
● Discussion with lawyer with respect to recoverability of amount.
If he is satisfied after applying alternative procedure he shall express a clean opinion, otherwise he shall consider
modifying the audit report as per the circumstances.


What are the factors that are to be considered while designing a confirmation request? (8 Marks)
As per SA -505 "External Confirmations", the design of a confirmation request may directly affect the confirmation
response rate, and the reliability and the nature of the audit evidence obtained from responses.
The following factors should be considered while designing a confirmation request: -

a. The assertions being addressed.
b. Specific identified risks of material misstatement, including fraud risks.
c. The layout and presentation of the confirmation request.
d. Prior experience on the audit or similar engagements.
e. The method of communication (कैसे बताए )
f. Management's authorisation 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. ( य तझ ु को
चाह)
g. The ability of the confirming party to provide the requested information (यारा बता ना पाए – ability)



SA 580 - WRITTEN REPRESENTATIONS

What do you mean by "Written Representations"? As an auditor, how you will deal if management does not provide
requested written representations?


Answer
Written Representations: As per SA 580, "Written Representation", is a written statement by management provided
to the auditor to confirm certain matters or to support other audit evidence.These representations are an important source
of audit evidence.

If management modifies or does not provide the requested written representations, it may alert the auditor to the
possibility that one or more significant issues may exist.

Requested Written Representations not provided by Management: If management does not provide one or more
of 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 management does not provide the written
representations.
From Whom
Auditor shall request written representations from management with appropriate responsibilities for the financial
statements and knowledge of the matters concerned.


People from whom written representation is to be requested may vary depending on the governance structure of
the entity,a and relevant law or regulations; however, management (rather than TCWG) is often the responsible
party.
Written representations may therefore be requested from the entity’s CEO and CFO, or other equivalent persons in
entities that do not use such titles. In some circumstances , however, other parties, such as TCWG , are also
responsible for the preparation and presentation of the financial statements.


Miscellaneous Topic - SA 500

Management’s expert – An individual or organisation possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.
When information to be used as audit evidence has been prepared using the work of a management’s expert, the
auditor shall, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s
purposes,:
● Evaluate the competence, capabilities and objectivity of that expert;

● Obtain an understanding of the work of that expert; and
● Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.


RISK ASSESSMENT AND INTERNAL

CONTROL




Conditions which increases risk of fraud or error

While planning and performing an audit, the auditor should consider the risk of material misstatements that may be
caused due to fraud or error. Various conditions and events that may increase risk of fraud or error are;
1. Weaknesses in the design of internal control system and non-compliance with the laid down control
procedures.
2. Doubts about the integrity or competence of the management.
3. Unusual pressures within the entity.
4. Unusual transaction such as transactions with related parties, excessive payment for certain services to
lawyers, etc.
5. Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate documentation, significant
differences between the figures as per the accounting records and confirmation received from third parties,
etc


Internal Control
Meaning
❖ The process designed, implemented and maintained
❖ By TCWG, management and other personnel
❖ To provide reasonable assurance
❖ with regard to
-reliability of financial reporting,
-effectiveness and efficiency of operations,
-safeguarding of assets, and
- compliance with applicable laws and regulations
Inherent Limitations of I.C.

Limitations which are inseparable from system of l.C.
Effect
▪ Due to Limitations of l.C. System,
▪ it can provide only reasonable,
▪ not absolute assurance,
▪ that its objectives are achieved.
What are Inherent Limitations of Internal control systems?
Answer
Internal control can provide only reasonable but not absolute assurance that its objective relating to
prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. This is because it
suffers from some inherent limitations, such as:-
1. Management's consideration that cost of an internal control does not exceed the expected benefits.
2. Most controls do not tend to be directed at unusual transactions.
3. The potential of human error due to carelessness, misjudgment and misunderstanding of instructions.
4. The possibility that control may be circumvented (बबगाडना) through collusion with employees or outsiders.
5. The possibility that a person responsible for exercising control may abuse that authority.
6. Compliance with procedures may deteriorate because the procedures becoming inadequate due to change in
condition.
7. Manipulation by management with respect to transactions or estimates and judgements required in the
preparation of financial statements.
8. Inherent limitations of Audit.
REVIEW OF I.C. BY AUDITOR

Review of l.C. refers to, - Examination and evaluation of Internal control system of the client.
Need for review

To assure that l.C. system is adequate.


Role/Advantages of Review
It enables the auditor to ascertain whether
1. Internal control system is adequate & operating effectively.
2. I .C. is able to prevent, detect & correct material misstatement.
3. l.C. Properly safeguards the assets.
4. l.C. ensures correct recording of transaction.
5. Reports & Certificate provided by management are reliable.
6. l.C. are weak / excessive in a-particular area.
7. Effective internal audit department is in operation.
8. Suggestions can be given to management to improve the l.C. system.
9. Extensive Substantive procedures are required.
10. Audit procedures or techniques need to be changed from planned ones.
Keyword Story


Tools to Review IC

There are four major tools to review IC
1. Narrative Records
2. Check List
3. Questionnaire
4. Flow Chart



Internal Control Questionnaire (HOMEWORK)
Prepare your notes of ICQ on this page



SA 315 Identifying and assessing the risk of material

misstatement through understanding the entity and its
environment
Basics
The auditor should
● identify and assess
● the risks of material misstatement,
● whether due to fraud or error,
○ at the financial statement
○ and assertion levels
He should understand the entity o and its environment, o including the entity's internal control.
He should do the above mentioned steps so that, he can design and implement responses to the assessed risks of
material misstatement.
his will help the auditor to reduce the risk of material misstatement to an acceptably low level.
Why there is a need to understand the entity and its environment?
We cannot audit the all the transactions because of ILA. Therefore, we need to decide the nature time and
extent of the audit procedures and we also need to know the sample size.
To determine NTE of Audit Procedures we need to understand 2 things

1. RMM (SA 315) (Assessment of RMM will help in deciding the NTE of AP)
2. Materiality (SA 320)
RMM can be further divided into (We studied this in basics)

1. Inherent Risk (Risk which is inseparable, risk that belongs to entity and is there because of nature
of entity)
2. Control Risk (Risk that IC will fail to PDC Misstatements.
To Assess Inherent risk we need to understand entity and it’s environment and to assess control risk we
need to understand the IC of the entity
Always keep in mind 315 is about assessment and not action and we will formulate our response to the
assessed risk in SA 330
Definitions
Business risk
A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an
entity's ability to achieve its objectives.


Risk assessment procedures

The audit procedures performed to obtain an understanding of the entity and its environment, including the entity's
internal control, to identify and assess the risks of material misstatement at the financial statement and assertion
levels.
Significant risk
An identified and assessed risk of material misstatement that requires special audit consideration.
Material Weakness
● Weakness in internal control that could have a material effect on the financial statements.
● The auditor shall check that whether any material weakness is there in DOC of IC.
● The auditor shall communicate material weakness in internal control (if any) on a timely basis to
management.



Risk Assessment Procedures

1. Inquiries of management, and of others within the entity.
2. Analytical procedures
3. Observation and inspection.
Inquiries of management, and of others within the entity

● Information obtained through inquiry from management and from those who are responsible for financial
reporting and from others within the entity and other employees with different levels of authority help in
identifying risks of material misstatement.
Analytical procedures
● Analytical procedures may help identify the existence of unusual transactions or events and amounts ,ratio
and trends that might indicate matters that have audit implications.
● Unusual or unexpected relationships that are identified may assist the auditor in identifying risks of material
misstatement, especially risks of material misstatements due to fraud.


Observation and inspection.

● Observation and inspection may support inquiries of management and others, and may also provide
information about the entity and its environment.
Understanding the entity
Purpose of Understanding


How to Understand the entity - Knowledge of the Client’s Business

It is one of the important principles in developing an overall audit plan. In fact without adequate knowledge of
client’s business, a proper audit is not possible.
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and
Its Environment”, the auditor shall obtain an understanding of the following:
1. Relevant industry, regulatory and other external factors including applicable financial reporting framework.
2. The nature of the entity, including:
a. Its operations;
b. Its ownership and governance structures;
c. The types of investments that the entity is making and plan to make: &
d. The way that the entity is structured and how it is financed.
3. The entity’s selection and application of accounting policies, including the reasons for changes thereto.
4. The entity’s objectives and strategies, and those related Business risks that may result in risks of material
Misstatement.
5. The measurement and review of the entity’s financial performance.
Risks that Require Special Audit Consideration

In exercising judgment as to which risks are significant risks, the auditor shall consider the following:
1. Whether the risk is a risk of fraud;
2. Whether the risk is related to recent significant economic, accounting, or other developments;
3. The complexity of transactions;
4. Whether the risk involves significant transactions with related parties;
5. The degree of subjectivity in the measurement of financial information; and
6. Whether the risk involves significant unusual transactions.
Identifying Significant Risks: Significant risks often relate to significant nonroutine transactions or judgmental
matters. Non-routine transactions are transactions that are unusual, due to either size or nature, and that therefore
occur infrequently. Judgmental matters may include the development of accounting estimates for which there is
significant measurement uncertainty.
DOCUMENTING THE RISK

a. The discussion among the engagement team and the significant decisions reached;
b. Key elements of the understanding obtained regarding each of the aspects of the entity and its environment
and of each of the internal control components, the sources of information from which the understanding
was obtained; and the risk assessment procedures performed;
c. The identified and assessed risks of material misstatement at the financial statement level and at the
assertion level ; and
d. The risks identified, and related controls about which the auditor has obtained an understanding


SA 265
COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO
THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT
1. This Standard on Auditing (SA) deals with the auditor's responsibility to communicate appropriately to
those charged with governance and management deficiencies in internal control that the auditor has
identified in an audit of financial statements.
2. Deficiency in internal control - This exists when
a. A control is designed, implemented or operated in such a way that it is unable to prevent, or detect
and correct, misstatements in the financial statements on a timely basis; or
b. A control necessary to prevent, or detect and correct, misstatements in the financial statements on a
timely basis is missing.
c. Significant deficiency in internal control - A deficiency or combination of deficiencies in internal
control that, in the auditor's professional judgment, is of sufficient importance to merit the attention
of those charged with governance. िजस पर TCWG का यान लाना ज़ र है
3. Requirements
a. The auditor shall determine whether, on the basis of the audit work performed, the auditor has
identified one or more deficiencies in internal control. कुछ मल या
b. If the auditor has identified one or more deficiencies in internal control, the auditor shall determine,
they constitute significant deficiencies or not. - मल तो SIGNIFICANT है या ?
c. The auditor shall communicate in writing significant deficiencies in internal control identified during
the audit to those charged with governance on a timely basis. The auditor shall also communicate to
management at an appropriate level of responsibility on a timely basis: (Significant है तो TCWG और
Apt. level of Mgt. को Communicate करदो in writing)
d. The auditor shall include in the written communication of significant deficiencies in internal control
i. A description of the deficiencies and an explanation of their potential effects; या थी और इस
से या हो सकता है
ii. Sufficient information to enable those charged with governance and management to
understand the context of the communication. In particular, the auditor shall explain that:
➢ The purpose of the audit was for the auditor to express an opinion on the financial
statements;
➢ The audit included consideration of internal control relevant to the preparation of the
financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control; and
➢ The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance


Letter of Weakness
1. The auditor does compliance procedure to ascertain that the internal control system exist in the entity, it
works effectively; it work continuously in the entity during review period.
2. When he comes across any weakness in the control points, he issues letter of weakness.
3. Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also
suggests measures by which the weakness in the system be corrected and the control system be made better
protected.
4. Lapses in operation of internal control too are reported in the communication of weakness.
5. The communication of weakness is reporting to management of such weakness in design and operation of
internal control as have come to notice of auditor during his auditing and it should not be taken to be a
review and comment on adequacy of the control mechanism for management purpose.
IT Related Risk
What are the specific risks related to internal control in an IT
environment?
Risks related to internal control in IT environment: The specific risks related to internal control in an IT
environment includes the following
1. Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both.
(either data is wrong or data processing is wrong)
2. Unauthorized access to data that may result in destruction of data or improper changes to data, including the
recording of unauthorized or non-existent transactions, or inaccurate recording of transactions. Particular
risks may arise where multiple users access a common database.
3. The possibility of IT personnel gaining access privileges beyond those necessary to perform their assigned
duties thereby breaking down segregation of duties. (Lack of segregation of duties)
4. Unauthorized changes to data in master files.
5. Unauthorized changes to systems or programs.
6. Failure to make necessary changes to systems or programs.
7. Inappropriate manual intervention.



Benefits of IT to an entity’s Internal Control

As per SA 315, 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 the timeliness, availability, and accuracy of information ;
● Facilitate the additional analysis of informations;
● Enhance the ability to monitor the performance of the entity’s activities and its policies and procedures;
● Reduce the risk that controls will be circumvented;and
● Enhance the ability to achieve effective segregation of duties by implementation security control in
applications, databases, and operating systems.
Objectives of Internal Control

● Transactions are executed in accordance with management general or specific authorizations;
● All transactions are promptly recorded in the correct amount in the appropriate accounts and in the
accounting period in which executed so as to permit preparation of financial information within a
framework of recognized accounting policies and practices, and relevant statutory requirements, if any, and
to maintain accountability for assets;
● Assets are safeguard from unauthorised access, use or disposition; and
● The recorded assets are compared with the existing assets as at reasonable intervals and appropriate
action is taken with regard to any differences.
Benefits of Understanding of Internal Control

An understanding of internal control assists the auditor in :
● identifying types of potential misstatements ;
● identifying factors that affect the risks of material misstatement, and
● designing the nature, timing, and extent of further audit procedures.
Controls Relevant to the Audit

There is a direct relationships between an entity’s objectives and the controls implements to provide reasonable
assurance about their achievement. The entity’s objectives, and therefore controls, relate to financial reporting,
operations and compliance, however, not all of these objectives and controls are relevant to the auditor’s risk
assessment.
Factors relevant to the auditor’s judgement about whether a control, individually or in combination with others, is
relevant to the audit may include such matters as the following:
● Materiality.
● The significance of the related risk.
● The size of the entity.
● The nature of the entity’s business, including , its organisation and ownership characteristics .
● The diversity and complexity of the entity’s operations.


● Applicable legal and regulatory requirements.
● The circumstances and the applicable component of internal control.
● The nature and complexity of the systems that are part of the entity’s internal control, including the use of
service organisations.
● Whether, and how, a specific control, individually or in combination with others, prevents, or detects and
corrects, material misstatements.
Components of IC
The division of internal control into the following five components provides a useful framework for auditors to
consider how different aspects of an entity’s internal control may affect the audit:
1. The control environment;

2. The entity’s risk assessment process
3. The information system, including the related business processes, relevant to financial reporting, and
communication
4. Control activities
5. Monitoring of controls.
Internal Audit
As defined in scope of the Standards on Internal Audit, Internal Audit means
● “An independent management function,
● which involves a continuous and critical appraisal
● of the functioning of an entity
● with a view to suggest improvements thereto and
● add value to and strengthen the overall governance mechanism of the entity,
● including the entity’s strategic risk management and internal control system
Applicability of Provisions of Internal Audit - Section 138
(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who
shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the
Board to conduct internal audit of the functions and activities of the company.
(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall
be conducted and reported to the Board.
Rule 13 - Companies required to appoint Internal auditor
13. (1) The following class of companies shall be required to appoint an internal auditor which may be either an
individual or a partnership firm or a body corporate namely:—
a. every listed company;
b. every unlisted public company having-
i. paid up share capital of fifty crore rupees or more during the preceding financial year; or
ii. turnover of two hundred crore rupees or more during the preceding financial year, or


iii.
outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year; or
iv. outstanding deposits of twenty five crore rupees or more at any point of time during the preceding
financial year: and
c. every private company having-
i. turnover of two hundred crore rupees or more during the preceding financial year, or
ii. outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year:
Provided that an existing company covered under any of the above criteria shall comply with the requirements of
section 138 and this rule within six months of commencement of such section.
Explanation. - For the purposes of this rule -

i. the internal auditor may or may not be an employee of the company;
ii. the term "Chartered Accountant" or "Cost Accountant" shall mean a "Chartered Accountant" or a "Cost
Accountant", as the case may be, whether engaged in practice or not ]
(2) The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the
scope, functioning, periodicity and methodology for conducting the internal audit.
Objective and Scope of Internal Audit Function





Basics of Internal Financial Controls and Reporting

Requirements
● Sec 134(5)(e) of companies Act,2013 defines the term Internal Financial Control as
○ the policies and procedures adopted by the company for ensuring
■ the orderly and efficient conduct of its business, including Adherence to company’s policies,
■ The safeguarding of its assets,
■ The prevention and detection of frauds and errors,
■ The accuracy and completeness of the accounting records, and
■ The timely preparation of reliable financial information.
● Rule 8(5)(viii) of the companies (Accounts) Rules,2014 requires that the director’s report should contain
details in respect of adequacy of internal financial controls with reference to the financial reporting.
Auditor’s responsibility for reporting on IFC


Clause (i) of Sec.143 (3) of companies Act,2013 requires the company auditor to report whether the company has
adequate internal financial control with reference to financial statements in place and the operating effectiveness of
such controls.
“Our responsibility is to express an opinion on the Company’s internal financial controls over financial reporting based
on our audit”


SA 330 - The Auditor’s Responses to Assessed Risks
Scope
This Standard on Auditing (SA) deals with the
● auditor’s responsibility to design and implement responses
● to the risks of material misstatement identified and assessed by the auditor
● in accordance with SA 315, “Identifying and Assessing Risks of Material
Misstatement Through Understanding the Entity and Its Environment” in a
financial statement audit.
Objective
The objective of the auditor is to
● obtain sufficient appropriate audit evidence
● about the assessed risks of material misstatement,
● through designing and implementing appropriate responses to those risks.
Definitions
For purposes of the SAs, the following terms have the meanings attributed below:
a. Substantive procedure
An audit procedure designed to
● detect material misstatements at the assertion level.
● Substantive procedures comprise:
1. Tests of details (of classes of transactions, account balances, and disclosures), and
2. Substantive analytical procedures.
b. Test of controls
An audit procedure designed to
● evaluate the operating effectiveness of controls
● in preventing, or detecting and correcting, material misstatements at the assertion level.
Requirements
Design and Perform FAP

The auditor shall design and perform further audit procedures whose nature, timing and extent are based on and
are responsive to the assessed risks of material misstatement at the assertion level
In designing the further audit procedures to be performed, the auditor shall:

a. Consider the reasons for the assessment given to the risk of material misstatement at the assertion level
for each class of transactions, account balance, and disclosure.
b. Obtain more persuasive audit evidence the higher the auditor’s assessment of risk (HIGHER the ROMM -
PERSUASIVE the audit evidence)
Test of Controls
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as to the


operating effectiveness of relevant controls when:
a) He expects that the controls are operating effectively, or
b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.
In designing and performing tests of controls, the auditor shall obtain more persuasive audit evidence the greater
the reliance the auditor places on the effectiveness of a control.
Nature and extent of tests of controls
In designing and performing tests of controls , the auditor shall:

1. Perform other audit procedures in combination with inquiry to obtain audit evidence about the operating
effectiveness of the controls, including
a. How the controls were applied at relevant times during the audit ?
b. The consistency with which they are applied.
c. By whom or by what means they were applied ?
2. Determine whether the controls to be tested depend upon other controls (indirect controls)and if so,
whether it is necessary to obtain audit evidence Supporting the effective operation of those indirect controls.
Matters to be considered in determining the extent of tests of controls.

1. The frequency of the performance of the control by the entity during the period.
2. The length of time during the audit period that the auditor is relying on the operating effectiveness of the
control. (Hum kitney period ki checking kar rahey hai agar period kam hai toh TOC ka extent _____________)
3. The expected rate of deviation from a control.
4. The relevance and reliability of the audit evidence to be obtained regarding the operating effectiveness of
the control at the assertion level.
5. The extent to which audit evidence is obtained from tests of other control related to the assertion.
Using audit evidence obtained during an interim period

● When the auditor obtains audit evidence about the operating effectiveness of controls during an interim
period, the auditor shall:
○ Obtain audit evidence about significant changes to those control subsequent to the interim
period; and
○ Determine the additional audit evidence to be obtained for the remaining period.



Using audit evidence obtained in previous audits
In determining whether it is appropriate to use audit evidence about the operating effectiveness of controls
obtained in previous audits, the auditor shall consider the following
Substantive Procedures
● Irrespective of the assessed risks of material misstatement, the auditor shall design and perform substantive
procedures for each material class of transactions, account balance, and disclosure.
Substantive Procedures Related to the Financial Statement Closing Process.
The auditor’s substantive procedures shall include the following

● Agreeing or reconciling the financial statements with the underlying accounting records; and
● Examining material journal entries and other adjustments made during the course of preparing the
financial statements.
Substantive Procedures Responsive to Significant Risks
When the auditor has determined that an assessed risk of material misstatement at the assertion level is a
significant risk, the auditor shall perform substantive procedures that are specifically responsive to that risk.


Documentation (Homework)
● The overall responses to address the assessed risks of material misstatement at the financial statement level,
and the nature time and extent of the further audit procedures performed;
● The linkage of those procedures with the assessed risks at the assertion level ;and
● The results of the audit procedures.

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also be given.

Chapter 5 FRAUD AND RESPONSIBILITIES

OF THE AUDITOR IN THIS REGARD
Meaning of Fraud
SA
240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”
Auditor’s Concern
Although fraud is a broad legal concept, for the purposes of the SAs, the auditor is concerned with fraud that causes
a material misstatement in the financial statements.
Two types of intentional misstatements are relevant to the auditor

● Misstatement resulting from fraudulent financial reporting.
● Misstatements resulting from misappropriation of assets.

also be given.

Characteristics of Fraud
Intentional
● Misstatements in the financial statements can arise from either fraud or error.
● The distinguishing factor between fraud and error is whether misstatement of the financial statements is
intentional or unintentional.
Conditions
● Incentive or 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.
● A perceived opportunity to do so: It may exist when an individual believes internal control can be
overridden, for example, because the individual is in position of trust or has knowledge of specific weakness
in internal control.
● Rationalization of the act: Individuals may be able to rationalize committing fraudulent act. Some
individuals possess an attitude, character or set of ethical values that allow them knowingly and
intentionally to commit a dishonest act. However, even otherwise honest individuals can commit fraud in an
environment that imposes sufficient pressure on them.
May be Accomplished By
● Manipulation, falsification (including forgery), or alteration of accounting records
● Misrepresentation / Intentional omission
● Intentional Misapplication of accounting principle
● Override of Controls by management
Broad reasons for commiting fraud

● Financial obligations/ pressure
● Management’s unrealistic goals
● Dissatisfied employees or lack of motivation among employees
● Name game
● Opportunity to commit fraud

also be given.

Different Ways of Committing Frauds relevant for Auditor
Fraudulent Financial Reporting

Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in
financial statements to deceive financial statement users.
Misappropriation of Assets
● Misappropriation of assets means the theft of an 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 capable of disguising or concealing
misappropriations in ways that are difficult to detect.
● Misappropriation of assets can be accomplished in a variety of ways including
○ Embezzling receipts (for example, misappropriating collections on accounts receivable or diverting
receipts in respect of written-off accounts to personal bank accounts).
○ 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).
○ Causing an entity to pay for goods and services not received (for example, payments to fictitious
vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices,
payments to fictitious employees).
○ Using an 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).

also be given.

Division of Misappropriation of Assets
Ways of Defalcating Cash

Inflating Cash Payments
1. Making payments against fictitious vouchers.
2. Making payments against vouchers, the amounts whereof have been inflated.
3. Manipulations totals of wage by including names of dummy workers in wage rolls.
4. Over casting for petty cash expenditure.
Suppressing cash receipts
1. Teeming and lading

2. Adjusting unauthorised rebates, allowances, discounts etc. to customer’ accounts and misappropriating
amount paid by them.
3. Writing off is as debts in respect of balances against which cash has already been received but has been
misappropriated.
4. Not accounting for cash sales fully.
5. Not accounting for miscellaneous receipts e.g sale of scrap etc.
6. Writing down asset values in entirely, selling them subsequently and misappropriating the proceeds.
By casting wrong totals in the cash book.

also be given.

Teeming and Lading

Amount received from a customer being misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the customer who has paid earlier. Similarly,
moneys received from the customer who has paid thereafter being credited to the account of the second customer
and such a practice is continued so that no one account is outstanding for payment for any length of time, which may
lead the management to either send out a statement of account to him or communicate with him.

also be given.

Detection of fraud and error duty of an auditor
Primary responsibility
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 those charged with
governance of the entity and management.
● It is important that management, with the oversight of those charged with governance, place for a strong
emphasis on fraud prevention, detection of Fraud/Error.
● This involves a commitment to creating a culture of honesty and ethical behavior which can be reinforced by
an active oversight by those charged with governance.
Broadly, the general principles laid down in the SA may be noted as under:
Auditor’s Objective
● 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.
Owning to ILA
● As described in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing,”
○ owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements will not be detected,
○ even though the audit is properly planned and performed in accordance with the SAs.
Risk of not detecting

● 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, deliberate failure to record transactions, or intentional
misrepresentations being made to the auditor.
Management Fraud
● Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud
is greater than for employee fraud,
○ because management is frequently in a position to
■ directly or indirectly manipulate accounting records,
■ present fraudulent financial information or
■ override control procedures designed to prevent similar frauds by other employees.
● When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional
skepticism throughout the audit, considering the potential for management override of controls and
recognizing the fact that audit procedures that are effective for detecting error may not be effective in
detecting fraud.

also be given.

Auditor’s failure and Negligence

The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does
not by itself indicate a failure to conduct an audit in accordance with SAs.
come to light,

○ with SA’s and

also be given.

FRAUD RISK FACTORS AND POSSIBILITY OF FRAUD
Fraud Risk Factors
Fraud Risk Factors may be defined as events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.
SA 240, further, explains by way of examples certain risk factors relating to possibility of fraud as may be considered
by the auditor which are dealt in the following paragraphs.
Examples of Fraud Risk Factors Can Be Divided Into 2 Parts
Fraud Risk Factors Examples For Fraudulent Financial Reporting

Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting: The following are examples of
risk factors relating to misstatements arising from fraudulent financial reporting
Incentive / Pressure
Financial stability or profitability is threatened by economic, industry or entity operating conditions such as
a) High degree of competition or market saturation, accompanied by declining margins.
b) High vulnerability to rapid changes, such as changes in technology , product obsolescence, or interest rates.
c) Significant declines in customer demand and increasing business failures in either the industry or overall
economy.
d) Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
e) Recurring negative cash flows from operations or an inability to generate cash flows from operations while
reporting earnings and earnings growth.
f) Rapid growth or unusual profitability especially compared to that of other companies in the same
industry.
g) New accounting, statutory, or regulatory requirements.
Opportunities
The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent financial
reporting that can arise.from the following:

also be given.

a) Significant related-party transactions not in the ordinary course of business.
b) A strong financial presence or ability to dominate a certain industry sector that allows the entity to
dictate terms or conditions to suppliers or customers that may result in inappropriate or non-arm’s length
transactions.
c) Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective judgements or
uncertainties that are difficult to corroborate.
d) Significant , unusual , or highly complex transactions, especially those close to period end that pose
difficult “substance over form” questions.
e) Significant operations located or conducted across international borders in jurisdictions where differing
business environments and cultures exist.
f) Significant bank accounts or subsidiary or branch operations in tax haven jurisdictions for which there
appears to be no clear business justification.
Attitudes /Rationalizations
a) 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.
b) Non- financial management’s excessive participation in the selection of accounting policies or the
determination of significant estimates.
c) 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.
d) Excessive interest by management in maintaining or increasing the entity’s stock price or earning
trend.
e) The practice by management of committing to analysts,creditor and other third parties to achieve
aggressive or unrealistic forecasts.
f) Management failing to correct known material weaknesses in internal control or in a timely basis.
g) An interest by management in employing inappropriate means to minimize reported earnings for
tax-motivated reasons.
h) Low morale among senior management.
i) The owner-manager makes no distinction between personal and business transactions.
j) Dispute between shareholders in a closely held entity.
k) Recurring attempts by management to justify marginal or inappropriate accounting on the basis of
materiality
Fraud Risk factors Examples relating to misstatements arising from

Misappropriation of Assets.
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:
a) Known or anticipated future employee layoffs.
b) Recent or anticipated changes to employee compensation or benefits plans.
c) Promotions, compensation, or other rewards inconsistent with expectations.
Opportunities

also be given.

Certain characteristics or circumstances may increase the susceptibility of assets of misappropriation. For example,
opportunities to misappropriate assets increase when there are the following:
a) Large amounts of cash on hand or processed.
b) Inventory items that are small in size, of high value, or in high demand.
c) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
d) 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 applications screening of employees with access to assets.
5. Inadequate record keeping with respect to assets.
6. Inadequate system of authorization and 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.
Attitudes /Rationalizations
a) Disregard for the need for monitoring or reducing risks related to misappropriations of assets.
b) Disregard for internal control over misappropriation of assets by overriding existing controls or by failing to
correct known internal control deficiencies.
c) Behaviour indicating displeasure or dissatisfaction with the entity or its treatment of the employee.
d) Changes in behaviour or lifestyle that may indicates assets have been misappropriated.
e) Tolerance of petty theft.

also be given.

Circumstances Relating to Possibility of Fraud

also be given.

also be given.

AUDITOR UNABLE TO CONTINUE THE ENGAGEMENT

If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional
circumstances that bring into question the auditor’s ability to continue performing the audit, the auditor shall:
● 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;
● Consider whether
○ it is appropriate to withdraw from the engagement,
○ where withdrawal is possible under applicable law or regulation; and
● If the auditor withdraws:
○ Discuss with the appropriate level of management and those charged with governance the auditor’s
withdrawal from the engagement and the reasons for the withdrawal; and
○ 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.


Audit in Automated Environment Chapter

6
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Situations in which IT will be relevant to an audit / Why IT should be

considered relevant for auditing
Relevance of IT in auditing
When a business operates in a more automated environment it is likely that we will see several business functions
and activities happening within the systems.
● Increased use of systems and Applications software in Business ( for example , use of ERPs)
● Complexity of business transactions (multiple systems, network of systems)
● Hi-tech nature of business ( Telecom , e-Commerce).
● High volume of transactions ( Insurance, Banking , etc.)
● Company Policy (Compliance).
● Regulatory requirements- IT Act, 2008.
● Requirement of standards of Auditing -SA 315.
● Increases efficiency and effectiveness of audit.
Understanding and Documenting Automated Environment:
Understanding the entity and its automated environment involves understanding how IT department is
organised, IT activities, the IT dependencies, relevant risks and controls.

Explain stating the points that an auditor should consider to obtain an understanding of the
company’s automated environment . (May 2018 RTP)
List any five points that an auditor should consider to obtain an understanding of the Company's
automated environment. (May 2018 Exams, 5 Marks)
Understanding the entity and its automated environment involves

● understanding how IT department is organised,
● IT activities,
● the IT dependencies,
● relevant risks and controls.
Given below are some of the points that an auditor should consider to obtain an understanding of the company’s
automated environment
● Information systems being used (one or more application systems and what they are)
● their purpose (financial and non-financial)
● Location of IT systems - local vs global
● Architecture (desktop based, client-server, web application, cloud based)
● Version (functions and risks could vary in different versions of same application)
● Interfaces within systems (in case multiple systems exist)
● In-house vs Packaged
● Outsourced activities (IT maintenance and support)
● Key persons (CIO, CISO, Administrators)


Impact of IT related risks

Discuss the impact of IT related risks on Substantive Audit, Controls and Reporting. (RTP May 2018)
Or
How IT risk is going to impact audit if not mitigated
1. First, we may not be able

○ to rely on the data obtained from systems where such risks exist.
■ This means,
● all forms of data, information or reports
● that we obtain from systems for the purpose of audit
● has to be thoroughly tested and corroborated for completeness and accuracy.
2. Second, we will not be able

○ to rely on automated
■ controls,
■ calculations,


■ accounting procedures
● that are built into the applications.
➢ Additional audit work may be required in this case.
3. Third, due to the regulatory requirement of auditors to report on internal financial controls of a company,
the audit report also may have to be modified in some instances.
In all the above scenarios, it is likely that the auditor will be required to obtain more audit evidence and perform
additional audit work.
The auditor should also be able to demonstrate

● how the risks were identified and
● what audit evidence was obtained and validated to address these IT risks.
As the complexity, automation and dependence of business operations on IT systems increases, the severity and
impact of IT risks too increases accordingly.
The auditor should apply professional judgement in determining and assessing such risks and plan the audit
response appropriately.


Question (November 2018 RTP ICAI www.icai.org)

When a business operates in a more automated environment it is likely that we will see several
business functions and activities happening within the systems. Explain stating the points that an
auditor should consider to substantiate the above.
When a business operates in a more automated environment it is likely that we will see several business
functions and activities happening within the systems. Following are some of the points to be
considered.

● Computation and Calculations are automatically carried out (for example, bank interest
computation and inventory valuation)
● Accounting entries are posted automatically (for example, sub-ledger to GL postings are
automatic)
● Business policies and procedures, including internal controls, are applied automatically (for
example, delegation of authority for journal approvals, customer credit limit checks are
performed automatically)
● Reports used in business are produced from systems. Management and other stakeholders rely
on these reports and information produced (for example, debtors ageing report)
● User access and security are controlled by assigning system roles to users (for example,
segregation of duties can be enforced effectively)


General IT Controls.
“General IT controls are policies and procedures that relate to many applications and support the effective
functioning of application controls.
General IT-controls that maintain the integrity of information and security of data commonly include controls over
the following:”
● Data center and network operations
● Program change
● Access security
● Application system acquisition, development, and maintenance (Business Applications)
These are IT controls generally implemented to mitigate the IT specific risks and applied commonly across multiple
IT systems, applications and business processes. Hence, General IT controls are known as “pervasive” controls or
“indirect” controls. For detail study please refer ICAI Study Material, (www.icai.org)
Application control
Application controls include
● both automated or manual controls
○ that operate at a business process level.
● Automated Application controls are embedded into IT applications and
○ help in ensuring the (CAI)
■ completeness,
■ accuracy and
■ integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, mandatory data fields.
General IT Controls vs. Application Controls

● These are interrelated
● The relationship between the application controls and the General IT Controls is such that
○ General IT Controls are needed
■ to support the functioning of application controls, and
○ both are needed
■ to ensure complete and accurate information processing through IT systems.

INTERNAL FINANCIAL CONTROLS
The term Internal Financial Controls (IFC) basically refers to the policies and procedures put in place by companies
for ensuring:
● reliability of financial reporting
● effectiveness and efficiency of operations


● compliance with applicable laws and regulations

● safeguarding of assets
● prevention and detection of frauds
Statutory Auditors, along with their opinion on financial statements,

● should also 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.
The directors and management have primary responsibility of implementing and maintaining an effective internal
controls framework and auditors are expected to evaluate, validate and report on the design and operating
effectiveness of internal financial controls.
Audit Approach - Picture Credit ICAI Study Material (www.icai.org)
Data Analytics For Audit


In today’s digital age when companies rely on more and more on IT systems and networks to operate
business, the amount of data and information that exists in these systems is enormous. Explain stating
uses of Data analytics.
In today’s digital age when companies rely on more and more on IT systems and networks to operate business, the
amount of data and information that exists in these systems is enormous.
A famous businessman recently said, “Data is the new Oil”.
The combination of
● processes,
● tools and techniques
○ that are used to
■ tap vast amounts of electronic data
■ to obtain meaningful information is called data analytics.
While it is true that companies can benefit immensely from the use of data analytics in terms of increased
profitability, better customer service, gaining competitive advantage, more efficient operations, etc., even auditors
can make use of similar tools and techniques in the audit process and obtain good results.
The tools and techniques that auditors use in applying the principles of data analytics are known as Computer
Assisted Auditing Techniques or CAATs in short.
Data analytics can be used in

● testing of electronic records and data residing in IT systems
○ using spreadsheets and s
○ specialised audit tools viz., IDEA and ACL to perform the following,
★ Check completeness of data and population that is used in either test of controls or substantive audit tests
★ Selection of audit samples – random sampling, systematic sampling
★ Re-computation of balances – reconstruction of trial balance from transaction data
★ Reperformance of mathematical calculations – depreciation, bank interest calculation
★ analysis of journal entries as required by SA 240
★ fraud investigation
★ evaluating impact of control deficiencies
Testing Methods
Discuss the different ways testing is performed in an automated environment (5 Marks)
The following are different ways testing is performed in an automated environment
There are basically four types of audit tests that should be used. They are
○ inquiry,
○ observation,


○ inspection and
○ reperformance.
Inquiry is the most efficient audit test but it is also gives the least audit evidence.
● Hence, inquiry should always be used in combination with any one of the other audit testing methods.
● Inquiry alone is not sufficient.
Reperformance is most effective as an audit test and gives the best audit evidence. However, testing by
reperformance could be very time consuming and least efficient most of the time.
Generally, applying inquiry in combination with inspection gives the most effective and efficient audit evidence.
● However, which audit test to use, when and in what combination is a matter of professional judgement and
will vary depending on several factors including
○ risk assessment,
○ control environment,
○ desired level of evidence required,
○ history of errors/misstatements,
○ complexity of business,
○ assertions being addressed, etc.
● The auditor should document the nature of test (or combination of tests) applied along with the judgements
in the audit file as required by SA 230.
When testing in an automated environment, some of the more common methods are as follows:
● Obtain an understanding of how an automated transaction is processed by doing a walkthrough of one
end-to-end transaction using a combination of inquiry, observation and inspection.
● Observe how a user processes transactions under different scenarios.
● Inspect the configuration defined in an application

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Chapter 7 Audit Sampling

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SAMPLE DESIGN, SIZE AND SELECTION OF ITEMS FOR
TESTING
● Sample Size - Auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low
level.
● Selection of items for testing - Samples should be selected in such a way that every item must have an equal
chance of selection.
● Sample Design – While designing an audit sample auditor should consider the purpose of audit procedure
and characteristic of population from which the sample will be drawn
Anomaly
What is an Anomaly? A misstatement or deviation that is demonstrably not representative of misstatements or
deviations in a population.

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In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a sample
to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation is not
representative of the population
Sampling Flow of Events

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Methods of Sampling
What is the meaning of Sampling? Also discuss the methods of Sampling. Explain in the light of the SA 530.
(Most Important)
Audit Sampling: "Audit Sampling" means the application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor
with a reasonable basis on which to draw conclusions about the entire population.
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.
There are many methods of selecting samples. The principal methods are as follows
i. Random Sampling (Selection)

● Simple random sampling is a basic type of sampling.
● The principle of simple random sampling is that every object has equal chance of selection.
● A simple random sample is an unbiased sampling technique.
● Applied through random number generators, for example, random number tables).
● It is considered that random number tables are simple and easy to use they remove the biasness
● This method is preferred when population consists of reasonably similar units and fall within a
reasonable range.
● For example the population can be considered as homogeneous if expenses fall within the range of ₹
5,000 to ₹ 25,000 and not in the range of 5,000 to 1,00,00,000
ii. Stratified Sampling

● Stratified Sampling is

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● One of the methods of Random Sampling.
● This method involves dividing the whole population to be tested in a few groups called strata
● And taking a sample from each of them.
● Each stratum is treated as if it were a separate population and if 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 judgement
● Example
➢ Entire expense vouchers may be divided into:
✓ Vouchers above Rs. 1,00,000
✓ Vouchers between Rs. 25,000 and Rs. 1,00,000
✓ Vouchers below Rs. 25,000.
✓ The auditor can then decide to check all vouchers above Rs. 1,00,000, 50% between
Rs. 25,000 and Rs. 1,00,000 and 25% of those below Rs. 25,000
● The reasoning behind the stratified sampling is that for a highly diversified population, weights
should be allocated to reflect these differences. This is achieved by selecting different
proportions from each strata. It can be seen that the stratified sampling is simply an extension of
simple random sampling.
iii. Interval Sampling or Systematic Sampling

● Systematic selection is a selection method in which the number of sampling units in the population is
divided by the sample size to give a sampling interval
● for example 50, and having determined a starting point within the first 50, each 50th sampling unit
thereafter is selected.
● 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 computerized random number generator or random number
tables.
● When using systematic selection, the auditor would need to determine that sampling units within the
population are not structured in such a way that the sampling interval corresponds with a particular
pattern in the population.
iv. Monetary Unit Sampling

● It is a type of value-weighted selection in which sample size, selection and evaluation results in a
conclusion in monetary amounts.
● With monetary unit sampling each ₹ in a transaction is a separate sampling unit.
● ₹500 contain 500 sampling unit
● May be used for accounts receivable etc
v. Haphazard sampling
● Haphazard selection, in which the auditor selects the sample without following a structured
technique.
● Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, 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.

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vi. Block Sampling

● This method involves selection of a block(s) of contiguous items from within the population.
● Block selection cannot ordinarily be used in audit sampling because most populations are structured
such that items in a sequence can be expected to have similar characteristics to each other, but
different characteristics from items elsewhere in the population.
● Although in some circumstances it may be an appropriate audit procedure to examine a block of
items, it would rarely be an appropriate sample selection technique when the auditor intends to
draw valid inferences about the entire population based on the sample.

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Approaches to sampling
There are two approaches to audit sampling
1. Statistical sampling
2. Non-Statistical sampling
Statistical sampling
● Statistical sampling is an approach to sampling
➢ that has the random selection of the sample items;
➢ and the use of probability theory
i. to evaluate sample results,
ii. including measurement of sampling risk
● Audit testing done through this approach is more scientific than testing based entirely on the auditor’s own
judgment
➢ because it involves use of mathematical laws of probability
➢ in determining the appropriate sample size in varying circumstances.
● Statistical sampling has reasonably wide application where a population to be tested consists of a large
number of similar items for example accounts receivable or payroll checking.
● In statistical sampling, the sample results are measurable as to the adequacy and reliability of the audit
objectives. (Basically we can assure that sample size is appropriate to represent the population and are
reliable considering the circumstance and nature of population)

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Non- Statistical Sampling

● A sampling approach that does not have above characteristics (Random selection, Use of probability
theory) is considered non-statistical sampling.
● Under this approach, the sample size and its composition are determined on the basis of the personal
experience and knowledge of the auditor.
● It is very simple to operate.
● For example, March, June and September may be selected in year one and different months would be
selected in the next year.
● An attempt would be made to avoid establishing a pattern of selection year after year to maintain an element
of surprise as to what the auditor is going to check.
● It is a common practice to check large number of items towards the close of the year so that the adequacy of
cut-off procedures can also be determined.
● The non-statistical sampling is criticized on the grounds that it is neither objective nor scientific.
● The results cannot be projected in the entire population.
The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditor’s judgment;
however, sample size is not a valid criterion to distinguish between statistical and non-statistical
approaches.
Whatever may be the approach non-statistical or statistical sampling, the sample must be representative. This
means that it must be closely similar to the whole population although not necessarily exactly the same.
Another truth about the sampling technique should be noted. It can never bring complete reliability; it cannot give
precisely accurate results. It is a process of estimation. It may have some error. For Knowledge Purpose Only
In most of the circumstances, the evidence available is not conclusive and the auditor
always takes a calculated risk in giving his opinion.
Even by undertaking hundred percent checking of the transactions, the auditor does not
derive absolute satisfaction. (Because of ILA)
This state of uneasiness led pragmatic auditors to adopt the statistical theory of
sampling to derive the necessary satisfaction about the state of affairs by checking only
a part of the total population of entries.
Auditors realised that they can derive good satisfaction by undertaking a much lesser
checking by adoption of this technique in the auditing process. It is a mathematical truth
that the sample, if picked purely on a random basis would reveal the features and
characteristics of the population.
Advantages of Statistical Sampling

1. The amount of testing (sample size) does not increase in proportion to the increase in the size of the area
(universe) tested. (Smaller sample size gives a better representation of the population, in judgemental
or non statistical sampling sample size is large still it does not give a fair representation of the population )
2. The sample selection is more objective and thereby more defensible.
3. The method provides a means of estimating the

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minimum sample size associated with a specified risk. (Basically helps in determining the sample
size depending upon audit risk)
4. It provides a means for deriving a “calculated risk” (sampling error) i.e. the probable difference in result due
to the use of a sample in lieu of examining all the records in the group (universe), using the same audit
procedures.
5. It may provide a better description of a large mass of data when compared to non-statistical approach of
sampling.
6. Results of sampling can be evaluated and projected in a better way
Tolerable error
● Tolerable error is the maximum error in the population that auditors would be willing to accept and still
conclude that the result from the sample has achieved the audit objective.
● Tolerable error is considered during the planning stage and, for substantive procedures, is related to the
auditor's' judgement about materiality. T
● The smaller the tolerable error, the greater the sample size needs to be.
● In tests of control, the tolerable error is the maximum rate of deviation from a prescribed control procedure
that auditors would be willing to accept and still conclude that the preliminary assessment of control risk is
valid.
● In substantive procedures, the tolerable error is the maximum monetary error in an account balance or a
class of transactions that auditors would be willing to accept so that when the results of all audit procedures
are considered, auditors are able to conclude, with reasonable assurance, that the financial statements are
not materially misstated.
Expected error
If auditors expect errors to be present in the population, a larger sample than when no error is expected ordinarily
needs to be examined to conclude that the actual error in the population is not greater than the planned tolerable
error. Smaller sample sizes are justified when the population is expected to be error free.
In determining the expected error in a population, auditors would consider such matters as error levels identified in
previous audits, changes in the entity's procedures and evidence available from other procedures, including tests of
control.

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Chapter 8 Analytical Procedure SA 520

(The Chapter No. Is According to the ICAI Study Material)

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video classes. www.neerajaroraclasses.com Amendments and updates will be taught in classes and videos. Extra notes and charts will also be given.

Audit of Item of Financial Statement

Basic Understanding of Chapter
Please refer to the first video and watch it at least 4 times.
Please note if charts of this chapter are not available. Please make them yourself from videos.

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Cut-off Procedure
MEANING
● Accounting is a continuous process
● because the business never comes to halt.
● It is, therefore, necessary that transactions of one period
● would be separate from those in the upcoming period
● so that the results of the working of each period can be correctly ascertained.
● The arrangement that is made for the purpose is technically known as "Cut-off arrangement".
TRADING TRANSACTIONS
● Cut-off procedures are generally applied to trading transactions.
● Can also be applied for inventory, cash etc.
● Cut-off procedures are used to check the assertion of completeness.
EXAMINATION BY AUDITOR
● For this purpose, the auditor satisfies by examination and test checks that the cut-off procedures adequately
ensure that:
○ GOODS PURCHASED
■ Goods purchased, property in which has passed to the client, have in fact been included in the
inventories and that the liability has been provided for in case of credit purchase; and
○ GOODS SOLD
■ Goods sold have been excluded from the inventories and credit has been taken for such sales. If
the value of sales is to be received, the concerned party has been debited.
SAMPLE OF DOCUMENTS The auditor may examine a sample of documents evidencing the movement of stocks into and
out of stores, including documents pertaining to period shortly before and after the cut-off date and check whether
stocks represented by those documents were included or excluded, as appropriate, during stock taking because this
directly affects the profitability of the business.


Audit of Share Capital

Audit - Refer Videos
Schedule III Requirements w.r.t Share Capital (Homework)

For each class of share capital
a) The number and amount of shares authorized;
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 reporting 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 reserved for issue under options and contracts/commitments for the sale of shares/disinvestment,
including the terms and amounts;
g) For the period of five years immediately preceding the date as at which the Balances Sheet is prepared:
i) Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment
being received in cash
ii) Aggregate number and class of shares allotted as fully paid up by way of bonus shares.
iii) Aggregate number and class of shares bought back.
h) Name of holding company
i) Name of holding company of the holding company, if any (ULTIMATE HOLDING COMPANY)
j) Details of shareholder having more than 5% of shares.
More requirements may be there we will cover only the above mentioned requirements.
More notes to come with videos.

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Chapter 10 Company Audit

CHAPTER X
AUDIT AND AUDITORS
Appointment of auditors - 139

139. (1) Subject to the provisions of this Chapter,
● every company
● shall,
● at the first annual general meeting,
● appoint an individual or a firm as an auditor
○ who shall hold office
■ from the conclusion of that meeting till the conclusion of its sixth annual general meeting
■ And the manner and procedure of selection of auditors by the members of the company at such meeting shall
be such as may be prescribed.
Provided further that

● before such appointment is made,
● the written consent of the auditor to such appointment, and
● a certificate from him or it
○ that the appointment,
○ if made,
○ shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of
such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.
139 (11) Where a company is required to constitute an Audit Committee under section 177, all appointments,
including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the
recommendations of such committee.
Manner and procedure of selection and appointment of auditors - Rule 3 Companies

(Audit and Auditors) Rules, 2014
3. (1) In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in
cases where such a committee is not required to be constituted, the Board, shall take into consideration the
qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and
whether such qualifications and experience are commensurate with the size and requirements of the company:

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Provided that while considering the appointment, the Audit Committee or the Board, as the case may be, shall have
regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor
before the Institute of Chartered Accountants of India or any competent authority or any Court.
(2) The Audit Committee or the Board, as the case may be, may call for such other information from the proposed
auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit Committee, the
committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other
cases, the Board shall consider and recommend an individual or a firm as auditor to the members in the annual
general meeting for appointment.
(4) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment
of an individual or a firm as auditor to the members in the annual general meeting.
(5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to
the committee for reconsideration citing reasons for such disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original
recommendation, the Board shall record reasons for its disagreement with the committee and send its own
recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration by members in the annual
general meeting.
(7) The auditor appointed in the annual general meeting shall hold office from the conclusion of that meeting till the
conclusion of the sixth annual general meeting, with the meeting wherein such appointment has been made being
counted as the first meeting.
Conditions for appointment and notice to Registrar - Rule 4

4. (1) The auditor appointed under rule 3 shall submit a certificate that -
a. the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
b. the proposed appointment is as per the term provided under the Act;
c. the proposed appointment is within the limits laid down by or under the authority of the Act;
d. the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to
professional matters of conduct, as disclosed in the certificate, is true and correct.
(2) The notice to Registrar about appointment of auditor under fourth proviso to sub-section (1) of section 139 shall
be in Form ADT-

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Rule 3 Charts

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(5) Notwithstanding anything contained in sub-section (1), in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments, the Comptroller and
Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an
auditor of companies under this Act, within a period of one hundred and eighty days from the commencement of the
financial year, who shall hold office till the conclusion of the annual general meeting.
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within thirty days from the date of registration of the company
and in the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall
within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the
conclusion of the first annual general meeting.

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

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139(2) - Rotation
No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint
or re-appoint—
a. an individual as auditor for more than one term of five consecutive years; and
b. an audit firm as auditor for more than two terms of five consecutive years
Provided that—
● an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as
auditor in the same company for five years from the completion of his term;
● an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor
in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other
audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years
Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove an auditor
or the right of the auditor to resign from such office of the company.
139(3)
Subject to the provisions of this Act, members of a company may resolve to provide that—
a. in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be
resolved by members; or
b. the audit shall be conducted by more than one auditor
139(4)
The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors in
pursuance of sub-section (2).

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139(8) - Casual Vacancy

Any casual vacancy in the office of an auditor shall—
● in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by
the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual
vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a
general meeting convened within three months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting;
● in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the said period, the
Board of Directors shall fill the vacancy within next thirty days.
139(9) Reappointment of retiring auditor

Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-appointed at
an annual general meeting, if—
a. he is not disqualified for re-appointment;
b. he has not given the company a notice in writing of his unwillingness to be re-appointed; and
c. a special resolution has not been passed at that meeting appointing some other auditor or providing expressly
that he shall not be re-appointed.
139(10) - No auditor is appointed or reappointed

Where at any annual general meeting, no auditor is appointed or reappointed, the existing auditor shall continue to be
the auditor of the company.

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Manner of rotation of auditor will not be applicable to company A, which is having paid up share capital of Rs. 15 crores and
having public borrowing from nationalized bank of Rs. 50 crore because it is a Private Limited Company.
Incorrect: According to section 139 of the Companies Act, 2013, the provisions related to rotation of auditor are
applicable to all private limited companies having paid up share capital of Rs. 50 crore or more; and all
companies having paid up share capital of below threshold limit mentioned above, but having public
borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more.

Although company A is a private limited company yet it is having public borrowings from nationalized bank of
Rs. 50 crores, therefore it would be governed by provisions of rotation of auditor.
Managing director of A Ltd. himself appointed the first auditor of the company.
Incorrect: As per section 139(6) of the Companies Act, 2013, the first auditor of a company, other than a
government company, shall be appointed by the Board of directors within 30 days from the date of registration of
the company.
Therefore, the appointment of first auditor made by the managing director of A Ltd. is in violation of the provisions
of the Companies Act, 2013.
OR Question
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered Accountant, as first
auditor of the company. Comment on the proposed action of the Managing Director.
Due to the resignation of the existing auditor(s), the Board of directors of X Ltd. appointed CA. Hari as the auditor. Is
the appointment of Hari as auditor valid?
Board's Powers to Appoint an Auditor: As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the
office of an auditor shall-
(i) In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by
the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days. If such casual
vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a
general meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting;
(ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Comptroller and Auditor-General of India within 30 days.
It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within he said
period the Board of Directors shall fill the vacancy within next 30 days.

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In the given case, the Board of directors of X Ltd. has appointed CA. Hari as the auditor due to resignation of the
existing auditor(s). The appointment made by the Board is correct, however, such appointment should be approved
by the company at a general meeting convened within 3 months of the recommendation of the Board and newly
appointed auditor shall hold office till the conclusion of the next annual general meeting.
The first auditor of a Government company was appointed by the Board in its meeting after 10 days from the date of
registration (True or False)
Incorrect: According to section 139(7) of the Companies Act, 2013, in the case of a Government company, the first
auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of
registration of the company. If CAG fails to make the appointment within 60 days, the Board shall appoint in next 30
days.
At the AGM of ICI (P) Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3 months since
he wanted to give up practice and join industry. State, how the new auditor will be appointed by ICI (P) Ltd. and the
conditions to be complied for.
Appointment of New Auditor in Case of Resignation: Section 139(8) of the Companies Act, 2013 deal with
provisions relating to appointment of auditor caused due to casual vacancy. A casual vacancy normally arises when
an auditor ceases to act as such after he has been validly appointed, e.g., death, disqualification, resignation, etc.
The section provides that a casual vacancy shall be filled by the Board of Directors within 30 days. However, in case
a casual vacancy has been created by the resignation of the auditor, the Board cannot fill in that vacancy itself, such
appointment shall also be approved by the company at general meeting convened within 3 months of the
recommendation of the board and then he shall hold office till the conclusion of the next annual general meeting.
In the instance case, Mr. X had been validly appointed and thereafter he had resigned. Consequently, the casual
vacancy has been created on account of resignation.
Therefore, the Board of Directors will have to fill the vacancy within 30 days and such appointment shall be
approved by the company at the general meeting within 3 months of the recommendations of the board. The new
auditor so appointed shall hold office only till the conclusion of the next annual general meeting.
As an auditor, comment on the following situation The first auditors of Health and Wealth Ltd., a Government
company, was appointed by the Board of Directors.
Appointment of the First Auditor in the Case of Government Company: Section 139(6) of the Companies Act, 2013
lays down that the first auditor or auditors of a company, other than a Government Company, shall be appointed by
the Board of directors within 30 days from the date of registration of the company. However, in the case of a
Government Company, the appointment of first auditor is governed by the provisions of Section 139(7) of the
Companies Act, 2013 which states that the first auditor shall be appointed by the Comptroller and Auditor-General
of India within 60 days from the date of registration of the company.
Hence, in the case of M/s Health and Wealth Ltd., being a government company, the first auditors shall be appointed

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by the Comptroller and Auditor General of India.
Thus, the appointment of first auditors made by the Board of Directors of M/s Health and Wealth Ltd., is null and
void.
Nickson Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25% by Uttar
Pradesh Government and 10% by Madhya Pradesh Government. Nickson Ltd. appointed Mr. P as statutory auditor
for the year.
Appointment of Auditor in the Case of Government Company: According to Section 139(7) of the Companies Act,
2013, a Government company is defined "as any company in which not less than 51% of the paid-up share capital is
held by the Central Government or by any State Government or Governments or partly by the Central Government
and partly by one or more State Governments and includes a company which is a subsidiary of a Government
Company as thus defined". The auditors of a government company shall be appointed or re-appointed by the
Comptroller and Auditor General of India.
In the given case Ajanta Ltd is a government company as its 20% shares have been held by Central Govt, 25% by
U.P. State Government and 10% by M.P. State Govt. Total 55% shares have been held by Central and State
governments. Therefore, it is a Government company.
Nickson Ltd. is a subsidiary company of Ajanta Ltd. Hence Nickson Ltd. covers in the definition of a government
company. Hence the Auditor of Nicksons Ltd. can be appointed only by C&AG.
Therefore, appointment of 'P' is invalid and 'P' should not give acceptance to the Directors of Nicksons Ltd.
White Star Ltd. was incorporated on 01.08.2014 and Mr. T, who is a relative to the Chairman & Managing Director
(CMD) of the Company, appointed as auditor by the Board of Directors in their meeting on 04.09.2014. Comment.
Appointment of First Auditors by the Board: Apparently, there are two issues arising out of this situation, viz., first
one relates to appointment of first auditor by the Board of Directors; and second, pertains to relation of such an
auditor with the Chairman of the company. Regarding the first issue relating to appointment of auditor, particularly,
in this case relating to appointment of first auditors, it may be noted as per the provisions of Section 139(6) of the
Companies Act, 2013, the first auditor of a company shall be appointed by the Board of Directors within 30 days
from the date of registration of the company.
As per the facts given in the case, the Board has failed to appoint the first auditor within 30 days from the
registration of company because the date of incorporation of White Star Ltd. is 01-08-2014 and the date of
appointment of auditors by the Board of Directors is 04-09-2014. Accordingly if the Board fails to appoint the first
auditor, it shall inform the members of the company, who shall within 90 days at an extraordinary general meeting
has to make the appointment.
Thus the appointment of Mr. T is not valid. Under the circumstances, the second issue relating to relationship of
auditor with the Chairman & Managing Director (CMD) becomes redundant.

also be given.

Mr. A was appointed auditor of AAS Ltd. by Board to fill the casual vacancy that arose due to death of the auditor
originally appointed in AGM. Subsequently, Mr. A also resigned on health grounds during the tenure of appointment.
The Board filled this vacancy by appointing you through duly passed Board resolution. Comment.
Answer Filling of a Casual Vacancy: Section 139(8) of the Companies Act, 2013 provides that any casual vacancy in
the office of an auditor shall be filled by the Board of Directors within 30 days. However, if such casual vacancy is as
a result of the resignation of an auditor, such appointment shall also be approved by the company at a general
meeting convened within 3 months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.
In the present case, the auditor Mr. A resigned and the vacancy had been filled in by Board. But, the vacancy caused
by resignation cannot be filled by Board itself, such appointment shall also be approved by the company at general
meeting.
The fact that the Mr. A was appointed by Board originally is a matter irrelevant in this situation. If the cause of
vacancy is resignation, then the power of appointment shall vest with the general meeting only. As such, the
appointment made by Board is invalid.
Rano Pvt. Ltd. is a private limited Company, having paid up share capital of Rs. 45 crore but having public borrowing
from nationalized banks and financial institutions of Rs. 40 crore. Advise the company on the applicability of
rotation of auditors.
Applicability of Section 139 (2) Rotation of Auditor :
As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of section 139(2) the class
of companies shall mean the following classes of companies excluding one person companies and small companies -
● all unlisted public companies having paid up share capital of rupees ten crore or more;
● all private limited companies having paid up share capital of rupees fifty crore or more;
● all companies having paid up share capital of below threshold limit mentioned above, but having public
borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.
From the above, it can be concluded that rotational provisions would not be applicable.
The first auditors of Bhartiya Petrol Ltd., a Government company, were appointed by the Board of Directors.
Analyse.
Managing Director of Pigeon Ltd. himself want s to appoint CA. Champ, a practicing Chartered Accountant, as first
auditor of the company. Advise
K Ltd., a non-government company, was incorporated on 01-10-2017. Mr. B, Managing Director of K Ltd., himself
appointed the first auditor of the company on 31-12-2017.

also be given.

At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He, however, resigned after 3 months
since he wanted to pursue his career in banking sector. The Board of Director has appointed Mr. L as the statutory
auditor in board meeting within 30 days. Comment on the matter with reference to the provisions of Companies Act,
2013.
Casual Vacancy by Resignation: As per Section 139(8), any casual vacancy in the office of an auditor shall in the case
of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller
and Auditor-General of India, be filled by the Board of Directors within 30 days. If such casual vacancy is as a
result of the resignation of an auditor, such appointment shall also be approved by the company at a general
meeting convened within three months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting.
Further, as per section 140(2) the auditor who has resigned from the company shall file within a period of 30 days
from the date of resignation, a statement in the prescribed Form with the company and the Registrar. In the instant
case, R resigned after three months of his appointment as statutory auditor as he wanted to pursue his career in
banking sector.
Therefore, the board of director has appointed Mr. L as the statutory auditor with in 30 days is in order subject to
such appointment shall also be approved by the company at a general meeting convened within three months of the
recommendation of the Board.
Further, it is also the duty of the auditor to file, within a period of 30 days from the date ofvresignation, a statement
in the prescribed Form with the company and the Registrar in compliance with section 140(2) of the Companies Act,
2013.

also be given.

Section 141- eligibility, qualifications and disqualifications of

auditors
141. (1) A person shall be eligible for appointment as an auditor of a company
● only if he is a chartered accountant
● Provided that a firm whereof
● majority of partners practising in India are qualified for appointment as aforesaid
● may be appointed by its firm name to be auditor of a company.
2(17) "chartered accountant" means a chartered accountant as defined in clause (b) of subsection (1) of section 2 of
the Chartered Accountants Act, 1949 (38 of 1949) who holds a valid certificate of practice under subsection (1) of
section 6 of that Act
2(1)(b) of The Chartered Accountants Act, 1949- chartered accountant” means a person who is a member of the
Institute
Section 6 (To be discussed in class and videos)
(2) Where a firm including a limited liability partnership is appointed as an auditor of a company,
● only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
(3) The following persons shall not be eligible for appointment as an auditor of a company, namely:—
(a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership
Act, 2008 (6 of 2009);
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(d) a person who, or his relative or partner—
(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not exceeding one
thousand rupees or such sum as may be prescribed (Not exceeding Rs. 1 lakh)
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, in excess of such amount as may be prescribed (N ot exceeding Rs. 5 lakh) ;
or
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third
person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such
holding company, for such amount as may be prescribed; (N ot exceeding Rs. 1 lakh.)
(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its
subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of
such nature as may be prescribed;
For the purpose of clause (e) of sub-section (3) of section 141, the term "business relationship" shall be
construed as any transaction entered into for a commercial purpose, except -

also be given.

i. commercial transactions which are in the nature of professional services permitted to be rendered by
an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the
regulations made under those Acts;
ii. commercial transactions which are in the ordinary course of business of the company at arm's length
price -like sale of products or services to the auditor, as customer, in the ordinary course of business,
by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other
similar businesses.
(f) a person whose relative is a director or is in the employment of the company as a director or key managerial
personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as
its auditor, if such persons or partner is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies other than one-person Company, dormant
companies , small companies and private Companies and private companies having paid up capital less
than 100 Crores which has not committed default in filing it’s financial statements u/s 137 or annual
return u/s 92 of companies act with the registrar.
(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not
elapsed from the date of such conviction.
(i) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its
holding company or its subsidiary company.
Explanation.—For the purposes of this clause, the term "directly or indirectly" shall have the meaning assigned
to it in the Explanation to section 144.
(4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in 141(3) after
his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in
the office of the auditor.
Meaning of Relative : The term “relative” as defined under the Companies Act, 2013, means anyone who is related to
another as members of a HUF; husband and wife; Father (including step-father), mother (including stepmother), Son
(including step-son), Son’s wife, Daughter, Daughter’s husband, Brother (including step-brother), sister (including
step-sister).
Mischief rule (Wikipedia)

The mischief rule is one of three rules of statutory interpretation traditionally applied by English courts.[2] The
other two are the "plain meaning rule" (also known as the "literal rule") and the "golden rule".
The main aim of the rule is to determine the "mischief and defect" that the statute in question has set out to remedy,
and what ruling would effectively implement this remedy. In applying the mischief rule, the court is essentially
asking what part of the law did the law not cover, but was meant to be rectified by Parliament in passing the bill.
Mischief rule (Wikipedia)

The mischief rule is one of three rules of statutory interpretation traditionally applied by English courts.[2] The other
two are the "plain meaning rule" (also known as the "literal rule") and the "golden rule".

also be given.

The main aim of the rule is to determine the "mischief and defect" that the statute in question has set out to remedy,
and what ruling would effectively implement this remedy. In applying the mischief rule, the court is essentially asking
what part of the law did the law not cover, but was meant to be rectified by Parliament in passing the bill.
Golden Rule (Wikipedia)

The rule can be used to avoid the consequences of a literal interpretation of the wording of a statute when such an
interpretation would lead to a manifest absurdity or to a result that is obnoxious to principles of public policy.
144 - Auditor not to render certain services.

An auditor appointed under this Act shall provide to the company only such other services as are approved by the
Board of Directors or the audit committee, as the case may be, but which shall not include any of the following services
(whether such services are rendered directly or indirectly to the company or its holding company or subsidiary
company), namely
(a) accounting and book keeping services;

(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed :
Explanation.—For the purposes of this subsection, the term "directly or indirectly" shall include rendering of services
by the auditor
i. in case of auditor being an individual,

○ either himself or
○ through his relative or
○ any other person connected or associated with such individual or
○ through any other entity, whatsoever, in which such individual has significant influence or control,
○ or whose name or trade mark or brand is used by such individual;
ii. in case of auditor being a firm,
○ either itself or
○ through any of its partners or
○ through its parent, subsidiary or associate entity or
○ through any other entity, whatsoever, in which the firm or any partner of the firm has significant
influence or control, or
○ whose name or trademark or brand is used by the firm or any of its partners.

also be given.

AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the relative of Mr. B is holding securities having face value of ₹
2,00,000 in XYZ Ltd. AB & Co. is qualified for being appointed as an auditor of XYZ Ltd.

Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be appointed as an auditor of a
company if his relative is holding any security of or interest in the company of face value exceeding ₹1 lakh.

Therefore, AB & Co. shall be disqualified for being appointed as an auditor of XYZ Ltd. as Mr. C, the relative of Mr. B who is a
partner in AB & Co., is holding securities in XYZ Ltd. having face value of ₹2 lakh.

A Chartered Accountant holding securities of S Ltd. having face value of ₹950 is qualified for appointment as an auditor of S
Ltd.

Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be appointed as an auditor of a
company if he is holding any security of or interest in the company.

As the chartered accountant is holding securities of S Ltd. having face value of ₹950, he is not eligible for appointment as an
auditor of S Ltd.

Mr. N, a member of the Institute of Chartered Accountants of England and Wales, is qualified to be appointed as auditor of
Indian Companies.

Incorrect: A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.

It may be noted that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may
be appointed by its firm name to be auditor of a company.

Thus, Mr. N is disqualified to be appointed as an auditor of Indian Companies.

M/s R & Co., a firm of Chartered Accountants, was appointed as statutory auditors of Ramesh Company Ltd. Ramesh
Company Ltd. holds 51% shares in Suresh Company Ltd. Mr. R, one of the partners of M/s R & Co., owed ₹1,500 as on the date
of appointment to Suresh Company Ltd. for goods purchased in normal course of business. Comment.

Indebtedness to the Subsidiary Company: As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his
relative or partner is indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its
holding company, for an amount exceeding ₹5,00,000, then he is not qualified for appointment as an auditor of a company.

Where an auditor purchases goods or services from a company audited by him or its subsidiary, or its holding or associate
company, or a subsidiary of its holding company, whether in normal course of business, he is definitely indebted to the
company and if the amount outstanding exceeds ₹5,00,000, he is disqualified for appointment as an auditor of the
company. In such a case, he becomes indebted to the company and consequently he has deemed to have vacated his office.

In the given case, M/s R & Co., a firm of Chartered Accountants, was appointed as statutory auditors of Ramesh Company
Ltd. where the company holds 51% shares in Suresh Company Ltd. Mr. R, one of the partners of M/s R & Co. owed ₹ 1,500 as on
the date of appointment to Suresh Company Ltd. for goods purchased.

Accordingly, the partner, Mr. R, is not disqualified to be appointed as auditor of the company as he is indebted to the
company for an amount not exceeding ₹ 5,00,000.

Due to this, M/s R & Co. is not disqualified to be appointed as an auditor of Ramesh Company Ltd.

also be given.

ABC Ltd. appointed CA Prem as an auditor of the company for the current financial year. Further the company offered him
the services of investment banking, rendering of outsourced financial services and management services which was also
approved by the Board of Directors. State the services which the auditor is restrained from rendering and then advise
accordingly. (For Answer Please refer Section 144)

An auditor purchased goods worth ₹ 510,200 on credit from a company being audited by him. The company allowed him
one month's credit, which it normally allowed to all known customers.

Purchase of Goods on Credit by the Auditor: Section 141(3)(d)(ii) of the Companies Act, 2013 specifies that a person shall be
disqualified to act as an auditor if he is indebted to the company for an amount exceeding five lakh rupees.

Where an auditor purchases goods or services from a company audited by him on credit, he is definitely indebted to the
company and if the amount outstanding exceeds rupees five lakh, he is disqualified for appointment as an auditor of the
company.

It will not make any difference if the company allows him the same period of credit as it allows to other customers on the
normal terms and conditions of the business.

The auditor cannot argue that he is enjoying only the normal credit period allowed to other customers. In fact, in such a
case he has become indebted to the company and consequently he has deemed to have vacated his office.

Mr. A, a chartered accountant has been appointed as auditor of Laxman Ltd. in the Annual General Meeting of the company
held in September, 2018. Subsequently in January, 2019 he joined Mr. B, another chartered accountant, who is the Manager
Finance of Laxman Ltd., as partner.

Disqualifications of an Auditor: 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. Sub-section
(4) of Section 141 provides that an auditor who incurs any of the disqualifications mentioned in sub-section (3) after his
appointment, he shall vacate his office as such auditor.

In the present case, Mr. A, an auditor of Laxman Ltd., joined as partner with Mr. B, who is Manager Finance of Laxman Limited,
has attracted sub-section (3)(c) of Section 141 and, therefore, he shall be deemed to have vacated office of the auditor of
Laxman Limited.

If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company, every partner of a firm shall be
authorized to act as an auditor.

Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including a limited liability partnership (LLP) is
appointed as an auditor of a company, only the partners who are Chartered Accountants shall be authorized to act and
sign on behalf of the firm.

also be given.

KBC & Co. a firm of Chartered Accountants has three partners, namely, Mr. K, Mr. B & Mr. C. Mr. K is also in whole time
employment elsewhere. The firm is offered the audit of ABC Ltd. and is already holding audit of 40 companies.

Ceiling on Number of Company Audits: Section 141 (3)(g) of the Companies Act, 2013 states that the following persons shall
not be eligible for appointment as an auditor of a company i.e. a person who is in full time employment elsewhere; or a
person, or a partner of a firm holding appointment as its auditor, if such person, or partner is at the date of such
appointment, or reappointment holding appointment as auditor of more than twenty companies.

In the given case, Mr. K, a partner in the firm KBC & Co., is in whole-time employment elsewhere, therefore, he will be excluded
in determining the number of company audits that the firm can hold. If Mr. B and Mr. C do not hold any audits in their
personal capacity or as partners of other firms, the total number of company audits that can be accepted by KBC & Co., is
40, and in the given case company is already holding 40 audits, therefore, KBC & Co. can't accept the offer for audit of ABC
Ltd.

Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory Auditor of Krishna Ltd.
for the accounting year 2014-2015. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna Ltd.

Auditor Holding Securities of a Company: As per sub-section (3)(d)(i) of Section 141 of the Companies Act, 2013 along with
Rule 10 of the Companies (Audit and Auditors) Rule, 2014, a person shall not be eligible for appointment as an auditor of a
company, who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company. Provided that the relative may hold security or
interest in the company of face value not exceeding ` 1 lakh.

Also, as per sub-section 4 of Section 141 of the Companies Act, 2013, where a person appointed as an auditor of a company
incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such
auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and Hanuman Associates, holds 100 equity
shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.

Therefore, the firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as statutory auditor of Krishna
Ltd., which is the holding company of Shiva Ltd., because one of the partners Mr. Hanuman is holding equity shares of its
subsidiary.

Preksha, a member of the ICAI, does not hold a Certificate of practice. Is her appointment as an auditor valid?

Qualifications of an Auditor: A person shall be qualified for appointment as an auditor of a company, only if one is a
Chartered Accountant within the meaning of the Chartered Accountants Act, 1949. Under the Chartered Accountants Act,
1949, only a Chartered Accountant holding the certificate of practice can engage in public practice. Preksha does not hold a
certificate of practice and hence cannot be appointed as an auditor of a company.

also be given.

'B' owes ₹ 5,01,000 to 'C' Ltd., of which he is an auditor. Is his appointment valid? Will it make any difference, if the advance is
taken for meeting-out travelling expenses?

Indebtedness to the Company: As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or
partner is indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its holding
company, for an amount exceeding ₹ 5,00,000/- then he is not qualified for appointment as an auditor of a company.
Accordingly, B's appointment is not valid and he is disqualified as the amount of debt exceeds ₹ 5,00,000.

Even if the advance was taken for meeting out travelling expenses particularly before commencement of audit work, his
appointment is not valid because in such a case also the auditor shall be indebted to the company. The auditor is entitled to
recover fees on a progressive basis only.

Mr. Aditya, a practicing chartered accountant is appointed as a "Tax Consultant" of ABC Ltd., in which his father Mr. Singhvi is
the Managing Director.

Appointment of a Practicing CA as 'Tax Consultant': A chartered accountant appointed as an auditor of a company, should
ensure the independence in respect of his appointment as an auditor, else it would amount to "misconduct" under the
Chartered Accountants Act, 1949 read with Guidance Note on Independence of Auditors.

In this case, Mr. Aditya is a "Tax Consultant" and not a "Statutory Auditor" or "Tax Auditor" of ABC Ltd., hence he is not
subject to the above requirements.

PBS & Associates, a firm of Chartered Accountants, has three partners P, B and S. The firm is already having audit of 45
companies. The firm is offered 20 company audits. Decide and advise whether PBS & Associates will exceed the ceiling
prescribed under Section 141(3)(g) of the Companies Act, 2013 by accepting the above audit assignments?

Ceiling on Number of Audits: Before appointment is given to any auditor, the company must obtain a certificate from him to
the effect that the appointment, if made, will not result in an excess holding of company audit by the auditor concerned
over the limit laid down in section 141 (3)(g) of the Act which prescribes that a person who is in full time employment
elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of
such appointment or reappointment holding appointment as auditor of more than 20 companies.

In the case of a firm of auditors, it has been further provided that 'specified number of companies' shall be construed as the
number of companies specified for every partner of the firm who is not in full time employment elsewhere.

If Mr. P, B and S do not hold any audits in their personal capacity or as partners of other firms, the total number of company
audits that can be accepted by M/s PBS & Associates is 60. But, the firm is already having audit of 45 companies. So the firm
can accept the audit of 15 companies only, which is well within the limit, specified by Section 141(3)(g) of the Companies Act,
2013.

also be given.

Mr. Fat, auditor of Thin Ltd., has his office and residence in the building owned by Thin Ltd. Mr. Fat has been given 10%
concession in rent by the company as compared to other tenants.

Independence of Auditor: As per SA 200, "Overall Objectives of the Independent Auditor and the conduct of an audit in
accordance with standards on auditing", In the case of an audit engagement it is in the public interest and, therefore,
required by the Code of Ethics, that the auditor be independent of the entity subject to the audit. The Code describes
independence as comprising both independence of mind and independence in appearance. The auditor's independence
from the entity safeguards the auditor's ability to form an audit opinion without being affected by influences that might
compromise that opinion. Independence enhances the auditor's ability to act with integrity, to be objective and to maintain
an attitude of professional skepticism. In the instant case, Mr. Fat has his office and residence in the building owned by Thin
Ltd. who are subject to audit by Mr. Fat. Giving 10% concession in rent may be due to some other reasons other than holding
auditor ship of Thin Ltd. It may be due to being very old tenant or due to office and residence in the same building or Mr. Fat
might have carried out major renovation and so on.

Thus in the instant case unless and until there is direct proof, giving 10% concession in rent does not affect independence of
the auditor in expressing his opinion on the audit of Thin Ltd.

Under what circumstances the retiring Auditor cannot be reappointed? (झकास)

Answer Circumstances where Retiring Auditor Cannot be Reappointed: In the following circumstances, the retiring auditor
cannot be reappointed-

i.A specific resolution has not been passed to reappoint the retiring auditor.
i.The auditor proposed to be reappointed does not possess the qualification prescribed under section 141 of the Companies
Act, 2013.
i.The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and 144 of the Companies Act, 2013.
v.He has given to the company notice in writing of his unwillingness to be reappointed.
v.A resolution has been passed in AGM appointing somebody else or providing expressly that the retiring auditor shall not be
reappointed.
i.A written certificate has not been obtained from the proposed auditor to the effect that the appointment or
reappointment, if made, will be in accordance within the limits specified under section 141 (3)(g) of the Companies Act, 2013.

Mr. Amar, a Chartered Accountant, bought a car financed at ₹ 7,00,000 by Chaudhary Finance Ltd., which is a holding
company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd. and continues to be to even after taking
the loan.

Indebtedness to the Holding Company: According to section 141(3)(d)(ii) of the Companies Act, 2013, a person is not eligible
for appointment as auditor of any company, If he is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of ₹ 5 lakh.

In the given case Mr. Amar is disqualified to act as an auditor under section 141 (3)(d) (ii)) as he is indebted to M/s Chaudhary
Finance Ltd. for more than ₹ 5'00'000. Also according to Section 141(3)(d)(ii), he cannot act as an auditor of any subsidiary
of Chaudhary Finance Ltd. i.e. he is also disqualified to work in Charan Ltd. & Das Ltd. Therefore, he has to vacate his office in
Das Ltd. Even though it is a subsidiary of Chaudhary Finance Ltd.

Hence audit work performed by Mr. Amar as an auditor is invalid, he should vacate his office immediately and Das Ltd must
have to appoint any other CA as an auditor of the company.

also be given.

Question (Imp Question) Mr. Y was appointed as an auditor of PQR Ltd. for the year ended 31.3.2015 at the Annual General
Meeting held on 16.08.2014. Mr. Y has been indebted to the company for sum of Rs. 5,10,000 as on 01.04.2014, the opening
date of accounting year which has been subject to his audit. However, Mr. Y having come to know that he might be
appointed as auditor, he repaid the amount on 10.8.2014. One of the shareholders, complains that the appointment of Mr. Y
as an auditor was invalid because he incurred disqualification u/s 141 of the Companies Act, 2013. Comment.
Indebtedness to the Company: According to the section 141(3)(d)(ii) of the Companies Act, 2013, a person who is indebted to
the company for an amount exceeding ` 5,00,000 shall be disqualified to act as an auditor of such company and he should
vacate his office of auditor when he incurs this disqualification subsequent to his appointment.

However, where the person has liquidated his debt before the appointment date, there is no disqualification to be construed
for such appointment.

In the given case, Mr. Y was appointment as an auditor of PQR Ltd. for the year ended 31.03.2015 at the Annual General
Meeting held on 16.08.2014. He repaid the loan amount fully to the company on 10.8.2014 i.e. before the date of his
appointment.

Hence, the appointment of Mr. Y as an auditor is valid and the shareholder's complaint is not acceptable.

also be given.

Section 143 Powers and duties of auditors and auditing

standards
143. (1) Every auditor of a company shall have a
● right of access
○ at all times
○ to the books of account and vouchers of the company,
○ whether kept at the registered office of the company or at any other place and
● shall be entitled to require
○ from the officers of the company
○ such information and explanation as he may consider necessary for the performance of his duties as
auditor and
● amongst other matters 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;
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:
Provided that the auditor of a company which is a holding company shall also have the right of access to the records of
all its subsidiaries and associate companies insofar as it relates to the consolidation of its financial statements with
that of its subsidiaries and associate companies.

also be given.

also be given.

also be given.

143(2) Report To Members
The auditor shall

● make a report
● to the members of the company
● on the accounts examined by him and on every financial statements which are required by or under this Act to
be laid before the company in general meeting and
● the report shall after taking into account
○ the provisions of this Act,
○ the accounting and
○ auditing standards and
○ matters which are required to be included in the audit report under the provisions of this Act or
○ any rules made thereunder or
○ under any order made under sub-section (11) and
○ to the best of his information and knowledge,
● the said accounts, financial statements give a true and fair view of the state of the company's affairs as at the
end of its financial year and profit or loss and cash flow for the year and such other matters as may be
prescribed.
143(3) - Report on Other Elements

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;
c. whether the report on the accounts of any branch office of the company audited under sub-section (8) by a
person other than the company's auditor has been sent to him under the proviso to that sub-section and the
manner in which he has dealt with it in preparing his report;
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.
j. such other matters as may be prescribed
Reporting under clause(i) of Sec. 143(3) shall not apply to a private company:
● Which is a one-person company or a small company ; or

also be given.

● Which has turnover less than Rs 50 crores as per latest audited financial
statement And Which has aggregate borrowings from banks or financial
institutions or any body corporate at any point of time during the financial
year less than Rs 25 Cr.
Other Matters Prescribed-Rule 11 of Companies (Audit & Auditors) Rules , 2014

The auditor’s report shall also include their views and comments on the following matters, namely:
1. Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its
financial statement;
2. Whether the company has made provisions, as required under any law or accounting standards, for
material foreseeable losses, if any, or long term contracts including derivative contracts;
3. Whether there has been any delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the company.
143(4) - Reasons
Where
● any of the matters required to be included in the audit report
● under this section
● is answered in the negative
● or with a qualification,
● the report shall state the reasons therefor.

also be given.

(5) In the case of a Government company or any other company owned or controlled, directly or indirectly, by the
Central Government, or by any State Government or Governments, or partly by the Central Government and partly by
one or more State Governments, the Comptroller and Auditor General of India shall appoint the auditor under
subsection (5) or subsection (7) of section 139 and direct such auditor the manner in which the accounts of the
company are required to be audited and]thereupon the auditor so appointed shall submit a copy of the audit report to
the Comptroller and Auditor General of India which, among other things, include the directions, if any, issued by the
Comptroller and Auditor General of India, the action taken thereon and its impact on the accounts and financial
statement of the company.
(6) The Comptroller and Auditor General of India shall within sixty days from the date of receipt of the audit report
under subsection (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person or persons as he may
authorise in this behalf; and for the purposes of such audit, require information or additional information to be
furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as
the Comptroller and AuditorGeneral of India may direct; and
(b) comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor General of India upon, or supplement to, the audit
report shall be sent by the company to every person entitled to copies of audited financial statements under
subsection (1) of section 136 and also be placed before the annual general meeting of the company at the same time
and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor General of India may, in case of
any company covered under subsection (5) or subsection (7) of section 139, if he considers necessary, by an order,
cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller
and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 (56 of 1971), shall apply to the report of
such test audit.
Section 19A - Laying of reports in relation to accounts of Government companies and corporation
Branch Audit
(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor appointed
for the company (herein referred to as the company's auditor) under this Act or by any other person qualified for
appointment as an auditor of the company under this Act and appointed as such under section 139, or where the
branch office is situated in a country outside India, the accounts of the branch office shall be audited either by the
company's auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the
branch office in accordance with the laws of that country and the duties and powers of the company's auditor with
reference to the audit of the branch and the branch auditor, if any, shall be such as may be prescribed
Provided that the branch auditor shall prepare a report on the accounts 89 of the branch examined by him and send it
to the auditor of the company who shall deal with it in his report in such manner as he considers necessary.

also be given.

Duties and powers of the company's auditor with reference to the audit of
the branch and the branch auditor. - Rule 12
12. (1) For the purposes of subsection (8) of section 143, the duties and powers of the company's auditor with
reference to the audit of the branch and the branch auditor, if any, shall be as contained in subsections (1) to (4) of
section 143.
(2) The branch auditor shall submit his report to the company's auditor.
(3) The provisions of subsection (12) of section 143 read with rule 12 hereunder regarding reporting of fraud by
the auditor shall also extend to such branch auditor to the extent it relates to the concerned branch.
(9) Every auditor shall comply with the auditing standards.
(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as recommended by
the Institute of Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act, 1949
(38 of 1949), in consultation with and after examination of the recommendations made by the National Financial
Reporting Authority:
Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute
of Chartered Accountants of India shall be deemed to be the auditing standards.
LATER With CARO

(11) The Central Government may, in consultation with the National Financial Reporting Authority, 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
Reporting of Fraud
(12) Notwithstanding anything contained in this section, 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:
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the
audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as
may be prescribed:
Provided further that the companies, whose auditors have reported frauds under this subsection to the audit
committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the
Board's report in such manner as may be prescribed.
(13) No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by
reason of his reporting the matter referred to in subsection (12) if it is done in good faith.
(14) The provisions of this section shall mutatis mutandis apply to—
a. the cost accountant conducting cost audit under section 148; or

also be given.

b. the company secretary in practice conducting secretarial audit under section 204.
(15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of subsection
(12), he shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty five
lakh rupees.
Rule 13 - Reporting of frauds by auditor and other matters.

13. (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 rupees one crore
or above, is being or has been committed against the company by its officers or employees, the auditor shall report
the matter to the Central Government.
(2) The auditor shall report the matter to the Central Government 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 two days of his knowledge of the fraud, seeking their reply or observations within
fortyfive 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 Central Government within fifteen 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 forty five days, he shall forward his report to the Central Government along with a note
containing the details of his report that was earlier forwarded to the Board or the Audit Committee for
which he has not received any reply or observations;
d. the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post
with Acknowledgement Due or by Speed Post followed by an email in confirmation of the same;
e. the report shall be on the letterhead of the auditor containing postal address, email 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 ADT4.
(3) In case of a fraud involving lesser than the amount specified in subrule (1), the auditor shall report the matter to
Audit Committee constituted under section 177 or to the Board immediately but not later than two 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
(4) The following details of each of the fraud reported to the Audit Committee or the Board under subrule
(3) during the year 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.
(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during
the performance of his duties under section 148 and section 204 respectively.]

also be given.

also be given.

also be given.

also be given.

also be given.

Reporting of Fraud Etc.

also be given.

also be given.

also be given.

Section 140- Removal, resignation of auditor and giving of

special notice
140. (1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only
by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf
in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable
opportunity of being heard.
Removal of the auditor before expiry of his term

7. (1) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and
shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and
Fees) Rules, 2014.
(2) The application shall be made to the Central Government within thirty days of the resolution passed by the
Board.
(3) The company shall hold the general meeting within sixty days of receipt of approval of the Central
Government for passing the special resolution.
(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of
resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies
referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and
Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.
(3) If the auditor does not comply with the provisions of sub-section (2), he or it shall be liable to a penalty of fifty
thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of
continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure
continues, subject to a maximum of five lakh rupees.
(4)
i. Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person
other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except
where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as
provided under sub-section (2) of section 139.
ii. On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring
auditor.

also be given.

iii. Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation
in writing to the company (not exceeding a reasonable length) and requests its notification to members of the
company, the company shall, unless the representation is received by it too late for it to do so,—
a. in any notice of the resolution given to members of the company, state the fact of the representation
having been made; and
b. send a copy of the representation to every member of the company to whom notice of the meeting is
sent, whether before or after the receipt of the representation by the company, and if a copy of the
representation is not sent as aforesaid because it was received too late or because of the company's
default, the auditor may (without prejudice to his right to be heard orally) require that the
representation shall be read out at the meeting:
Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar:
Provided further that if the Tribunal is satisfied on an application either of the company or of any other aggrieved
person that the rights conferred by this sub-section are being abused by the auditor, then, the copy of the
representation may not be sent and the representation need not be read out at the meeting.
(5) Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the
Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it
is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the
company to change its auditors:
Provided that if the application is made by the Central Government and the Tribunal is satisfied that any change
of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not
function as an auditor and the Central Government may appoint another auditor in his place:
Provided further that an auditor, whether individual or firm, against whom final order has been passed by the
Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five
years from the date of passing of the order and the auditor shall also be liable for action under section 447.
Explanation I.—It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers.
Explanation II.—For the purposes of this Chapter the word "auditor" includes a firm of auditors.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

Remuneration of auditors. Section 142
142. (1) The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as
may be determined therein :
Provided that the Board may fix remuneration of the first auditor appointed by it.
(2) The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to
him but does not include any remuneration paid to him for any other service rendered by him at the request of the
company.
Auditor to sign audit reports, etc. - Section 145

145. The person appointed as an auditor of the company shall sign the auditor's report or sign or certify any other
document of the company in accordance with the provisions of sub-section (2) of section 141, and the qualifications,
observations or comments on financial transactions or matters, which have any adverse effect on the functioning of
the company mentioned in the auditor's report shall be read before the company in general meeting and shall be open
to inspection by any member of the company.
Auditors to attend general meeting. - Section 146

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the
company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his
authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be
heard at such meeting on any part of the business which concerns him as the auditor.

also be given.

Punishment for contravention. - Section 147

147. (1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
● the company shall be punishable
● with fine
○ which shall not be less than twenty-five thousand rupees
○ but which may extend to five lakh rupees and
■ every officer of the company who is in default
■ shall be punishable
■ with imprisonment
■ for a term which may extend to one year or
■ with fine which shall not be less than ten thousand rupees but which may extend to one lakh
rupees,
■ or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section
145, the auditor shall be punishable with fine which shall not be less
● than twenty-five thousand rupees
● but which may extend to
○ five lakh rupees or
○ four times the remuneration of the auditor,
○ whichever is less.
Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the
company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term
which may extend to one year and with fine which shall not be less
● than fifty thousand rupees
● but which may extend to
○ twenty-five lakh rupees or
○ eight times the remuneration of the auditor, whichever is less
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to—
i. refund the remuneration received by him to the company; and
ii. pay for damages to the company, statutory bodies or authorities or to members or creditors of the company
for loss arising out of incorrect or misleading statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring
prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body,
authority or officer shall after payment of damages to such company or persons file a report with the Central
Government in respect of making such damages in such manner as may be specified in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of
the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by,
the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any
other law for the time being in force, for such act shall be of the partner or partners concerned of the audit
firm and of the firm jointly and severally:

also be given.

Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner
or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be
liable

also be given.

Section 148 Cost Records and Cost Audit

(Please note the short notes yourself which are there in video)
148. (1) Notwithstanding anything contained in this Chapter,

● the Central Government may,
○ by order,
○ in respect of such class of companies engaged in the production of such goods or providing such
services as may be prescribed,
● direct that particulars relating to the utilisation of material or labour or to other items of cost as may be
prescribed shall also be included in the books of account kept by that class of companies:
Provided that the Central Government shall, before issuing such order in respect of any class of companies regulated
under a special Act, consult the regulatory body constituted or established under such special Act.
(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of
cost records of class of companies, which are covered under sub-section (1) and which have a net worth of such
amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner
specified in the order.
Rule 3 of Companies (Cost Records and Audit) Rules, 2014 as amended on

31st December 2014
Application of cost records
A. The ministry has introduced six major regulated sectors which are:
○ Telecommunication Services,
○ Generation, distribution, and regulation of Electricity,
○ Petroleum industry,
○ Drugs and Pharmaceuticals,
○ Fertilizers, and
○ Sugar & Industrial Alcohol).
B. Besides the regulated sectors, the ministry has also named a number of Non-regulated sectors that should
be included in the purview of the new audit rules. The major industries in the Non-regulated sector are
○ Arms and Ammunitions,
○ Turbojets,
○ Steel,
○ Aeronautics, and
○ Coffee and Tea, etc.
○ Others (हमाऱे बस क नह ं है ) ☺
Provided further that nothing contained in this rule shall apply to a company which is classified as a micro
enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of the Micro
Small and Medium Enterprises Development Act, 2006 (27 of 2006).

also be given.

Records are to be maintained under this rule only if the overall turnover from all of its product and service equal to
or exceed Rs. 35 Crores in the preceding financial year.
Rule 4 – Applicability for Cost Audit
FOR REGULATED SECTORS

Every company specified in item (A) of rule 3 shall get its cost records audited in accordance with these rules if the
● overall annual turnover of the company from all its products and services during the immediately preceding
financial year is
○ rupees fifty crore or more
● and the aggregate turnover
○ of the individual product or products or service or services.
○ for which cost records are required to be maintained under rule 3
■ is rupees twenty-five crore or more.
FOR UNREGULATED SECTORS

Every company specified in item (B) of rule 3 shall get its cost records audited in accordance with these rules if the
● overall annual turnover of the company from all its products and services during the Immediately preceding
financial year is rupees one hundred crore or more
● and the aggregate turnover
○ of the individual product or products or service or services
○ for which cost records are required to be maintained under rule 3
■ is rupees thirty-five crore or more.
The Requirement for cost audit under these rules shall not apply to a company which is covered rule 3, and
● Whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total revenue; or
● Which is operating from a special economic zone.
Rule 5 of the Companies (cost records and audit) Rules, 2014
Every company under these rules

● including all units and branches thereof,
● Shall,
● Maintain cost records in form CRA -1
● The cost records shall be maintained on regular basis
● in such manner as to facilitate calculation of
○ per unit cost of production
○ or cost of operations,
○ Cost of sales and
○ Margin
● for each of its products and activities for every financial year on monthly or quarterly or half-yearly or
annual basis.
● The cost records shall be maintained in such manner so as to

also be given.

○ enable the company to exercise, over the various operations and costs to achieve optimum
economies in utilization of resources and
○ these records shall also provide necessary data which is required to be furnished under these rules
(3) The audit under sub-section (2) shall be conducted by a cost accountant who shall be appointed by the Board on
such remuneration as may be determined by the members in such manner as may be prescribed.
Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting
the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
Explanation.—For the purposes of this sub-section, the expression "cost auditing standards" mean such standards as
are issued by the 5a[Institute of Cost Accountants of India], constituted under the Cost and Works Accountants Act,
1959 (23 of 1959), with the approval of the Central Government.
Procedure for appointment and fixation of remuneration of the Cost

Auditor - Rule 14 of Companies (Audit and Auditors) Rules, 2014.
Case I: The Company is required to constitute an audit committee
● The Board shall appoint the cost auditor on the recommendations of the Audit Committee.
● The Audit Committee shall recommend the remuneration of the cost auditor.
● The remuneration of the cost auditor shall be considered and approved by the Board and ratified
subsequently by the members.
Case II: The Company is not required to constitute an audit committee

● The Board shall appoint the cost auditor.
● The remuneration of the cost auditor shall be fixed by the Board and ratified subsequently by the members.
● Only a cost accountant in practice or a firm of cost accountants in practice can be appointed as a cost
auditor.
(4) An audit conducted under this section shall be in addition to the audit conducted under section 143.
(5) The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter shall,
so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the
company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost
records of the company:
Provided that the report on the audit of cost records shall be submitted by the 6[cost accountant] to the Board of
Directors of the company.

also be given.

(6) A company shall within thirty days from the date of receipt of a copy of the cost audit report prepared in
pursuance of a direction under sub-section (2) furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained therein.
(7) If, after considering the cost audit report referred to under this section and the information and explanation
furnished by the company under sub-section (6), the Central Government is of the opinion that any further
information or explanation is necessary, it may call for such further information and explanation and the company
shall furnish the same within such time as may be specified by that Government.
(8) If any default is made in complying with the provisions of this section,—
a. the company and every officer of the company who is in default shall be punishable in the manner as provided
in sub-section (1) of section 147;
b. the cost auditor of the company who is in default shall be punishable in the manner as provided in
sub-sections (2) to (4) of section 147.
Cost Audit Rule 6 of Companies (Cost Records And Audit) Rules

2014.
(1) The category of companies specified in rule 3 and the thresholds limits laid down in rule 4, shall within one
hundred and eighty days of the commencement of every financial year, appoint a cost auditor:
Provided that before such appointment is made, the written consent of the cost auditor to such appointment, and a
certificate from him or it, as provided in sub-rule (1A), shall be obtained.
(1A) The cost auditor appointed under sub-rule (1) shall submit a certificate that—
a. the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Cost and Works Accountants Act, 1959 (23 of 1959) and the rules or
regulations made thereunder;
b. the individual or the firm, as the case may be, satisfies the criteria provided in section 141 of the Act, so far as
may be applicable;
c. the proposed appointment is within the limits laid down by or under the authority of the Act; and
d. the list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with
respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
(2) Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its appointment as such
and file a notice of such appointment with the Central Government within a period of thirty days of the Board meeting
in which such appointment is made or within a period of one hundred and eighty days of the commencement of the
financial year, whichever is earlier, through electronic mode, in form CRA-2, alongwith the fee as specified in
Companies (Registration Offices and Fees) Rules, 2014.
(3) Every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty days
from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has
been appointed:

also be given.

Provided that the cost auditor appointed under these rules may be removed from his office before the expiry of his
term, through a board resolution after giving a reasonable opportunity of being heard to the Cost Auditor and
recording the reasons for such removal in writing
Provided further
that the Form CRA-2 to be filed with the Central Government for intimating appointment of another cost auditor shall
enclose the relevant Board Resolution to the effect: Provided also that nothing contained in this sub-rule shall
prejudice the right of the cost auditor to resign from such office of the company.
(3A) Any casual vacancy in the office of a cost auditor, whether due to resignation death or removal, shall be filled by
the Board of Director, within thirty days of occurrence of such vacancy and the company shall inform the Central
Government in Form CRA-2 within thirty days of such appointment of cost auditor.
(3B) The cost statements, including other statements to be annexed to the cost audit report, shall be approved by the
Board of Directors before they are signed on behalf of the Board by any of the director authorised by the Board, for
submission to the cost auditor to report thereon.
(4) Every cost auditor, who conducts an audit of the cost records of a company, shall submit the cost audit report
along with his or its reservations or qualifications or observations or suggestions, if any, in form CRA-3.
(5) Every cost auditor shall forward his duly signed report to the Board of Directors of the company within a period of
one hundred and eighty days from the closure of the financial year to which the report relates and the Board of
Directors shall consider and examine such report, particularly any reservation or qualification contained therein.
(6) Every company covered under these rules shall, within a period of thirty days from the date of receipt of a copy of
the cost audit report, furnish the Central Government with such report along with full information and explanation on
every reservation or qualification contained therein, in Form CRA-4 in Extensible Business Reporting Language format
in the manner as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting
Language) Rules, 2015 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.
(7) The provisions of sub-section (12) of section 143 of the Act and the relevant rules made thereunder shall apply
mutatis mutandis to a cost auditor during performance of his functions under section 148 of the Act and these rules.

also be given.

CARO - COMPANIES (AUDITOR'S REPORT)

ORDER, 2016
Section 143(11)
(11) The Central Government may,
● in consultation with the National Financial Reporting Authority,
● 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
Applicability
It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies
Act. 2013 except
● A banking company;
● An insurance company;
● A company licensed to operate u/s 8 of the Companies Act;
● 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
● A private limited company, not being a subsidiary or holding of a public company,
○ Having a paid up capital & Reserves & surplus not more than Rs 1 Cr. as on the balance sheet date, and
○ Which does not have total borrowings exceeding Rs 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 Rs. 10 Crore during the financial year as per the
Paid up Share capital

● Paid up capital includes equity as well as preference.
● Amount originally paid up on forfeited shares should be added to the figure of paid up capital.
● Share Application money - NO.
● Securities Premium - YES
● General Reserve - YES
● Reserves includes Capital reserves, revenue reserves as well as Revaluation Reserves.
● Credit Balance of Profit and Loss Account will form part of reserve.
● In case of debit balance of profit or loss, the same shall be netted for computing reserves & surplus.

To get the best out of these notes visit www.neerajaroraclasses.com CARO | 1
also be given.

Borrowings
● Loans from banks and financial institutions are to be considered in aggregate.
● Financial Institutions includes NBFC.
● Loans may be in any form like term loan, demand loans, cash credit overdraft, export credit, bill
purchased/discounted.
● Long term, loans as well as short term loans, secured as well as unsecured will be considered .
● Outstanding dues, in respect of credit cards will also be considered.
● Fund based facilities are counted in borrowings whereas non fund based facilities are not counted.
● Security amount is not to be adjusted
● Loans from other than banking and financial institutions shall not be considered
● Limit or actual Amount? -
● Loans from NBFC?
● Balance Sheet Borrowings “Zero”
Total Revenue
● Revenue from operations and other Income.
● Here revenue will also include revenue from discontinuing operations as specified in the Order.
● Other income shall consist of the following;
❖ Interest Income (other than a finance company);
❖ Dividend Income;
❖ Net gain/loss on sale of investments;
❖ Other non-operating income (net of expenses directly attributable to such income).
● Commision
● Taxes
● Sales return

also be given.

also be given.

also be given.

also be given.

Matters to be included in the auditor’s report under CARO,

2016
Fixed Assets
Whether the company is
● maintaining proper records showing full particulars,
■ including (Fixed asset register) quantitative details and (For Verification)
● situation of fixed assets.
Points to be considered
● These records should also contain particulars in respect of those items of fixed assets that have been fully
depreciated or amortized or have been retired from active use and held for disposal.
● The records should also contain necessary particulars in respect of item of fixed assets that have been fully
impaired during the period covered by the audit report.
● Where assets like furniture etc., are located in the residential premises of members of the staff, the fixed assets
register should indicate the name/ designation of the person.
Whether these fixed assets have been

● physically verified
● by the management o 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.
● Physical verification of the assets has to be made by the management and not by the auditor.
● The auditor may observe the verification, particularly when verification of all assets can be made by the
management on a single day or within a relatively short period of time.
● It is necessary to ensure that the person making the verification had the required technical knowledge, where
such knowledge is required.
● It is also possible for verification to be made by outside expert agencies engaged by the management for the
purpose.
Whether the title deeds of immovable properties are held in the name of the company. If not, provide the details
thereof.
● The auditor should obtain the fixed asset register and reconcile it with the title deeds of immovable
properties.
● He should seek confirmation from banks if the title deeds have been kept with them as a charge against loan.
Inventory
● Whether
○ physical verification of inventory has been conducted at
○ reasonable intervals by the management and

also be given.

● Whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the
books of account.
● Inventories include goods purchased and held for resale, for example, merchandise purchased by a retailer
and held for resale.
● Inventories also include finished goods produced, or work in progress and materials, stores and spares,
consumables and loose tools.
● Physical verification of inventory is the responsibility of the management of the company.
● The periodicity of the physical verification of inventories depends upon the nature of inventories and their
location.
● This would require the auditor to make use of his professional judgment.
● The SA-501, "Audit Evidence - Additional Consideration for specific items", lays down the guidance
regarding the audit procedures to be applied for physical verification of inventory.

also be given.

Loans and Advances
Whether the company has granted

● any loans, secured or unsecured
● to companies, firms, LLPs or other parties covered
● in the register maintained under section 189 of the Act. if so,
a) Whether the terms and conditions of the grant of such loans are not prejudicial to the company’s
interest;
b) Whether the schedule of repayment of principal and payment of interest has been stipulated and
whether the repayments or receipts are regular.
c) If the amount is overdue, state the total amount overdue for more than 90 days and whether
reasonable steps have been taken by the company for recovery of the principal and interest;
➔ Section 189 - Register of contracts or arrangements in which directors are interested. Basically in this
register particulars of all contracts or arrangements to which subsection (2) of section 184 or section 188
applies are maintained
➔ Section 184(2) - Gives us an overview of the parties for whom register under section 189 has to be
maintained.
◆ The parties are generally with whom the director is associated
◆ for example
● a partnership firm in which director is a partner or
● a body corporate in in which such director
○ is in association with any other director,
○ holds more than two per cent shareholding of that body corporate,
○ or is a promoter, manager, Chief Executive Officer of that body corporate
➔ Section 188 Deals with related party transaction and discuss the procedure to be followed while transacting
anything with related party
➔ Related Party is defined in Section 2(76)
➔ Auditor should obtain a list of the parties covered under Section 184(2) and 189

also be given.

Compliance of provisions of Sections 185 & 186

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.

also be given.

Public Deposits
● In case the company has accepted deposits from the public,

○ whether the d irectives issued by the RBI and
○ the provisions of section 73 to 76 or
○ any other relevant provisions of the Companies Act and the rules framed there under , where
applicable,
■ have been complied with.
● ature of contraventions be stated;
If not, the n
● If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of
India or any Court or any other Tribunal,
○ whether the same have been complied with or not ?

also be given.

Cost Records
Where maintenance of cost records has been specified by the CG u/s 148 (1) of the Companies Act, 2013
whether such accounts and records have been so made and maintained.
● The auditor should obtain a written representation from the management.

● The auditor should, conduct a general review of the cost records to ensure that the records as prescribed arc
made and maintained.
Dues

also be given.

Repayment of Dues
● Whether the company has defaulted in repayment of loans or borrowings to a financial institution , bank
government or dues to debenture holders?
● If yes,
○ the period and
○ amount of default to be reported
○ in case of defaults to banks, fi nancial institutions, and Government, lender wise details to be
provided
● Auditors should obtain a list of loans and borrowings from FI. banks and government & dues to
debenture holders from the management.
● He should obtain c onfirmation from lenders in accordance with SA-____
● The auditor should obtain a s chedule of repayments to banks, financial institutions, government and
debenture- holders from the management of the company.
● The auditor should examine the a greement or other documents containing the terms and conditions of
the loans and borrowings of the company from banks and financial institution.
● The auditor should also examine the d ebenture t rust d
eed.
● It is clarified that the auditor should report the period and amount of all defaults existing at the
balance sheet date irrespective of when those defaults have occurred
Moneys raised by way of initial public offer etc.

● Whether money raised by way of
○ initial public offers or
○ further public offer (including debt instruments ) and
○ terms loans
■ were applied for the purposes for which those are raised.
● If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be
reported.
Fraud on or by Company
Whether any fraud on or by the company has been noticed or reported during the year, if yes, the nature and the
amount involved is to be indicated.
● The clause does not require the auditor to discover the on the company and by the company.
● The auditor is also required to comply with the requirements of SA-240.
● The auditor should examine the reports of the internal auditor with a view to ascertain whether any fraud
has been reported or noticed by the management.
● The auditor should also discuss the matter with other employees of the company. The auditor should also
examine the minute book of the board meeting of the company in regard.

also be given.

Managerial Remuneration
● Whether managerial remuneration has been paid or provided in accordance with the requisite approvals
mandated by the provisions of Section 197 read with Schedule V to the Companies Act?
● If not. state the amount involved and steps taken by the company for securing refund of the same.

also be given.

NIDHI Company
Whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the
liability and whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the
Nidhi Rules, 2014 to meet out the liability
Related Party Transaction

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.
NOTES
1. As per requirements of section 188, all related party transactions (which are not arm's length transactions)
require board resolution.
2. Moreover, if such transactions exceed limits as provided, approval by members is also obtained in general
meeting.
3. In this regard, auditor shall read the agenda of board meeting wherein such proposal was considered. He shall
obtain a copy of board resolution approving such transaction with related party.
4. In case member's approval was required, he shall obtain a copy of such resolution also, to check compliance
with section 188.
5. In case, company is required to constitute audit committee as per the provision of section 177 of the
companies Act' 2013. the transactions with related parties require approval of audit committee.
6. The auditor shall examine if approval of audit committee has been obtained or not.
7. For this he shall examine the minutes of the meeting of the audit committee.
8. As per relevant Accounting standard, (AS-18) the transaction with related party needs to be disclosed within
financial statements by the management.
9. The auditor shall, as per SA - 550 "Related Parties", ensure that all the details with respect to such transactions
have been provided in accordance with applicable accounting standards.
Preferential allotment or private placement of shares

● Whether the company has made any preferential allotment or private placement of shares or fully or partly
convertible debentures during the year under review and if so, as to
● whether the requirement of section 42 of the Companies Act, 2013 have been complied with and
○ the amount raised have been used for the purposes for which the funds were raised.
● If not, provide the details in respect of the amount involved and nature of non-compliance.
NOTES
● As per the provisions of section 42 of the companies Act, 2013, a company may make private placement
through issue of a private placement offer letter.
● A private placement shall be made only to a select group of persons who have been identified by the Board
(herein referred to as "identified persons"),
● whose number shall not exceed fifty or such higher number as may be prescribed
○ excluding the qualified institutional buyers and
○ employees of the company being offered securities under a scheme of employees stock option in terms
of provisions of clause (b) of sub-section (1) of section 62,
■ in a financial year subject to such conditions as may be prescribe
● Any offer or invitation not in compliance with the provisions of section 42 shall be treated as a public offer.

also be given.

● He shall obtain a written representation from management & TCWG as well.
● He should examine if the funds raised have been used for the purposes for which the funds were raised.
● He should study the funds flow statement to verify the application of funds.
NON Cash Transaction with Directors

Whether the company has entered into any non-cash transactions with directors or persons connected with him and if
so, whether the provisions of section 192 of Companies Act, 2013 have been complied with
NOTES
● As per section 192 of the companies Act' 2013. prior approval of the company in GM is required for an
arrangement by which
○ A director of the company or its holding, subsidiary or associate company or a person connected with
him acquires or is
■ to acquire assets for consideration other than cash from the company.or
○ The Company acquires or is to acquire
■ assets for consideration other than cash, from such director or person so connected.
NBFC
● 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.
● NOTES
○ Section 45-IA of the Reserve Bank of India Act, 1934 requires a non-banking financial company to be
registered with RBI.
○ Without obtaining registration certificate, a company cannot commence the business of non-banking
financial company (NBFC)
○ The auditor shall obtain a copy of such registration certificate from the company.

also be given.

Chapter 11 Audit Report

SA 700 Basics

Auditor’s Objective
The objectives of the auditor are:
(a) To form an opinion on the financial statements
● based on an evaluation of the conclusions
➢ drawn from the audit evidence obtained; and
(b) To express clearly that opinion
● through a written report.
Unmodified opinion
The opinion expressed by the auditor
● when the auditor concludes that
● the financial statements are prepared,
➢ in all material respects,
➢ in accordance with the applicable financial reporting framework.
Forming an Opinion on the Financial Statements

The auditor shall form an opinion
● on whether the financial statements are prepared,
○ in all material respects,
■ in accordance with the applicable financial reporting framework.
In order to form that opinion,

● the auditor shall conclude
○ as to whether the auditor has obtained reasonable assurance about
■ whether the financial statements as a whole are free from material misstatement,
● whether due to fraud or error.
That conclusion shall take into account

(a) The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence has been
obtained
(b) The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are material,
individually or in aggregate;
(c) The evaluations mentioned below
(i) whether the financial statements are prepared, in all material respects, in accordance with the
requirements of the applicable financial reporting framework. This evaluation shall include
consideration of the qualitative aspects of the entity’s accounting practices, including indicators of
possible bias in management’s judgments.
(ii) In particular, the auditor shall evaluate whether, in view of the requirements of the applicable financial
reporting framework:

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also be given.

(1) The financial statements adequately disclose the significant accounting policies selected and
applied;
(2) The accounting policies selected and applied are consistent with the applicable financial
reporting framework and are appropriate;
(3) The accounting estimates made by management are reasonable;
(4) The information presented in the financial statements is relevant, reliable, comparable, and
understandable;
(5) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in the
financial statements; and
(6) The terminology used in the financial statements, including the title of each financial statement,
is appropriate.
(iii) When the financial statements are prepared in accordance with a fair presentation framework, the
evaluation shall also include whether the financial statements achieve fair presentation for this he has
to consider the following
(1) The overall presentation, structure and content of the financial statements; and
(2) Whether the financial statements, including the related notes, represent the underlying
transactions and events in a manner that achieves fair presentation.

also be given.

also be given.

also be given.

also be given.

Elements of Audit Report

Title
The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor.
Addressee
The auditor’s report shall be addressed, as appropriate, based on the circumstances of the engagement. Law,
regulation or the terms of the engagement may specify to whom the auditor’s report is to be addressed. The auditor’s
report is normally addressed to those for whom the report is prepared, often either to the shareholders or to those
charged with governance of the entity whose financial statements are being audited.
Auditor’s Opinion
Auditor’s Opinion: The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.”
The Opinion section of the auditor’s report shall also:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial statements.
When the auditor expresses an unmodifi ed opinion, it is not appropriate to use phrases such as “with the foregoing
explanation” or “subject to” in relation to the opinion, as these suggest a conditional opinion or a weakening or
modification of opinion.
Basis for Opinion

The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for
Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical
requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities in accordance
with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion.
Going Concern
Where applicable, the auditor shall report in accordance with SA 570 (Revised).
Key Audit Matters

For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate
key audit matters in the auditor’s report in accordance with SA 701.

also be given.

When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in the
auditor’s report, the auditor shall do so in accordance with SA 701.
Law or regulation may require communication of key audit matters for audits of entities other than listed entities.
Responsibilities for the Financial Statements

The auditor’s report shall include a section with a heading “Responsibilities of Management for the Financial
Statements.”
The description of management’s responsibilities in the auditor’s report includes reference to responsibilities of
Management for IC and PPFS as it helps to explain to users the premise on which an audit is conducted.
This section of the auditor’s report shall describe
● Management’s responsibility for:

○ Preparing the financial statements in accordance with the applicable financial reporting framework,
■ and for such internal control
➢ as management determines is necessary
✓ to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error;
○ 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 concern.
NOTE
When those individuals who have signed the engagement agreement at the start of the audit have left the entity, the
auditor would request those who are giving the representations to acknowledge their responsibilities
within the letter of representations.
Oversight of the financial reporting process. (Under Mgt. Respo only)

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 diff erent from Management.

also be given.

Auditor’s Responsibilities for the Audit of the Financial Statements

The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for the Audit of the Financial
Statements.”
This section of the auditor’s report shall:

(a) State that the objectives of the auditor are to
(i) Obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with SAs will always detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements; or
(ii) Provide a definition or description of materiality in accordance with the applicable financial
reporting framework.

also be given.

The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report shall further:
(a) State that, as part of an audit in accordance with SAs, the auditor exercises professional judgment and
maintains professional skepticism throughout the audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error; to design and perform audit procedures responsive to those risks; and to
obtain audit evidence that is sufficient and appropriate to provide a basis for the auditor’s opinion.
(ii) To obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances.
(iii) To evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
(iv) To conclude on the
■ appropriateness of management’s use of the going concern basis of accounting (
based on the audit evidence obtained), and
■ whether a material uncertainty exists related to events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern.

also be given.

The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance regarding,
○ among other matters,
○ the planned scope and timing of the audit and
○ significant audit findings,
○ including any significant deficiencies in internal control that the auditor identifies during the audit;
(b) For audits of financial statements of listed entities,

○ state that the auditor provides
○ those charged with governance
○ with a statement that the 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 the auditor’s independence,
■ and where applicable, related safeguards; and
(c) For audits of financial statements of

also be given.

○ listed entities and any other entities for which key audit matters are communicated in
accordance with SA 701,
○ state that, from the matters communicated with those charged with governance,
○ the auditor determines those matters that were of most significance in the audit of the financial
statements of the current period and are therefore the key audit matters.
○ The auditor describes these matters in the auditor’s report unless law or regulation precludes public
disclosure.
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:
(a) Within the body of the auditor’s report;
(b) 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

also be given.

(c) 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 national auditing standards expressly permit the auditor to
do so.
Other Reporting Responsibilities

If the auditor addresses other reporting responsibilities in the auditor’s report on the financial statements that are in
addition to the auditor’s responsibilities under the SAs, these other reporting responsibilities shall be addressed in a
separate section in the auditor’s report with a heading titled- “Report on Other Legal and Regulatory Requirements”
or otherwise as appropriate to the content of the section.
Signature
The auditor’s report shall be signed. The report is signed by the auditor (i.e. the engagement partner) in his personal
name. Where the firm is appointed as the auditor, the report is signed in the personal name of the auditor and in the
name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the membership number assigned by the
Institute of Chartered Accountants of India.
They also include the registration number of the firm, wherever applicable, as allotted by ICAI, in the audit reports
Place of Signature
The auditor’s report shall name specific location, which is ordinarily the city where the audit report is signed.
Date
The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient appropriate
audit evidence on which to base the auditor’s opinion on the Financial statements, including evidence that:
(a) All the statements that comprise the financial statements, including the related notes, have been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for those financial
statements.
The date of the auditor’s report informs the user of the auditor’s report that the auditor has considered the effect of
events and transactions of which the auditor became aware and that occurred up to that date.
The auditor’s responsibility for events and transactions after the date of the auditor’s report is addressed in
SA 560.

also be given.

AUDITOR’S REPORT PRESCRIBED BY LAW OR REGULATION

If the auditor is required by law or regulation to use a specific layout, or wording of the auditor’s report, the auditor’s
report shall refer to Standards on Auditing only if the auditor’s report includes, at a minimum, each of the following
elements.
(a) A title.
(b) An addressee, as required by the circumstances of the engagement.
(c) An Opinion section containing an expression of opinion on the financial statements and a reference to the
applicable financial reporting framework used to prepare the financial statements.
(d) An identifi cation of the entity’s financial statements that have been audited.
(e) 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.
(f) Where applicable, a section that addresses, and is not inconsistent with, the reporting requirements relating to
going concern as per SA 570 (Revised).
(g) Where applicable, a Basis for Qualifi ed (or Adverse) Opinion section that addresses, and is not inconsistent
with, the reporting requirements relating to going concern as per SA 570 (Revised).
(h) 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.
(i) A description of management’s responsibilities for the preparation of the fi nancial statements and an identifi
cation of those responsible for the oversight of the fi nancial reporting process that addresses, and is not
inconsistent with, the requirements as contained in this SA 700.
(j) A reference to Standards on Auditing and the law or regulation, and a description of the auditor’s
responsibilities for an audit of the fi nancial statements that addresses, and is not inconsistent with, the
requirements as contained in this SA 700.
(k) The auditor’s signature.
(l) The Place of signature.
(m)The date of the auditor’s report.

also be given.

SA 701 - Communicating Key Audit Matters in the Independent

Auditor’s Report
Purpose
As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the purpose of communicating key audit
matters is to
● enhance the communicative value of the auditor’s report by providing greater transparency about the audit
that was performed.
● Communicating key audit matters provides additional information to intended users of the financial
statements to assist them in understanding those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements of the current period.
● Communicating key audit matters may also assist intended users in understanding the entity and areas of
signifi cant management judgment in the audited financial statements.
● The communication of key audit matters in the auditor’s report may also provide intended users a basis to
further engage with management and those charged with governance about
○ certain matters relating to the entity,
○ the audited financial statements,
○ or the audit that was performed.
Applicability
This SA applies to
● audits of complete sets of general purpose financial statements of listed entities and
● circumstances when the auditor otherwise decides to communicate key audit matters in the auditor’s report.
● This SA also applies when the auditor is required by law or regulation to communicate key audit matters in the
auditor’s report.
However, SA 705 (Revised) prohibits the auditor from communicating key audit matters when the auditor
disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.
This SA is effective for audits of financial statements for periods beginning on or after April 1, 2018
Objectives
The objectives of the auditor are
● To determine key audit matters and, having formed an opinion on the financial statements,
● Communicate those matters by describing them in the auditor’s report.
Key audit Matters

Those matters that,
● in the auditor’s professional judgment,
○ were of most significance
■ in the audit of the financial statements of the current period.
● Key audit matters are selected from matters communicated with those charged with governance.

also be given.

Determining Key Audit Matters

The auditor shall determine,
● from the matters communicated with those charged with governance,
● those matters that required significant auditor attention in performing the audit.
● In making this determination, the auditor shall take into account the following
a. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance
with SA 315.
b. 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.
c. The effect on the audit of significant events or transactions that occurred during the period.
Communicating Key Audit Matters

The auditor shall
● describe each key audit matter,
● using an appropriate subheading,
● in a separate section of the auditor’s report under the heading “Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state that:
a. Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in
the audit of the financial statements.
b. These matters were addressed in the context of the audit of the financial statements as a whole, and in forming
the auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters.
Communicating Key Audit Matters- not a substitute for disclosure in the
Financial Statements etc.
Communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion on
the fi nancial statements as a whole. Communicating key audit matters in the auditor’s report is not:
a. A substitute for disclosures in the fi nancial statements that the applicable financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair presentation;
b. A substitute for the auditor expressing a modified opinion when required by the circumstances of a specifi c
audit engagement in accordance with SA 705
c. A substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or
conditions that may cast significant doubt on an entity’s ability to continue as a going concern; or
d. A separate opinion on individual matters.
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 financial statements and 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.

also be given.

Circumstances in Which a Matter Determined to Be a Key Audit Matter Is

Not Communicated in the Auditor’s Report
The auditor shall describe each key audit matter in the auditor’s report unless
a. Law or regulation precludes public disclosure about the matter; or
b. In extremely rare circumstances, the auditor determines that the matter should not be communicated in the
auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication. This shall not apply if the entity has publicly disclosed
information about the matter.
A matter giving rise to a modified opinion in accordance with SA 705 (Revised), 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 (Revised), are by their nature key audit matters.
These matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements in
Rather, the auditor shall
a. Report on these matter(s) in accordance with the applicable SA(s); and
b. 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.
If the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key
audit matters to communicate or that the only key audit matters communicated are those matters mentioned above,
the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading “Key
Audit Matters.”
Communication with TCWG
The auditor shall communicate with those charged with governance:

a. Those matters the auditor has determined to be the key audit matters; or
b. If applicable, depending on the facts and circumstances of the entity and the audit, the auditor’s determination
that there are no key audit matters to communicate in the auditor’s report.
Documentation
The auditor shall include in the audit documentation:

a. The matters that required significant auditor attention as determined , and the rationale for the auditor’s
determination as to whether or not each of these matters is a key audit matter.
b. Where applicable, the rationale for the auditor’s determination that there are no key audit matters to
communicate in the auditor’s report or that the only key audit matters to communicate are
i. Modified Opinion
ii. Material uncertainty related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern; and
c. Where applicable, the rationale for the auditor’s determination not to communicate in the auditor’s report a
matter determined to be a key audit matter.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

also be given.

SA 705 - Modifications to the Opinion in the Independent

Auditor's Report
Nature of Matter Giving Rise to the Auditor’s judgment about the Pervasiveness of the Effects or Possible
Modification Effects on the Financial statements
Material but Not Pervasive Material and Pervasive
❖ Financial Statements are Qualified opinion Material and Pervasive

materially misstated
❖ Inability to obtain SAAE Qualified opinion Disclaimer of opinion

also be given.

Disclaimer of Opinion - Special Point

❖ 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 Financial Statements
■ due to potential interaction of the uncertainties and
■ their possible cumulative effect on the Financial Statements
Circumstances when a Modification to the Auditor’s Opinion is Required

● The auditor concludes that based, on the audit evidence obtained, the Financial Statements 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 statements.
● The auditor is unable to obtain sufficient appropriate audit evidence to conclude may be due to following
reasons:
○ Limitations imposed by management
○ Circumstances beyond entity control ( )
○ Circumstances related to Nature and Timing of auditor’s work
Limitation after the auditor has Accepted the Engagement

also be given.

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.
When the auditor modified the opinion on the Financial Statements, the auditor shall, in addition to the specific
elements as required by SA 700:
a) Amend the heading “Basis for Opinion” to “Basis for Qualified Opinion,” Basis for Adverse Opinion”, or Basis
for Disclaimer of Opinion,” as appropriate; and
b) Within this section, include a description of the matter giving rise to the modification.
Language to be Used
Qualified Opinion
● When the auditor expresses a qualified opinion due to a material misstatement in the Financial Statements,
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
○ 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 in accordance with
applicable FRF).
○ 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 SAAE, the auditor shall use the corresponding phrase
“except for the possible effects of the matter(S)... “For the modified opinion.
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 matters described in the Basis for Adverse Opinion section :
● 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
● When reporting in accordance with a compliance framework the Accompanying Financial Statements have not
been prepared, in all material respect in accordance with (the applicable FRF).
Disclaimer
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 Financial Statements;
● State the, 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 SAAE to provide a basis for an audit opinion on the
financial statements; and
● Amend the statement in the Opinion Section, which indicates that the financial statements have been audited,
to state that the auditor was engaged to audit the financial statements. (Example in Class / Videos)

also be given.

Considerations When the Auditor Disclaims an Opinion on the Financial Statements.

Unless required by law or regulation, when the auditor disclaims an opinion on the financial statements, the auditor’s
report shall not include a Key Audit Matters section in accordance with SA 701.
WHY?
Communication of any key audit matters other than the matter(s) giving rise to the disclaimer of opinion
● may suggest that the financial statements as a whole are more credible
● than would be appropriate in the circumstances,
● and would be inconsistent with the disclaimer of opinion on the financial statements as a whole.
Communication with 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.

also be given.

SA 706 Emphasis of matter paragraphs & other matter

paragraphs in the independent auditor's report
Scope
This SA addresses the relationship between key audit matters and any additional communication in the auditor’s
report in accordance with this SA.

also be given.

also be given.

The Relationship between Emphasis of Matter Paragraphs and Key Audit

Matters in the Auditor’s Report
When SA 701 applies, the use of Emphasis of Matter paragraphs is

● not a substitute for a description of individual key audit matters.
There may be a matter that is not determined to be a key audit matter in accordance with SA 701 (i.e., because it did
not require significant auditor attention), but which, in the auditor’s judgment, is fundamental to users’ understanding
of the financial statements (e.g., a subsequent event).
If the auditor considers it necessary to draw users’ attention to such a matter, the matter is included in an Emphasis of
Matter paragraph in the auditor’s report in accordance with this SA.
Placement of Emphasis of Matter Paragraphs and Other Matter Paragraphs

in the Auditor’s Report
The placement of an Emphasis of Matter paragraph or Other Matter paragraph in the auditor’s report
● depends on the nature of the information to be communicated,
● and the auditor’s judgment
○ as to the relative significance of such information
○ to intended users compared to other elements required to be reported in accordance with SA 700
Emphasis of Matter Paragraphs

When the Emphasis of Matter paragraph relates to the applicable financial reporting framework, the auditor may
consider it necessary to place the paragraph immediately following the Basis of Opinion section to provide
appropriate context to the auditor’s opinion.

also be given.

When a Key Audit Matters section is presented in the auditor’s report,
● an Emphasis of Matter 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.
Other Matter Paragraphs

When a Key Audit Matters section is presented in the auditor’s report
● and an Other Matter paragraph is also considered necessary,
● the auditor may add further context to the heading “Other Matter”, such as “Other Matter – Scope of the Audit”,
● to differentiate the Other Matter paragraph from the individual matters described in the Key Audit Matters
section.
When an Other Matter paragraph is included to draw users’ attention to a matter relating to Other Reporting
Responsibilities addressed in the auditor’s report, the paragraph may be included in the Report on Other Legal and
Regulatory Requirements section.
When relevant to all the auditor’s responsibilities or users’ understanding of the auditor’s report, the Other Matter
paragraph may be included as a separate section following the Report on the Audit of the Financial Statements and the
Report on Other Legal and Regulatory Requirements.

also be given.

Bank Audit

Regulating Body - Reserve Bank of India

● The functioning of banking industry in India is regulated by the Reserve Bank of India (RBI) which
acts as the Central Bank of our country.
● RBI is responsible for
○ development and supervision of the constituents of the Indian financial system (which
comprises banks and non-banking financial institutions) as well as
○ for determining, in conjunction with the Central Government, the monetary and credit
policies keeping in with the need of the hour.
● Important functions of RBI are
○ issuance of currency;
○ regulation of currency issue;
○ acting as banker to the central and state governments;
○ and acting as banker to commercial and other types of banks including term-lending
institutions.
● Besides, RBI has also been entrusted with the responsibility of
○ regulating the activities of commercial and other banks.
○ No bank can
■ commence the business of banking or
■ open new branches without obtaining licence from RBI.
○ The RBI also has the power to inspect any bank.

Independent audit of financial statement of banks is important for a healthy, safe and sound banking
system.

Regulatory Framework

● Reserve Bank of India Act, 1934
● Banking Regulation Act, 1949.
● State Bank of India Act, 1955.
● Companies Act, 2013. State Bank of India (Subsidiary Banks) Act 1959.
● Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
● Regional Rural Banks Act, 1976.
● Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
● Information Technology Act, 2000.
● Prevention of Money Laundering Act, 2002.
● Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.
● Credit Information Companies Regulation Act, 2005.

To get the best out of these notes visit www.neerajaroraclasses.com Banks Audit | 1
also be given.

● Payment and Settlement Systems Act, 2007.

Some of the different features of Bank

● Huge volumes and complexity of transactions,
● Wide geographical spread of banks’ network,
● Large range of products and services off ered,
● Extensive use of technology,
● Strict vigilance by the banking regulator etc.

Understanding the Accounting System in Banks

There is a sea change in banking
● as use of technology
● and its continuous evolution has
○ enabled banks to reach their customers
○ providing them the convenience and
○ comfort of
■ anytime-anywhere-banking
● by letting them access their information/data
○ on real time basis,
○ as stored in a safe and secure environment
○ on the bank’s servers.

The transactions in banks have become voluminous and
● it needs to be ensured that in the
● system of
○ recording ,
○ transmission and
○ storage of information/ data
■ is optimally maintained and
● control systems
○ ensure that
○ the same is
○ free of risks of
■ errors, omissions, irregularities and frauds;

Bank Audit Approach - Engagement Team Discussion

also be given.

WHY
The engagement team should hold discussions
● to gain better understanding of the bank and its environment, including internal control,
● and also to assess the potential for material misstatements of the financial statements.

DOCUMENTATION
All these discussions should be appropriately documented for future reference.

BENEFITS or PURPOSE
The discussion provides
● An opportunity for more experienced engagement team members, including the audit engagement
partner, to share their insights based on their knowledge of the bank and its environment.
● An opportunity for engagement team members to exchange information about the bank’s business
risks.
● An understanding amongst the engagement team members about eff ect of the results of the risk
assessment procedures on other aspects of the audit, including decisions about the nature, timing,
and extent of further audit procedures.

MATTERS

The engagement team discussion ordinarily includes a discussion of the following matters:
● Errors that may be more likely to occur;
● Errors which have been identifi ed in prior years;
● Method by which fraud might be perpetrated by bank personnel or others within particular
account balances and/or disclosures;
● Audit responses to Engagement Risk, Pervasive Risks, and Specifi c Risks;
● Need to maintain professional skepticism throughout the audit engagement;
● Need to alert for information or other conditions that indicates that a material misstatement may
have occurred (e.g., the bank’s application of accounting policies in the given facts and
circumstances).

FORM AND CONTENT OF FINANCIAL STATEMENTS

● Sub-sections (1) and (2) of section 29 of the Act deal with the form and content of financial
statements of a banking company and their authentication.
● These sub-sections are also applicable to nationalised banks, State Bank of India, subsidiaries of
the State Bank of India, and Regional Rural Banks.
● Every banking company is required to prepare a Balance Sheet and a Profi t and Loss Account in
the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit.

also be given.

● Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance
Sheet and Form B contains the form of Profi t and Loss Account.

Audit of Accounts

Sub-section (1) of section 30 of the Act requires that the balance sheet and profi t and
loss account of a banking company should be audited by a person duly qualifi ed under
any law for the time being in force to be an auditor of companies.

Appointment of auditor

The auditor of a
● banking company is to be appointed
○ at the annual general meeting of the shareholders, whereas the
● auditor of a nationalised bank
○ is to be appointed by the bank concerned
○ acting through its Board of Directors.
● In either case, approval of the Reserve Bank is required before the appointment is made.
● The auditors of the State Bank of India
○ are to be appointed by the Comptroller and Auditor General of India
○ in consultation with the Central Government.
● The auditors of the subsidiaries of the State Bank of India are to be appointed
○ by the State Bank of India.
● The auditors of regional rural banks are to be appointed
○ by the bank concerned with the approval of the Central Government.

Remuneration of Auditor

The remuneration of auditor of a banking company is to be fi xed in accordance with the
provisions of section 142 of the Companies Act, 2013 (i.e., by the company in general
meeting or in such manner as the company in general meeting may determine). The
remuneration of auditors of nationalised banks and State Bank of India is to be fi xed by
the Reserve Bank of India in consultation with the Central Government.

POWERS OF AUDITOR
The auditor of a banking company or of a nationalised bank, State Bank of India, a
subsidiary of State Bank of India, or a regional rural bank has the same powers as those
of a company auditor in the matter of access to the books, accounts, documents and
vouchers.

also be given.

Auditor’s Report
In the case of a nationalised bank, the auditor is required to make a report to the Central Government in
which he has to state the following:

a. whether,in his opinion,
● the balance sheet is a
○ full and fair balance sheet
➢ containing all the necessary particulars and
➢ is properly drawn up
➢ so as to exhibit a true and fair view of the affairs of the bank,
● and in case he had called for any explanation or information,
○ whether it has been given and
○ whether it is satisfactory;
b. whether or not the transactions of the bank,
● which have come to his notice,
○ have been within the powers of that bank
c. whether or not the
● returns
○ received from the offices and branches of the bank
➢ have been found adequate for the purpose of his audit;
d. whether the
● profit and loss account
○ shows a true balance of profit or loss for
➢ the period covered by such account; and
e. any
● other matter which
○ he considers
➢ should be brought to the notice of the Central Government.

The report of auditors of State Bank of India is also to be made to the Central Government
and is almost identical to the auditor’s report in the case of a nationalised bank.

Format of Report

The auditors,
● central as well as branch,
○ should also ensure that the audit report issued by them
■ complies with the requirements of
● Standards on Auditing on Audit Report.

The auditor should ensure that
● information relating to number of unaudited branches is given
● quantifi cation of

also be given.

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

Long Form Audit Report

● Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks (as well as
their branches), require the auditors to also furnish a long form audit report (LFAR).

● The matters which the banks require their auditors to deal with in the long form audit report have
been specified by the Reserve Bank of India.

● The LFAR is to be submitted before 30th June every year.

● To ensure timely submission of LFAR, proper planning for completion of the LFAR is required.

Duty to report on Frauds under the Companies Act, 2013

As per sub-section 12 of section 143 of the Companies Act, 2013, if an auditor of a company,in the course
of the performance of his duties as auditor, has reason to believe that an off ence 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.

The member shall be required to report the matters to RBI.

It must be noted that auditor is not expected to look into each and every transaction but to evaluate the
system as a whole.

Therefore, if the auditor while performing his normal duties comes across any instance, he should report
the matter to the RBI in addition to Chairman/Managing Director/Chief Executive of the concerned bank.

Evaluation of Internal Controls over Advances:

The auditor should examine the efficacy of various internal controls over advances to determine the
nature, timing and extent of his substantive procedures.

In general, the internal controls over advances should include, inter alia, the following:

also be given.

● CREDIT WORTHINESS
○ The bank should make an advance only after satisfying itself as to the credit worthiness of
the borrower and after obtaining sanction from the appropriate authorities of the bank.

● DOCUMENTS
○ All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.

● COMPLIANCE
○ The compliance with the terms of sanction and end use of funds should be ensured.

● SUFFICIENT MARGIN
○ Sufficient margin as specified in the sanction letter should be kept against securities taken
so as to cover for any decline in the value thereof.
○ The availability of sufficient margin needs to be ensured at regular intervals.

● SECURITIES OWNERSHIP
○ If the securities taken are in the nature of shares, debentures, etc., the ownership of the
same should be transferred in the name of the bank and the effective control of such
securities be retained as a part of documentation.

● SECURITIES REGISTRATION
○ All securities requiring registration should be registered in the name of the bank or
otherwise accompanied by documents sufficient to give title to the bank.

● CONTENTS OF THE PACKAGE
○ In the case of goods in the possession of the bank, contents of the packages should be test
checked at the time of receipt. The godowns should be frequently inspected by responsible
officers of the branch concerned, in addition to the inspectors of the bank.

● DRAWING POWER REGISTER
○ Drawing Power Register should be updated every month to record the value of securities
hypothecated. These entries should be checked by an officer.

● LIMIT
○ The accounts should be kept within both the drawing power and the sanctioned limit.

● IRREGULAR ACCOUNTS
○ All the accounts which exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority regularly.

● REVIEW
○ The operation of each advance account should be reviewed at least once a year, and at
more frequent intervals in the case of large advances.

also be given.

also be given.

also be given.

Mr. A approaches a bank for financial assistance for his upcoming project. The Bank Branch Manager,
after verifying the proposal, is agreeable to financing Mr. A, but asks for the security to be offered to the
bank. Discuss the nature of securities required to be offered to the bank. (MAY 2018, ICAI CA INTER)

Nature of Security:

1. Primary security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank. This security is the principal security for an advance.
2. Collateral security is an additional security. Security can be in any form i.e. tangible or intangible
asset, movable or immovable asset.

Examples of most common types of securities accepted by banks are the following.
● Personal Security of Guarantor
● Goods / Stocks / Debtors / Trade Receivables
● Gold Ornaments and Bullion
● Immovable Property

also be given.

● Plantations (For Agricultural Advances)
● Third Party Guarantees
● Banker’s General Lien
● Life Insurance Policies
● Stock Exchange Securities and Other Instruments

Your firm of Chartered Accountants has been appointed as the Auditor of two branches of OBC which
are located in the Industrial area. Considering that the location of the branches of bank in industrial
area, these would be “advances oriented branches and audit of advances would require the major
attention of the auditors. Advise how would you proceed to obtain evidence in respect of audit of
advances. (RTP MAY 2018)

Advances generally constitute the major part of the assets of the bank. There are large number of
borrowers to whom variety of advances are granted. The audit of advances requires the major attention
from the auditors.

In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about the
following

1. Amounts included in balance sheet in respect of advances are outstanding at the date of the
balance sheet.
2. Advances represent amount due to the bank.
3. Amounts due to the bank are appropriately supported by Loan documents and other documents
as applicable to the nature of advances.
4. There are no unrecorded advances.
5. The stated basis of valuation of advances is appropriate and properly applied, and that the
recoverability of advances is recognised in their valuation.
6. The advances are disclosed, classified and described in accordance with recognised accounting
policies and practices and relevant statutory and regulatory requirements.
7. Appropriate provisions towards advances have been made as per the RBI norms, Accounting
Standards and generally accepted accounting practices.
8. Internal controls for sanctioning advances and reviewing them are designed, operating effectively,
throughout the period.
9. Carrying out appropriate analytical procedures.

In carrying out his substantive procedures, the auditor should examine all large advances while other
advances may be examined on a sampling basis.

The accounts identified to be problem accounts however need to be examined in detail unless the
amount involved is insignificant.

Advances which are sanctioned during the year or which are adversely commented by RBI inspection
team, concurrent auditors, bank’s internal inspection, etc. should generally be included in the auditor’s
review.

also be given.

An asset becomes NPA when it ceases to generate income for the Bank . Explain the criteria for
classification of advances as Non-Performing Advance.

Ans : Criteria for classification of advance as NPA :

An Advance will be classified as NPA if:
● It ceases to generate income for a bank.
● Interest and/or instalment of principal in respect of such an advance have remain overdue or out
of order for a specified period of time
○ Overdue : An amount is said to be ‘overdue’, if it is not paid on the due date fixed by the
Bank.
○ Out of Order:
■ An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/ drawing power. OR
■ If
● there are no credits continuously for 90 days as on the balance sheet date
● or the credits are not enough to Cover the interest debited during the same
period.

NPA classifications w.r.t specified advances
● Term Loans : Term loan will become NPA if interest and / or Instalment of principal has remained
overdue for a period exceeding 90 days.
● CC/OD : CC/OD account will become NPA if the account has remained out -of-order for a period
exceeding 90 days.
● Bills Purchased & Discounted: Bills purchased & Discounted will become NPA when bill remains
overdue & unpaid for a period exceeding 90 days.

Pankaj & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st
March, 2018. In the audit planning, the partner of Pankaj & Co. observed that the allotted
branches are predominantly based in rural areas and major portion of the advances were for
agricultural purpose. He needs your assistance in incorporating the criteria prescribed for
determination of NPA norms in respect of agricultural advance, in audit plan.

Criteria for determination of NPA norms in respect of agricultural advances
An agricultural advance is classified as NPA if interest and / or instalment of principal is overdue
for
● Two crops seasons , in case loans granted for Short Duration crops,
● One crop season, in case loans granted for Long Duration crops (i.e. More than 1 year)

For this purpose, the following points are to be considered:
1. Long duration crops mean the crop season longer than one year.

also be given.

2. Short Duration Crops means the period up to harvesting of the crops, as determined by
the State Level Bankers’ Committee in each State.
3. If natural calamities impair the repaying capacity of agricultural borrowers, banks may
decide on their own as a relief measure conversion of the short-term production loan into
a term loan or reschedulement of the repayment period; and the sanctioning of fresh
short-term loan, subjects to guidelines issued by RBI.

also be given.

Verify the Interest Expenditure while Carrying out audit of a

bank

1. Weighted average interest rate
Check various types of deposits outstanding at the end of each quarter and compute a weighted
average interest rate.

2. Compare the rate with Actual
Compare that rate with the actual average rate and enquire into the difference , if that difference
is material in the professional judgement of the auditor.

3. Compare the rate with Actual with figure of previous year
Compare the average rate of interest paid on deposits with the figures for the previous year and
enquire into the difference, if that difference is material in the professional judgement of the
auditor.

4. Verifying the calculation of interest and ensure the following:
a. Interest has been provided on all deposits upto the date of the balance sheet and
determine whether there is any excess or short credit.
b. Interest rates are in accordance with the bank’s internal regulations, RBI directives and
agreements with the depositors;
c. In relation to fixed deposits, examine whether the interest rate in the accounting system are
same as mentioned in the Fixed Deposit Receipt/Certificate.
d. Interest on Savings Account should be checked on a test check basis in accordance with the
rules framed by the bank.
e. Interest on inter-branch balances has been provided at the rates prescribed by the head
office.
f. Interest on overdue/ matured term deposits should be estimated and provided for.

5. Changes in interest rate
Check whether there are any changes in interest rate on various type of deposits like recurring,
saving or fixed during the period.

Audit procedures for verification of provisions and contigencies in case of bank audit.

1. COMPLIANCE with recent circulars etc
○ Check compliance with the various regulatory requirements for provisioning as contained in
the various circulars.

2. Understand
○ Understand how the Bank computes provision on standard assets and non-performing
assets.

also be given.

3. Break-Up
○ Obtain the detailed breakup of standard loans, non-performing loans and reconcile the
outstanding balance with the general ledger.

4. COMPLIANCE with regulatory requirements
○ Examine whether the provisions in respect of standard loans and NPA comply with the
regulatory requirements.

5. Tax
○ Obtain statement of computation of tax provision from the bank’s management and verify
the nature of items debited and credited to profit and loss account to ascertain that the
same are appropriately considered in the tax provision computation.

6. Provision of tax
○ Re- compute the provision for tax by applying the applicable tax rate after considering the
allowances and disallowances as per Income Tax Act, 1961.

7. Other Provisions and adequacy
○ Other provisions for expenditure should be examined vis-a-vis (in relation to) the
circumstances warranting the provisioning and the adequacy of the same by discussing
and obtaining the explanations from the bank’s management.

Understanding the Risk Management Process

● Management develops controls and uses performance indicators to aid in managing key business
and financial risks.
● An effective risk management system in a bank generally requires the following:

1. Oversight and involvement in the control process by those charged with governance
○ Those charged with governance (BOD/Chief Executive Officer)
○ should approve written risk management policies.
■ The policies should be consistent
■ with the
● bank’s business objectives and strategies,
● capital strength,
● management expertise,
● regulatory requirements
● and the types and amounts of risk it regards as acceptable.

2. Identification, measurement and monitoring of risks
○ Risks that could signifi cantly impact the achievement of bank’s goals should be
■ identified,
■ measured and
■ monitored

also be given.

○ against pre-approved limits and criteria.

3. Control activities
○ A bank should have appropriate controls to manage its risks,
○ including effective segregation of duties (particularly, between front and back offices),
○ accurate measurement and reporting of positions,
○ verifi cation and approval of transactions,
○ reconciliation of positions and results,
○ setting of limits,
○ reporting and approval of exceptions,
○ physical security and contingency planning.

4. Monitoring activities:
○ Risk management models, methodologies and assumptions used to measure and manage
risk should be regularly assessed and updated.
○ This function may be conducted by the independent risk management unit.

5. Reliable information systems
○ Banks require reliable information systems that provide adequate financial, operational
and compliance information on a timely and consistent basis.
○ Those charged with governance and management require risk management information
that is easily understood and that enables them to assess the changing nature of the
bank’s risk profile.

discussed everything in our video classes. www.neerajaroraclasses.com Amendments and updates will be taught in classes and videos. Extra notes and charts will
also be given.

Chapter 13 Audit of Different types of

Entities

To get the best out of these notes visit www.neerajaroraclasses.com Chapter 13 Audit of Different types of Entities | 1
also be given.

Legal Framework and Comptroller & Auditor General

The Constitution of India contains specific provisions regarding the appointment, salary and duties and powers of the
C&AG.
Appointment
The President of India shall appoint CAG.
Removal or resignation
● He can be removed from the office only on the ground of proven misbehavior or incapacity.
● Moreover, he can be removed from office only when each house of parliament decides to do so by a
majority of at least two third of members present and voting.
Remuneration
● The parliament is competent to make laws to determine salary and other conditions of service.
● The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 passed in
pursuance of the provisions of the Constitution lays down a fixed tenure of the office prescribing that he shall
be paid a salary which is e
qual to the s
alary of the J udge of the S
upreme C
ourt thereby further
strengthening his independence.
Duties and Power

Article 149 states that the C&AG shall perform such duties and exercise such powers in relation to the accounts of the
Union and of the States and of any other authority or body as may be prescribed by or under any law made by the
Parliament.
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and
powers in detail.
Article 150 of the Constitution provides that the accounts of the Union and of the States shall be kept in such form as
the President may on the advice of the C&AG prescribe.
Reporting Procedures
Article 151 of the Indian Constitution states that the C&AG shall report on the accounts of the Union and of each of the
States to the President or the Governor concern and the report to be laid before the legislatures.
The reports should not only be presented to the legislatures but thereafter also publicised adequately in order to
create a proper climate of public opinion for taking remedial action where necessary, on the findings of the Auditor
General.

also be given.

Study Plan
We will study the audit of following items in Government for CA Intermediate
1. Expenditure audit
2. Audit of Receipts
3. Audit of Stores
Expenditure Audit
Expenditure Audit The auditor examines the fulfillment of conditions for incurring government expenditure. It
involves examination of following:—
1. Audit of rules and orders
2. Audit of sanctions
3. Audit against provision of funds
4. Propriety audit
5. Performance audit
Audit of Rules and Orders/Audit of Regularity and Legality

( ख़चा Constitution, law CAG और higher authority क़े हसाब े होना चा हए) ये चेक करने के लए auditor को कुछ चीज़ क
Sound knowledge होनी चा हए)
1. Its objective is to ensure whether the expenditure is in accordance with:

○ Relevant provisions of the C onstitution and of the l aws and r ules.
○ The rules, regulations issued by CAG.
○ The orders of, or rules made by, any higher authority.
2. In this connection, auditor should have sound knowledge of rules and orders w.r.t. Following:
○ The powers to incur and sanction expenditure from the Consolidated Fund/ contingency fund of India
/ State;
○ The m ode of p
resentation of claims against government, withdrawing moneys from the
Consolidated Fund, Contingency Fund and the financial rules prescribing the procedure to be followed
by government; and (HOW CLAIMS ARE PRESENTED & HOW MONEY IS WITHDRAWAN)
○ Regulating the c onditions of s
ervice, pay and allowances, and pensions of government servants.
Audit of Sanctions
(हर ख़चा sanctioned होना चा हए है , और sanction proper authority से होना चा हए )
Its objective is to ensure whether the expenditure is:

1. Properly covered by a s anction, either general or special.
2. Sanctioned by authority, which is authorized to do so.
Thus auditor should consider following
● He should have k nowledge of the s anctioning p
owers of various authorities.
● He should examine whether all sanctions are adequately noted in the prescribed register.

also be given.

● For petty expenditure, the signature of the competent authority on a bill can be regarded as a sanction.
Audit against provision of funds

Its objective is to ensure whether the expenditure
● Is made for the p urpose for which the grant and appropriation has been provided.
● Does not exceed the appropriation made.
Propriety Audit(M.imp)
● The Propriety audit is to check the expenditure in accordance with financial wisdom and uprightness.
● It is to check to bring out the improper, avoidable, expenditure even though such expenditure has been
incurred in conformity with the existing rules and regulations.
● A transaction may satisfy all the requirements of regularity audit in so far as the various formalities
regarding rules and regulations are concerned but may still be highly wasteful.
● It is not audit of sanction or against rules.
● It is a qualitative, opinion-based expression of auditor's findings.
In this regards, the following main points should be kept for consideration:
● The expenditure should not be prima facie more than what the occasion demands. Public money should be
spent by the officers, as of their own with utmost diligence and care.
● No order for sanction of expenditure should be made by an authority which results in gains directly or
indirectly to that authority
● Public m
oney should not be utilised for the benefit of a particular person or section of the community
unless
○ the amount of expenditure involved is insignificant; or
○ a claim for the amount could be enforced in a Court of law; or
○ the expenditure is in pursuance of a recognized policy or custom; and
● The cost of administering should not eat off the benefits of the expenditure.
Performance audit / Full Scope Audit

● Here, auditor tries to ensure that government programmes have achieved the objectives at the lowest cost and
given the intended benefits. (Achieved Objectives, Lowest Cost, Intended Benefits)
● This involves that the various programmes, schemes and projects where large financial expenditure has been
incurred are being run economically and are yielding results expected of them.
● Includes efficiency, economy and effectiveness audit.
● It seeks to identify opportunities for greater economy and effectiveness.

also be given.

Audit of Stores and Stocks

● Auditor should ascertain whether the internal controls over purchase, receipt, and issue of stores are well
designed and properly carried out during the year.
● He should bring to the notice of the government any deficiencies in the system of control.
● The audit of purchase of stores is conducted in the same manner as audit of expenditure.
● The auditor has to ensure that the prices paid are reasonable.
● Cases of uneconomical purchase of stores and losses due to defective or inferior quality of stores are
specifically examined.
● The certificates of quality and quantity given by expert should be examined.

● Any excess or idle stocks should be specifically mentioned in the report.
● Auditor should ensure their existence by attending physical verification of stock.
● The valuation of the stocks is also examined properly.
Audit of Receipts
The government audit also covers receipts payable in to the Consolidated Fund of India and of each State/Union
Territory. The auditor examines whether: —
● Internal checks are imposed for prompt detection and investigation of irregularities. .
● Internal procedures adequately ensure proper accounting of demands collection.
● There is effective check on assessment, collection and proper allocation of revenue.
● Such regulations and procedures are actually being carried out.
● All revenues have been correctly assessed, realized and credited to the government account.
● There is no leakage of revenue.

also be given.

Duties of Comptroller & Auditor General:

The Comptroller & Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 lays down duties of the
C&AG as under:
● Compile and submit Accounts of Union and States

○ The C&AG shall be responsible for
■ compiling the accounts
■ of the Union and of each State rendered
■ to the audit and accounts offices under his control
■ by treasuries, offices or departments responsible for the keeping of such account.
● General Provisions Relating to Audit

○ It shall be the duty of the C&AG -
■ to audit and report
➢ on all expenditure
✓ from the Consolidated Fund of India and of each State and of each Union
Territory having a Legislative Assembly and
✓ to ascertain whether the moneys shown in the accounts as having been
disbursed were legally available for and applicable to the service or purpose to
which they have been applied or charged and
✓ whether the expenditure conforms to the authority which governs it;
■ to audit and report
➢ all transactions
✓ of the Union and of the States relating to Contingency Funds and Public
Accounts;
■ to audit and report on
➢ all trading, manufacturing profit and loss accounts and balance-sheets and other
accounts kept in any department of the Union or of a State.
● Audit of Receipts and Expenditure

○ Where anybody or authority
■ is substantially financed
➢ by grants or loans
➢ from the Consolidated Fund of India or of any State or of any Union Territory having a
Legislative Assembly,
■ the Comptroller and Auditor General shall,
■ subject to the provisions of any law for the time being in force applicable to the body or
authority, as the case may be,
➢ audit all receipts and expenditure of that body or authority and to report on the
receipts and expenditure audited by him.
● Audit of Grants or Loans

○ Where any grant or loan
○ is given for any specific purpose

also be given.

■ from the Consolidated Fund of India or of any State or of any Union Territory having a
Legislative Assembly
■ to any authority or body,
■ the Comptroller and Auditor General shall
➢ scrutinize the procedures by which the sanctioning authority satisfies itself as to the
fulfillment of the conditions subject to which such grants or loans were given and
➢ shall for this purpose have right of access, after giving reasonable previous notice, to
the books and accounts of that authority or body.
● Audit of Receipts of Union or States

○ It shall be the duty of the Comptroller and Auditor General
○ to audit all receipts
■ which are payable into
■ the Consolidated Fund of India and of each State and of each Union Territory having a
Legislative Assembly
○ and to satisfy himself that
■ the rules and procedures in that behalf are designed
● to secure an effective check on the
○ assessment,
○ collection and
○ proper allocation of revenue and
● are being duly observed and
○ to make this purpose such examination of the accounts as he thinks fit and report thereon.
● Audit of Accounts of Stores and Stock

○ The Comptroller and Auditor General shall have authority
○ to audit and report on the accounts of stores and stock kept in any office or department of the Union or
of a State.
● Audit of Government Companies and Corporations

○ The duties and powers of the Comptroller and Auditor General in relation to the audit of the accounts
of government companies shall be performed and exercised by him in accordance with the provisions
of the Companies Act, 2013.

also be given.

Power of Comptroller and Auditor General of India in

performance of duties. (November 2014)
Powers of the Comptroller and Auditor General of India in performance of duties: The Comptroller and Auditor
General's (Duties, Powers and Conditions of Service) Act, 1971 gives the following powers to the C&AG in connection
with the performance of his duties-
1. Inspect
● To inspect any office of accounts under the control of the Union or a State Government including
office responsible for the creation of the initial or subsidiary accounts.
2. Require (ABPO)
● To require that any accounts, books, papers and other documents which deal with or are otherwise
relevant to the transactions under audit, be sent to specified places.
3. Put Question / Make Observations / Call Info
● To put such questions or make such observations as he may consider necessary
● to the person in charge of the office and to call for such information as he may require for the
preparation of any account or report which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts or class
of transactions and to apply such limited checks in relation to such accounts or transactions as he may determine.

also be given.

Audit of Local Bodies

Background & Audit of Local Bodies

Background
State the background of 'Local Bodies". Draft an audit programme for audit of local bodies. (8 Marks)
Answer- Background of Local Bodies: A municipality can be defined as a unit of local self- government in an urban
area. By the term 'local self-government' is ordinarily understood the administration of a locality - a village, a town, a
city or any other area smaller than a state - by a body representing the local inhabitants, possessing fairly large
autonomy, raising at least a part of its revenue through local taxation and spending its income on services which are
regarded as local and, therefore, distinct from state and central services.
Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations,
the municipal councils, the notified area committees, the town area committees and the cantonment committees.
Audit Programme For Local Body
Audit Programme for local bodies

1. The Local Fund Audit Wing of the State Govt, is generally in charge of the audit of municipal accounts.
Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to appoint their own auditors for
regular external audit. So the auditor should ensure authenticity of his appointment.
2. The auditor while auditing the local bodies should report on the fairness of the contents and presentation of
financial statements, the strengths and weaknesses of the system of financial control, adherence to legal
and/or administrative requirements; upon whether value is being fully received on money spent. His objective
should be to detect errors and fraud and misuse of resources.
3. The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law and is
in accordance with the financial rules and regulations framed by the competent authority.
4. He should ensure that all types of sanctions, either special or general, accorded by the competent authority.
5. He should ensure that there is a provision of funds and the expenditure is incurred from the provision and the
same has been authorized by the competent authority.
6. The auditor should check that the different schemes, programmes and projects, where large financial
expenditure has been incurred, are running economically and getting the expected results.

also be given.

also be given.

also be given.

Features of Financial Administration of Local bodies

Describe the salient features of Financial Administration of Local Bodies
Salient Features of Financial Administration of Local Bodies
1. Budgetary Procedure: The objective of local bodies budgetary procedure are

a. financial accountability,
b. control of expenditure,
c. and to ensure that funds are raised and moneys are spent by the executive departments in accordance
with the rules and regulations and within the limits of sanction and authorisation by the legislature or
Council.
Different aspects covered in budgeting are determining the level of taxation, fees, rates, and laying down the
ceiling on expenditure, under revenue and capital heads.
2. Expenditure Control: At the State and Central level, there is a clear demarcation between the legislature and
executive. In the local body, legislative powers are vested in the Council whereas executive powers are
delegated to the officers, e.g., Commissioners. All matters of regular revenue and expenditures are generally
delegated to the executive wing. For special situations like, reduction in property taxes, refund of security
deposits, etc., sanction from the legislative wing is necessary.
3. Accounting System: Municipal Accounting System has been conventionally prepared under the cash system. In
the recent past however, it is being changed to the accrual system of accounting. The accounting system is
characterized by (a) subsidiary and statistical registers for taxes, assets, cheques etc., (b) separate vouchers
for each type of transaction, (c) compulsory monthly bank reconciliation, (d) submission of summary reports
on periodical basis to different authorities at regional and state level.

also be given.

Auditing of Leasing Transaction

What procedure may be adopted by an auditor, while auditing leasing transactions entered into by the leasing
company? (8 Marks)
Answer
In respect of leasing transaction entered into by the leasing company, the following procedures may be adopted by the
auditor.
1. The object clause of leasing company to see that the goods like capital goods, consumer durables etc. in respect
of which the company can undertake such activities. Further, to ensure that whether company can undertake
financing activities or not.
2. Whether there exists a procedure to ascertain the credit analysis of lessee like lessee's ability to meet the
commitment under lease, past credit record, capital strength, availability of collateral security, etc.
3. The lease agreement should be examined and the following points may be noted:
a. the description of the lessor, the lessee, the equipment and the location where the equipment is to be
installed. (The stipulation that the equipment shall not be removed from the described location except
for repairs. For the sake of identification, the lessor may also require plates or markings to be attached
to the equipment).
b. the tenure of lease, dates of payment, late charges, deposits or advances etc. should be noted.
c. whether the equipment shall be returned to the lessor on termination of the agreement and the cost
shall be borne by the lessee.
d. whether the agreement prohibits the lessee from assigning the subletting the equipment and
authorises the lessor to do so.
4. Examine the lease proposal form submitted by the lessee requesting the lessor to provide him the equipment
on lease.
5. Ensure that the invoice is retained safely as the lease is a long-term contract.
6. Examine the acceptance letter obtained from the lessee indicating that the equipment has been received in
order and is acceptable to the lessee.
7. See the Board resolution authorising a particular director to execute the lease agreement has been passed by
the lessee.
8. See that the copies of the insurance policies have been obtained by the lessor for his records.

also be given.

also be given.

Auditing of Hire Purchasing Companies

Hire-purchase agreement means an agreement under which goods are let on hire and under which the hirer has an
option to purchase them in accordance with the terms of the agreement
While checking the hire- purchase transaction, the auditor may examine the following
1. Check Memorandum of Association - Object clause to ascertain whether the hire purchase business can be
carried on by company
2. Hire purchase agreement is in writing and is signed by all parties.
3. Before signing the HP agreement credit worthiness must be evaluated, auditor will check whether proper
policy and procedure exist for the same and whether they are followed are not.
4. Hire purchase agreement specifies clearly-
a. The hire-purchase price of the goods to which the agreement relates;
b. The cash price of the goods, that is to say, the price at which the goods may be purchased by the hirer
for cash;
c. The date on which the agreement shall be deemed to have commenced;
d. The number of instalments by which the hire- purchase price is to be paid, the amount of each of those
instalments, and the date, upon which it is payable, and the person to whom and the place where it is
payable.
5. Ensure that instalment payments are being received regularly as per the agreement
6. Ensure that adequate resolution has been passed authorizing a particular director to execute the hire purchase
agreement.
7. Explain the adequacy of provision for doubtful debts against the hire purchase debtors
8. Examine the case of repossession of goods and their treatment afterwards. Check how and when they were
sold or disposed.
9. Check whether accounting treatment of amount due, amount received, loss on repossession and other related
items are done as per applicable financial reporting framework.
Auditor should also understand the following w.r.t Hire Purchase and design his audit procedures accordingly
1. Possession of goods is delivered by the owner thereof to a person on condition that such person pays the
agreed amount in periodical instalments,
2. The property in the goods is to pass to such person on the payment of the last of such instalments.
3. Such person has a right to terminate the agreement at any time before the property so passes
Homework - Difference between Operating (Right to use ) and Finance lease. (Risk and Reward) Study AS 19
For more details and also cover Difference between OL and FL from ICAI Auditing Study Material Chapter 13.

also be given.

Audit of Partnership
You are approached by a partnership firm to list out the advantages that will accrue to them, if the accounts
are audited. State five important advantages.
Advantages of audit of accounts of a partnership firm: Advantages are as follows (any five):
1. Audited accounts provide a convenient and reliable means of settling accounts between the partners
and thereby possibility of dispute among them is mitigated.
2. On the retirement/death of a partner, audited accounts constitutes a reliable evidence for computing the
amount due to the retiring partner or representative of deceased partner.
3. Audited accounts are generally accepted by the Income tax authorities for computing the assessable income.
4. Audited accounts are relied upon by banks for advancing loan.
5. Audited accounts can be helpful in the negotiation for sale or admission of a new partner.
6. It is an effective safeguard against any undue advantage being taken by a working partner
Mention important points which auditors will consider while conducting audit of accounts of a partnership
firm
Important points which auditors will consider while conducting audit of accounts of a partnership firm are:
1. Confirming that the letter of appointment, signed by a partner, duly authorised, clearly states the nature and
scope of audit contemplated by the partners, specially the limitation, if any, under which the auditor shall have
to function.
2. Studying the minute book, if any, maintained to record the policy decision taken by partners specially the
minutes relating to authorisation of extraordinary and capital expenditure, raising of loans; purchase of assets
extraordinary contracts entered into and other such matters as are not of a routine nature.
3. Verifying that the business in which the partnership is engaged is authorised by the partnership agreement; or
by any extension or modification thereof agreed to subsequently.
4. Examining whether books of account appear to be reasonable and are considered adequate in relation to the
nature of the business of the partnership.
5. Verifying generally that the interest of no partner has suffered prejudicially by an activity engaged in by the
partnership which, it was not authorised to do under the partnership deed or by any violation of a provision in
the partnership agreements.
6. Confirming that a provision for the firm's tax payable by the partnership has been made in the accounts before
arriving at the amount of profit divisible among the partners.
7. Verifying that the profits and losses have been divided among the partners in their agreed profit-sharing ratio.

also be given.

Audit of Hospitals
The special steps involved in such an audit are as follows:
1. Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected period with the
patients' attendance record to see that the bills have been correctly prepared. Also see that bills have been
issued to all patients from whom an amount was recoverable according to the rules of the hospital.
2. Check cash collections as entered in the Cash Book with the receipt, counterfoils and other evidence for
example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of rent bills, etc.
3. See by reference to the Property and Investment Register that all income that should have been received by
way of rent on properties, dividends and interest on securities settled on the hospital has been collected.
4. Ascertain that legacies and donations received for a specific purpose have been applied in the manner agreed
upon.
5. Trace all collections of subscription and donations from the Cash Book to the respective Registers Reconcile
that total subscriptions due (as shown by the Subscription Register and the amount collected and that still
outstanding).
6. Vouch all purchases and expenses and verily that the capital expenditure was incurred only with the prior
sanction of the Trustees or the Managing Committee and that appointments and increments to staff have been
duly authorised.
7. Verify that grants, if any, received from Government or local authority have been duly accounted for. Also that
refund in respect of taxes deducted at source has been claimed.
8. Compare the totals of various items of expenditure and income with the amount budgeted for them and report
to the Trustees or the Managing Committee significant variations which have taken place.
9. Examine the internal check as regards the receipts and issue of stores; medicines, lines, apparatus, clothing,
instruments, etc. so as to insure that purchases have been properly recorded in the Stock Register and that
issues have been made only against proper authorisation.
10. See that depreciation has been written off against all the assets at the appropriate rates.
11. Inspect the bonds, share scripts, title deeds of properties and compare their particulars with those entered in
the Property and Investment Register.
12. Obtain inventories, specially of stocks and stores as at the end of the year and check a percentage of the items
physically, also compare their total values with respective ledger balances.

also be given.

Audit of Cinemas
The special steps involved in its audit are as follows:-
1. Verify
a. that entrance to the cinema hall during show is only through printed tickets;
b. that they are serially numbered and bound into books;
c. that for advance booking a separate series of tickets is issued;
d. and that the stock of tickets is kept in the custody of a responsible official.
2. Confirm that at the end of show, a statement of tickets sold is prepared and cash collected is agreed with it.
3. Verify that a record is kept of the 'free passes' and that these are issued under proper authority.
4. Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for each class.
5. Verify the charges collected for advertisement slides by reference to the Register of Slides kept at the cinema
as well with the agreements, entered into with advertisers in this regard.
6. Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of such expenditure
should be capitalised except redecoration, and that should be adjusted as deferred revenue expenditure the
expenditure on extensive redecoration, and that should be adjusted as deferred revenue expenditure.
7. Vouch payments on account of film hire with bills of distributors and in the process, the agreements concerned
should be referred to.
8. Examine unadjusted balance out of advance paid to the distributors against film hire contracts to see that they
are good and recoverable. If any film in respect of which an advance was paid has already run, it should be
enquire as to why the advance has not been adjusted. The management should be asked to make a provision in
respect of advances that are considered irrecoverable.
9. The arrangement for collection of the share in the restaurant income should be enquired into either a fixed
sum or a fixed percentage of the taking may be receivable annually. In case the restaurant is run by the
Cinema, its accounts should be checked. The audit should cover sale of various items of foodstuffs, purchase of
foodstuffs, cold drink, cigarettes, etc. as in the case of club.

also be given.

NGO

also be given.

also be given.

also be given.

also be given.

also be given.

Audit of LLP
Audit of LLP - Basics

also be given.

also be given.

also be given.

also be given.

Audit of LLP - Appointment of Auditor

also be given.

Advantage or purpose of Audit

also be given.

Auditor’s duty regarding Audit of LLP
Audit of Co-Operative Society - We will study it from ICAI Study Material

also be given.

Chapter 14 Remaining SAs

Following SAs will be covered in this Chapter
1. 250
2. 260
3. 299
4. 450
5. 501
6. 510
7. 540
8. 550
9. 560
10. 570
11. 600
12. 610
13. 620

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SA 250 Consideration of Laws and

Regulation in an Audit of Financial
Statements
Responsibility of Management for Compliance with Law and Regulations
It is the responsibility of management,
● with the oversight of those charged with governance,
● to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations,
● including compliance with the provisions of laws and regulations that determine the reported amounts and
disclosures in an entity’s financial statements.
Policies are Procedures Implemented by Management to assist in the

prevention and detection of non-compliance with laws and regulations
The following are examples of the types of policies and procedures an entity may implement to assist in the prevention
and detection of non-compliance with laws and regulations:
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.
Responsibility of the Auditor

The requirements in this SA are designed
● to assist
● the auditor
● in identifying material misstatement of the financial statements
● due to non-compliance with laws and regulations.
However, the auditor is not responsible for preventing non-compliance and cannot be expected to detect
non-compliance with all laws and regulations.

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This SA distinguishes the auditor’s responsibilities in relation to compliance with two different categories of laws and
regulations as follows:
1. The provisions of those laws and regulations generally recognised to

● have a direct effect
● on the
■ determination of material amounts
■ and disclosures in the financial statements
■ such as tax and labour laws. ; and
The auditor’s responsibility is to

➔ obtain sufficient appropriate audit evidence
➔ about compliance with the provisions of those laws and regulations.
2. Other laws and regulations

● that do not have a direct effect on the determination of the amounts and disclosures in the financial
statements,
● but compliance with which may be
● fundamental
● to 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’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.
Indications of Non-Compliance with Laws and Regulations

1. Investigations by regulatory organisations and government departments or payment of fines or penalties.
2. Payments for unspecified services or loans to consultants, related parties, employees or government
employees.
3. Sales commissions 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. Purchasing at prices significantly above or below market price.
5. Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers to
numbered bank accounts.
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. (without compliance with laws on foreign
exchange movement)
10. Existence of an information system which fails, whether by design or by accident, to provide an adequate audit
trail or sufficient evidence.
11. Unauthorised transactions or improperly recorded transactions.
12. Adverse media comment.
The Auditor’s Consideration of Compliance with Laws and Regulations

● The auditor should obtain a general understanding of
○ The legal and regulatory framework applicable to the entity and the industry or sector in which the
entity operates; and
○ How the entity is complying with that framework.
● SAAE - COMPLIANCE
○ The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the provisions
of those laws and regulations that have
■ a direct effect on the
★ determination of material amounts and
★ disclosures in the financial statements.
● AUDIT PROCEDURE - IDENTIFY INSTANCES OF NON COMPLIANCE

○ 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
★ Inquiring of management and, where appropriate, those charged with governance, as to
whether the entity is in compliance with such laws and regulations; and
★ Inspecting correspondence, if any, with the relevant licensing or regulatory authorities
● ALERT
○ 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.
● WRITTEN REPRESENTATIONS for instances of Non-Compliance and Suspected Non Compliance

○ The auditor shall request management and, where appropriate, those charged with governance to
provide written representations that
○ all known instances of non-compliance or suspected non-compliance with laws and regulations
○ whose effects should be considered when preparing financial statements


○ have been disclosed to the auditor.
Audit Procedures When Non-Compliance is Identified or Suspected

1. 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 and the circumstances in which it has occurred; and
b. Further information to evaluate the possible effect on the financial statements.
2. 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.
3. If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the
effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
4. 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.


Reporting of Identified and suspected non compliance


also be given.

SA 260 - Communication With Those

Charged With Governance
Scope
This SA deals with Auditor’s Responsibility to communicate with TCWG in an audit of financial statements
Role of Communication
There must be two way communication full. this two-way communication is important in assisting ( basically now we
are going to discuss importance of two way communication)
1. Constructive working relationship and understanding the matters related to audit. this relationship is
developed while maintaining auditor's Independence and objectivity.
2. The auditor in obtaining from those charged with governance information relevant to the audit. for example
those charged with governance 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.
3. those charged with governance in fulfilling their responsibility to oversee the financial reporting process
thereby reducing the risk of material misstatement of the financial statements.
Definition
Those Charged with Governance
The person or organisation with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. this includes overseeing the financial reporting process.
Management
The person with Executive responsibility for the conduct of the entities operations.
Requirements
Those Charged with Governance

● The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to
communicate.
Communication with a Subgroup of Those Charged with Governance

● If the auditor communicates with a subgroup of those charged with governance, for example, an audit
committee, or an individual, the auditor shall determine whether the auditor also needs to communicate with
the governing body.

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also be given.

When All of Those Charged with Governance Are Involved in Managing the
Entity
● In some cases, all of those charged with governance are involved in managing the entity,
● For example, a small business where a single owner manages the entity and no one else has a governance role.
In these cases, if matters required by this SA are communicated with person(s) with management
responsibilities, and those person(s) also have governance responsibilities, the matters need not be
communicated again with those same person(s) in their governance role.
● The auditor shall be satisfied that communication with person(s) with management responsibilities
adequately informs all of those with whom the auditor would otherwise communicate in their governance
capacity.
Matters to Be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit

● The auditor shall communicate with those charged with governance the responsibilities of the auditor in
relation to the financial statement audit, including that:
○ The auditor is responsible for forming and expressing an opinion on the financial statements that have
been prepared by management with the oversight of those charged with governance; and
○ The audit of the financial statements does not relieve management or those charged with governance
of their responsibilities.
Planned Scope and Timing of the Audit

● The auditor shall communicate with those charged with governance an overview of the planned scope and
timing of the audit, which includes communicating about the significant risks identified by the auditor.
Significant Findings from the Audit

The auditor shall communicate with those charged with governance
a. The auditor’s views about significant qualitative aspects of the entity's accounting practices, including
accounting policies, accounting estimates and financial statement disclosures.
b. Significant difficulties, if any, encountered during the audit;
c. Significant matters arising during the audit that were discussed, or subject to correspondence, with
management; and
d. Written representations the auditor is requesting;
e. Circumstances that affect the form and content of the auditor's report, if any; and
f. 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.

also be given.

Auditor Independence
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
● We have identified and considered all relationship that may have an impact on Independence including the
impact of non audit services.
● The related safeguards that have been applied to eliminate identified threats to independence or reduce them
to an acceptable level.
The Communication Process
Establishing the Communication Process

The auditor shall communicate with those charged with governance the form, timing and expected general content of
communications.
Forms of Communication
The auditor shall communicate in writing with those charged with governance 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.
Independence
The auditor shall communicate in writing with those charged with governance regarding auditor independence when
required
Timing of Communications
The auditor shall communicate with those charged with governance on a timely basis.
Adequacy of the Communication Process

The auditor shall evaluate whether the two-way communication between the auditor and those charged with
governance has been adequate for the purpose of the audit. If it has not, the auditor shall evaluate the effect, if any, on
the auditor's assessment of the risks of material misstatement and ability to obtain sufficient appropriate audit
evidence, and shall take appropriate action.

also be given.

Significant difficulties
Significant difficulties encountered during the audit may include such matters as:
● 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.
● An unreasonably brief time within which to complete the audit.
● Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
● The 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.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification of the auditor’s
opinion.
Significant Matters
Significant matters discussed, or subject to correspondence with management may include such matters as:
● Significant events or transactions that occurred during the year.
● Business conditions affecting the entity, and business plans and strategies that may affect the risks of material
misstatement.
● Concerns about management’s consultations with other accountants on accounting or auditing matters.
● 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.

also be given.

Circumstances that Affect the Form and Content of the

Auditor’s Report
SA 210 requires the auditor to agree the terms of the audit engagement with management or those charged with
governance, as appropriate.
The agreed terms of the audit engagement are required to be recorded in an audit engagement letter or other
suitable form of written agreement and include, among other things, reference to the expected form and content of
the auditor’s report.
The communication required is intended to inform those charged with governance about circumstances in
which the auditor’s report may d
iffer from its expected form and content or may include additional
information about the audit that was performed.
Circumstances in which the auditor is required or may otherwise consider it necessary to include additional
information in the auditor’s report (or that affect the Form and Content of the Auditor’s Report)
● 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 in accordance with SA 570.
● Key audit matters are communicated in accordance with SA 701.
● The auditor considers it necessary to include an Emphasis of Matter paragraph or Other Matters paragraph in
accordance with SA 706 or is required to do so by other SAs.
In such circumstances, the auditor may consider it useful to provide those charged with governance with a draft of the
auditor’s report to facilitate a discussion of how such matters will be addressed in the auditor’s report.

also be given.

SA 299 - Joint Audit of Financial Statements

also be given.

also be given.

also be given.

also be given.

How Audit Work Will be Divided?

Where joint auditors are appointed, they should, by mutual discussion, divide the audit work among themselves. The
division of work would usually be in terms of audit of identifiable units or specified areas. In some cases, due to the
nature of the business of the entity under audit, such a division of work may not be possible. In such situations, the
division of work may be with reference to items of assets or liabilities or income or expenditure. Certain areas of work,
owing to their importance or owing to the nature of the work involved, would often not be divided and would be
covered by all the joint auditors.
Work Allocation Document

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 those charged with governance of the entity.
The 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 and the joint auditors

also be given.

also be given.

also be given.

also be given.

What are the advantages and disadvantages of Joint Audit?
Advantages
● Pooling and sharing of expertise
● Reduced workload
● Better performance
● Improved service to the client
● Local firms can conduct audit in a better manner especially in case of multinational companies.
● A sense of healthy competition towards better performance.
● Low cost (in terms of development of staff and conducting audit)
Disadvantages
● The fees being shared.
● Psychological problem where firms of different standing are associated in the joint audit.
● General superiority complexes of some auditors.
● Problems of coordination of the work.
● Areas of work of common concern being neglected,
● Uncertainty about the liability for the work done,
● Lack of clear definition of responsibility.

also be given.

Question Answers
QUESTION
E and S were appointed as Joint Auditors of X and Y Ltd. What will be their professional responsibility in a case where the company has
cleverly concealed certain transactions that escaped the notice of both the Auditors?

ANSWER
Joint Audit of Financial Statements

In conducting a joint audit, the auditor(s) should bear in mind the possibility of existence of any fraud or error or any other irregularities in
the accounts under audit.

The principles laid down in SA 200, SA 240 and SA 299 need to be read together for arriving at any conclusion.

The principle of joint audit involves that each auditor is entitled to assume that other joint auditor has carried out his part of work properly.
However, in this case, if it can be assumed that the joint auditors E and S have exercised reasonable care and skill in auditing the accounts of
X & Y Ltd. and yet the concealment of transaction has taken place, both joint auditors cannot be held responsible for professional
negligence.

However, if such concealment could have been discovered by the exercise of reasonable care and skill, the auditors would be responsible for
professional negligence. Therefore, it has to be seen that while dividing the work, the joint auditors have not left any area unattended and
exercised reasonable care and skill while doing their work.
QUESTION TRUE/FALSE
A branch auditor is a joint auditor according to SA299 and his relationship with the company auditor is governed by the said Standard.

False: Branch auditor is not a joint auditor within the meaning of SA 299 “Joint Audit of Financial Statements”. He is another auditor within
the meaning of SA 600 “Using the Work of Another Auditor”.
QUESTION TRUE/FALSE
If there is difference of opinion among the joint auditors with regard to any matter, majority joint auditors opinion will prevail while reporting.

False: As per SA 299 “Joint Audit of Financial Statements”, where the joint auditors are in disagreement with regard to any matters to be
covered by the report, each one of them should express their own opinion through a separate report. A joint auditor is not bound by the
views of majority of joint auditors regarding matters to be covered in the report
and should express his opinion in a separate report in case of a disagreement.
QUESTION TRUE/FALSE
All the joint auditors are jointly and severally responsible for the work, which is not divided and carried on jointly by all the joint auditors.
Answer
True: As per SA 299 on “Joint Audit of Financial Statements”, all the joint auditors are jointly and severally responsible for the audit work
which is not divided and carried on jointly by all the joint auditors.

also be given.

QUESTION TRUE/FALSE
A joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the auditor's report.

Answer
Correct: As per SA 299 “Joint Audit of Financial Statements”, if a joint auditor is not bound by the views of majority of joint auditors regarding
matters to be covered in the report and should express his opinion in a separate report in case of a disagreement.

QUESTION
'A Joint Auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the report.' Justify this
statement in the light of responsibilities of Joint Auditors under SA 299.

also be given.

SA 450 Evaluation Of Misstatements

Identified During The Audit
Objective
The objective of the auditor is to evaluate
● The effect of identified misstatements on the audit; and
● The effect of uncorrected misstatements, if any, on the financial statements.
Definitions
Misstatement -
A difference between the
● Amounts,
● Classification,
● presentation, or
● disclosure of a reported financial statement item
and required for the item to be in accordance with the applicable financial reporting framework. Misstatements can
arise from error or fraud.
Uncorrected misstatements
Misstatements that the auditor has accumulated during the audit and that have not been corrected.
Communication and Correction of Misstatements

● The auditor shall communicate on a timely basis all misstatements accumulated during the audit with the
appropriate level of management, unless prohibited by law or regulation.
● The auditor shall request management to correct those misstatements.
● If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor
shall obtain an understanding of management's reasons for not making the corrections.
Evaluating the Effect of Uncorrected Misstatements

● Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality determined.
● The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate. In
making this determination, the auditor shall consider:
○ The size and nature of the misstatements, both in relation to particular item and the financial
statements as a whole; and
○ The effect of uncorrected misstatements related to prior periods on the relevant and the financial
statements as a whole.

also be given.

Communication with Those Charged with Governance

● The auditor shall communicate with those charged with governance uncorrected misstatements and the effect
that they, individually or in aggregate, may have on the opinion in the auditor's report, unless prohibited by
law or regulation.
● The auditor shall also communicate with those charged with governance the effect of uncorrected
misstatements related to prior periods.
Written Representation
The auditor shall request a written representation from management and, where appropriate, those charged with
governance whether they believe the effects of uncorrected misstatements are immaterial, individually and in
aggregate, to the financial statements as a whole.
Documentation
The audit documentation shall include:
● The amount below which misstatements would be regarded as clearly trivial.
● All misstatements accumulated during the audit and whether they have been corrected; and
● The auditor's conclusion as to whether uncorrected misstatements are material, individually or in aggregate,
and the basis for that conclusion.

also be given.

SA 501 - Audit Evidence – Additional

Considerations for Specific Items

also be given.

Write a short note on“Physical attendance by auditor during inventory taking”.?

also be given.

also be given.

also be given.

Initial Audit engagement - Opening

balances (SA 510)
Definitions
Initial audit engagement
An engagement in which either:
○ The financial statements for the prior period were not audited; or
○ The financial statements for the prior period were audited by a predecessor auditor.
Opening balances
Those account balances that exist at the beginning of the period.
Predecessor auditor
The auditor from a different audit firm, who audited the financial statements of an entity in the prior period and who
has been replaced by the current auditor.
Duty of Auditor / Objective

As per the SA-510 "Initial Engagement - Opening Balances", it is the duty of the auditor, auditing the financial
statements first time, to verify and obtain appropriate audit evidence regarding assertions as follows:
a. Whether opening balances contain any misstatement which is materially affecting the financial statements of
the current period and
b. Accounting policies followed in the preceding period are also being followed in current period i.e. consistency
of accounting policies followed.
Audit Procedures - Opening Balances

The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period's financial statements by:
Correct brought forward & Adjustment done as required

● 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; OB Reflect Apt A/Cing Policy
OB reflect Apt Accounting policy

● Appropriate accounting policies reflected in the opening balances
○ have been consistently applied in the current period's financial statements, or
○ Changes thereto are properly accounted for and adequately presented and disclosed in accordance
with the applicable financial reporting framework.

also be given.

○
Misstatement in OB
Whether there is a misstatement in the opening balances (For checking this auditor should do the following things)
a. PRIOR PERIOD AUDITED
i. Auditor can place reliance on the audit report of the predecessor auditor. (Consider SA 200 – Using the
work performed by others)
ii. He should obtain the report of the predecessor auditor.
b. PRIOR period was not audited
i. Obtain audit evidence whether there is a misstatement in the opening balance or not.
NOTE - If the prior period FS were audited by a predecessor auditor and there was a modification in the opinion, the
auditor shall evaluate the effect of the modification in assessing the risk of material misstatement in the current
period
Audit Conclusions and Reporting

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
financial statements and the effect of the misstatements is not properly accounted for or not adequately presented or
disclosed, the auditor shall express a qualified opinion or an adverse opinion, as appropriate

also be given.

SA 540 - Auditing accounting estimates,

including fair value accounting estimates
and related disclosures”
Meaning
An approximation of a monetary amount in the absence of a precise means of measurement
● Closest Approximation
● Absence of a precise means of measurement
● Best Possible Information
● At a particular point of time.
Objective of auditor
To obtain sufficient appropriate audit evidence whether:
a) Accounting estimates, including fair value accounting estimates are reasonable ;and
b) Related disclosures in the financial statements are adequate.
Estimation Uncertainty
The suspecticity of an accounting estimate and related disclosures to an inherent lack of precision in its measurement.
NOTE : A difference between the outcome of accounting estimate and the amount originally recognized in the financial
statements does not necessarily represent a misstatement of the financial statements. This is particularly the case for
fair value accounting estimates.
Risk Assessment Procedures & Related Activities

Auditor shall obtain an understanding of the following in order to identify and assess the risks of material
misstatements for accounting estimates:
1. The requirements for applicable financial reporting framework.
2. How management identifies those transactions events and conditions that may give rise to the need for
accounting estimates.
3. The estimation making process adopted by the management including :
a. The method, including where applicable the model used in making the accounting estimates.
b. Whether management has used an expert.
c. Relevant controls
d. 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
e. Whether and if so, how the management has assessed the effect of estimation uncertainty.
f. The auditor shall review the outcome of accounting estimates includes in the prior period financial
statements.
4. The auditor shall determine whether, in the auditor’s judgement, any of those accounting estimates that have
been identified as having high estimation uncertainty give rise to significant risks.
NOTE - 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.

also be given.

Responses to the Assessed Risks

Based on the assessed risks of material misstatement, the auditor shall determine.
a) Whether management has appropriately applied the applicable financial reporting framework.
b) Whether the methods are appropriate and have been applied consistently.
Measurement and Disclosures Related to Accounting Estimates

The auditor shall obtain sufficient appropriate audit evidence about whether the accounting estimate are reasonble
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 disclosures of their
estimation uncertainty in the financial statements.
Written Representation
The auditor shall obtain written representation from management whether management believes significant as
assumptions used by it in making accounting estimates are reasonable.
Documentation
The audit documentation shall include :
a) The basis for the auditor’s conclusion about the reasonableness of accounting estimates and their disclosure
that give rise to significant risks; and
b) Indicators of possible management bias, if any.
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 estimates 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.
4. The length of the forecast period,
5. The relevance of data drawn from past events to forecast future events.
6. The availability of reliable data from external sources.

also be given.

What are accounting estimates according to the Standards on Auditing 540? Give examples.
Accounting Estimates: According to the SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosure”, accounting estimate means an approximation of a monetary amount in the
absence of a precise means of measurement.
Because of the uncertainties inherent in business activities, some financial statement items can only be estimated.
Further, the specific characteristics of an asset, liability or component of equity, or the basis of or method of
measurement prescribed by the financial reporting framework, may give rise to the need to estimate a financial
statement item.
Some financial reporting frameworks prescribe specific methods of measurement and the disclosures that are
required to be made in the financial statements, while other financial reporting frameworks are less specific.
Some accounting estimates involve relatively low estimation uncertainty and may give rise to lower risks of
material misstatements, for example:
● 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.
For some accounting estimates, however, there may be relatively high estimation uncertainty, particularly where
they are based on significant assumptions, for example:
● Accounting estimates relating to the outcome of litigation.
● Fair value accounting estimates for derivative financial instruments not publicly traded.
Additional examples of accounting estimates are:

● 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.

also be given.

SA 550 - Related Parties

The requirements in this SA are designed to
● assist the auditor
○ in identifying and assessing the risks of material misstatement associated with related party
relationships and transactions, and
○ in designing audit procedures to respond to the assessed risks.
Objective
The objectives of the auditor are
To obtain an understanding of related party relationships and transactions (RPRT) sufficient to be able:
a. To recognize fraud risk factors,
b. To conclude whether the financial statements, insofar as they are affected by those relationships and
transactions:
i. Achieve a true and fair presentation; or
ii. Are not misleading; and
c. To obtain sufficient appropriate audit evidence about whether RPRT have been appropriately
identified, accounted for and disclosed (IAD) in the financial statements in accordance with the
framework.
Related party
1. A related party as defined in the applicable financial reporting framework; or
2. Where the applicable financial reporting framework establishes minimal or no related party requirements
a. A person or other entity that has control or significant influence,
i. directly or indirectly
ii. through one or more intermediaries,
iii. over the reporting entity;
b. Another entity over which the reporting entity has control or significant influence, directly or
indirectly through one or more intermediaries; or
c. Another entity that is under common control with the reporting entity through having: —
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
3. However, entities that are under common control by a state (i.e., a national, regional or local government) are
not considered related unless they engage in significant transactions or share resources to a significant extent
with one another.

also be given.

Identification of Previously Unidentified or Undisclosed Related

Parties or Significant Related Party Transactions
The auditor identifies related parties or significant related party transactions that management has not previously
identified or disclosed to the auditor, the auditor shall
1. Promptly communicate to ET
2. Request management to identify all transactions with the newly identified related parties for the auditor's
further evaluation; and
3. Inquire as to why the entity's controls over RPRT failed
4. Perform appropriate substantive audit procedures relating to such newly identified related parties or
significant related party transactions;
5. Reconsider the risk that other related parties or significant related party transactions may exist that
management has not previously identified or disclosed to the auditor, and perform additional audit
procedures as necessary; and
6. If the non-disclosure by management appears intentional evaluate the implications for the audit.
Identified Significant Related Party Transactions outside the

Entity's Normal Course of Business
For identified significant related party transactions outside the entity's normal course of business, the auditor shall:
1. Inspect the underlying contracts or agreements, if any, and evaluate whether:
a. The business rationale (or lack thereof) of the transactions suggests that they may have been entered
into to engage in fraudulent financial reporting or to conceal misappropriation of assets;
b. The terms of the transactions are consistent with management's explanations; and
c. The transactions have been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework; and
2. Obtain audit "evidence that the transactions have been appropriately authorized and approved.
Evaluation of the Accounting for and Disclosure of Identified

RPRT
In forming an opinion on the financial statements the auditor shall evaluate:
● Whether the identified RPRT have been appropriately
○ accounted for and
○ disclosed in accordance with the applicable financial reporting framework; and
● Whether the effects of the RPRT
○ Prevent the financial statements from achieving true and fair presentation; or
○ Cause the financial statements to be misleading.

also be given.

Risk Assessment Procedure and Related Activities
1. Understanding the Entity's RPRT

● The auditor shall inquire of management regarding:
○ The identity of the entity's related parties, including changes from the prior period;
○ The nature of the relationships between the entity and these related parties; and
○ Whether the entity entered into any transactions with these related parties during the period
and, if so, the type and purpose of the transactions.
2. Understanding of the controls

○ The auditor shall inquire of management and others within the entity, and perform other risk
assessment procedures considered appropriate, to obtain an understanding of the controls
3. Maintaining Alertness for Related Party Information

○ When Reviewing Records or Documents maintain alertness with respect to RPRT they may indicate
RPR/T not identified or disclosed by Mgt.
4. Sharing Related Party Information with the Engagement Team

○ The auditor shall share relevant information obtained about the entity's related parties with the other
members of the engagement team.
5. Significant risk or not

○ Identification and Assessment of the Risks of Material Misstatement Associated with RPRT and
determine whether they are significant risk or not (SA 315 – significant risk)
6. Fraud risk factors identified

○ Consider them while I/A Risk of MMS and applying audit procedure

also be given.

Strong Ltd. holding 60% of the equity shares in Weak Ltd. purchased goods worth Rs. 50 Lakhs from Weak Ltd. during the
financial year 2006-07. The Managing Director of Strong Ltd.is of the opinion that it is normal business activity and there is
no need to disclose the same in the final accounts of the Company. Comment.
WHEN PARTIES ARE RELATED?

● As per definition given in the AS 18 “Related Party Disclosures”, parties are considered to be related
○ if at any time during the reporting period
○ one party has the
■ ability to control the other party or
■ exercise significant influence over the other party in making financial and/or operating
decisions.
In the instant case, Strong Ltd. is the holding company of Weak Ltd. as it holds more than 50% of the voting power
of Weak Ltd. and thus should be treated as related parties as per AS-18.
WHAT ARE RELATED PARTY TRANSACTIONS?

● Related party transaction means a transfer of resources or obligations between related parties, regardless of
whether or not a price is charged.
DISCLOSURE AS PER AS 18
According to AS-18, in the case of related party transactions, the reporting enterprise should disclose the following:
1. The name of the transacting related party;
2. A description of the relationship between the parties;
3. A description of the nature of transactions;
4. Volume of the transactions
5. Any other elements of the related party transactions necessary for an understanding of the financial
statements;
6. The amounts or appropriate proportions of outstanding items pertaining to related parties at the balance
sheet date and provisions for doubtful debts due from such parties at that date;
In the instant case

Since there is related party transaction the contention of Managing Director of Strong Ltd. is not correct and the
auditor should insist to make proper disclosure as required by AS-18 and if the management refuses, the auditor
should express a qualified opinion.
REQUIREMENT UNDER CARO

Related Party Transaction [Clause 3 (xiii)] Whether all transaction with the related party is in compliance with
Section 177 and 188 of the Companies Act, 2013 where applicable and the details have been disclosed in the
financial statement etc., as required by the applicable accounting standard.

also be given.

SA 560 - Subsequent Events

SUBSEQUENT EVENTS
Events occurring between the date of the financial statements and the date of the auditor's report, and facts that
become known to the auditor after the date of the auditor's report.
OBJECTIVE
● Obtain Sufficient And Appropriate Evidence about whether events occurring between the date of the financial
statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial
statements are appropriately reflected in those financial statements; and
● Respond appropriately to facts that become known to the auditor after the date of the auditor's report, that,
had they been known to the auditor at that date, may have caused the auditor to amend the auditor's report.
TYPES OF SUBSEQUENT EVENTS

Type I
Those events that provide additional evidence with respect to conditions that existed on the date of balance sheet and
effect the estimation made in the preparation of the financial statements. The statement should be adjusted for any
change in estimates resulting from the use of evidence of subsequent events.
For example
● Debtors as on balance sheet date are declared insolvent after the balance sheet date but before auditor's
report
● Settlement of legal disputes before audit report date, which arose before balance sheet date
Type II
Those events which provide evidence with respect to conditions that did not exist on the date of the balance sheet
being reported on but arose subsequent to the date. These events should not result in adjustments of the financial
statements. Some of these events however may be of such a nature that disclosure of them is required to keep the
financial statements from not being misleading.
For example
● Purchase of business
● Sale of shares and debentures
● Loss of plant or inventory as a result of fire

also be given.

AUDIT PROCEDURES FOR SUBSEQUENT EVENTS

This standard requires that auditor should perform procedures designed to obtain sufficient and appropriate audit
evidence that all the events up to date of the auditor’s report that may require adjustment of (type-l events) or
disclosure (type- ll event’s) the financial statements have been identified.
The following procedures may be followed to identify the subsequent events:

● Review the procedures that management followed to identify the subsequent events.
● Inquiring of management and, where appropriate, those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements.
● Read the minutes of meeting of board of directors, executive committee, meeting of shareholders held after
balance sheet date
● Read latest interim financial statements
● Inquire, read about and the latest position of legal cases
● Management representation that all subsequent events are identified

also be given.

INQUIRIES OF MANAGEMENT REGARDING SUBSEQUENT

EVENTS
The auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters:
● 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, fc example, by 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 in question the appropriateness of
accounting policies used in the finance statements, as would be the case, for example, if such events call ir
question the validity of the going concern assumption.
● Whether any events have occurred that are relevant to the measurement estimates or provisions made in the
● Whether any events have occurred that are relevant to the recoverability assets.

also be given.

SUBSEQUENT EVENTS AND BRANCH AUDITOR'S REPORT

If branch auditor has already audited the branch and submitted the report to principal auditor, the principal auditor
would follow audit procedures in respect events occurring between the date of signing of the audit report of the
auditor of branch and the date of signing of his (principal) report.
Facts Which Become Known To The Auditor After The Date Of
The Auditor's Report But Before The Date The Financial
Statements Are Issued

also be given.

also be given.

Facts Which Become Known To The Auditor After The Financial

Statements Have Been Issued

also be given.

SA 570 - GOING CONCERN

Responsibilities of management
● It is management's responsibility to assess the entity's ability to continue as a going concern even if the
financial reporting framework does not include an explicit requirement to do so.
Responsibilities of the auditor

● The auditor's responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of
management's use of the going concern assumption. (SAAE about Aptnes. )
● He shall consider whether there is a material uncertainty about the entity's ability to continue as a going
concern. (MU is there?)
Most Important – As per SA 200 The absence of any reference to going concern uncertainty in an auditor's report
cannot be viewed as a guarantee as to the entity's ability to continue as a going concern. (SA 200)
Risk assessment procedures and related activities

● 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.
● In doing so, the auditor shall determine whether management has already performed a preliminary
assessment of the entity's ability to continue as a going concern.
● 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.
● There may be following types of indicators
Financial indicators
➔ Negative Net worth/working capital;
➔ Arrears / discontinuance of Dividends;
➔ Adverse financial ratio;
➔ Substantial operating losses;
➔ Borrowings approaching maturity without any chance of renewal/ repayment;
➔ Short term borrowing for long term asset financing;
➔ No payment to creditors on due date.
➔ Non-compliance with terms in loan agreement;
➔ Negative cash flow from operations;
➔ Rearrangement with creditors for reduction in liability; or
➔ Change from creditors to cash on delivery transaction with supplier.
Operating indicators
➔ Loss of key management and no replacement available;
➔ Loss of major market or supplier;
➔ Labour unrest, strikes etc; or
➔ Loss of major licence, franchise, etc.

also be given.

Other indicators
➔ Pending legal proceedings;
➔ Change in Govt. Policy affecting the entity adversely; or
➔ Non- compliance with Statutory requirements
However, such indications may be mitigated by some positive factors.

For example: loss of some major supplier may be compensated by availability of some alternate source of supply.
Additional audit procedures when events or conditions are

identified
When 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 perform procedures as follows:
● Request management to make its assessment of the entity's ability to continue as a going concern.
● Evaluating management's plans for future actions.
● When the entity has prepared a cash flow forecast, then consider its reliability.
● Considering whether any additional facts or information have become available since the date on which
management made its assessment.
● Requesting written representations from management or those charged with governance, regarding their
plans for future action and the feasibility of these plans.
Auditor Conclusions
Appropriateness of management’s use of the going concern

The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall
conclude on, the appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements.
( या SAAE OBTAIN कर लए है और conclude करे गा ON…………………………….)
Existence of Material Uncertainty
Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s 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.
(Evidence के Basis पर conclude करे गा …………………………………)
Material Uncertainty
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

also be given.

Implications for the Auditor’s Report
Use of Going Concern Basis of Accounting Is Inappropriate

● If the financial statements have been prepared using the going concern basis of accounting but,
○ in the auditor’s judgment, management’s use of the going concern basis of accounting in the
preparation of the financial statements is inappropriate,
○ the auditor shall express an adverse opinion.
Use of Going Concern Basis of Accounting Is Appropriate but a Material

Uncertainty Exists
Adequate Disclosure of a Material Uncertainty Is Made in the Financial Statements

● If adequate disclosure about the material uncertainty is made in the financial statements,
● the auditor shall express an unmodified opinion and
● the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going
Concern” to
○ Draw attention to the note in the financial statements that discloses the matters.
○ 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 the Financial Statements

● If adequate disclosure about the 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
○ 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.
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.
Significant Delay in the Approval of Financial Statements

If there is significant delay in the approval of the financial statements by management or those charged with
governance after the date of the financial statements,
● the auditor shall inquire as to the reasons for the delay.
● If the auditor believes that the delay could be related to events or conditions relating to the going concern
assessment,
● the auditor shall perform those additional audit procedures necessary,
● as well as consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty.

also be given.

Adequacy of Disclosures When Events or Adequacy of Disclosures When Events or

Conditions Have Been Identified and a Conditions Have Been Identified but No
Material Uncertainty Exists Material Uncertainty Exists
The auditor shall determine whether the financial The auditor shall evaluate whether, in view of the
statements. requirements of the applicable financial
● Adequately disclose the
reporting framework, the financial statements
○ principal events or conditions
provide adequate disclosures about these events or
■ that may cast significant doubt on
conditions.
■ 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.

also be given.

also be given.

also be given.

also be given.

also be given.

SA 600 USING THE WORK OF ANOTHER

AUDITOR
Definition
Component
Any branch, division, subsidiary, joint venture or associates, etc., whose financial information is used in the financial
statements of client.
Principal Auditor
Auditor of client.
Another Auditor
Auditor of component of client.
Applicability
● This standard is applicable to material components, w.r.t. financial statements as a whole.
● Not Applicable
○ Joint Auditor - 299
○ Predecessor auditor
Coordination
Another auditor should also share important information with principal auditor and properly coordinate with him.
There should be statement of division of responsibility in Principal Auditor's Audit report by showing extent to which
financial statement of component audited by another auditor has been included in financial statement of entity.
Reporting by Principal auditor

● Principal auditor should Qualify / Disclaim his audit report if he
○ Can't use other auditors work & procedures.
○ Not able to perform sufficient additional procedures.

also be given.

Explain the audit procedures when Principal Auditor is using the work of another Auditor. (8 Marks – Nov 14)
Consideration by Principal Auditor before and while using the work of Another Auditor.
Using the Work of Another Auditor: As per SA 600, “Using the Work of Another Auditor” when the principal auditor
plan to use the work of another auditor:
1. The principal auditor should perform procedures to obtain sufficient audit evidence, that the work of the
other auditor is adequate for the principal auditor’s purpose, in the context of the specific assignment.
2. 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 Institute of Chartered Accountants of India.
3. When principal auditor decides to use the work of another auditor he should perform following procedures:
a. Advise the other auditor of the use that is to be made of the other auditor’s work and report and
make sufficient arrangements for co-ordination of their efforts at the planning stage of the audit.
b. Advise the other auditor of the significant accounting, auditing and reporting requirements and
obtain representation as to compliance with them.
4. The principal auditor might discuss with the other auditor the audit procedures applied or review a written
summary of the other auditor’s procedure and findings which may be in the form of a completed
questionnaire or checklist.
5. The principal auditor may conclude that it is
a. not necessary to apply procedures because sufficient appropriate audit evidence previously
obtained
b. that acceptable quality control policies and procedures are complied with in the conduct of the other
auditor’s practices.
6. The principal auditor should consider the significant findings of the other auditor.
7. Discuss with the other auditor and the management of the component, audit findings of the financial
statement of the component.
8. Principal auditor should document the significant findings of the component whose financial statements was
audited by the other auditor, name of the auditor, conclusions reached that the individual component is not
material, performed procedures and conclusions reached, how he deals with the qualifications or adverse
remarks contained in the other auditor’s report.

also be given.

also be given.

also be given.

SA 610 Using the work of Internal Auditor

also be given.

also be given.

also be given.

also be given.

also be given.

SA 620 Using the work of an Auditor's

Expert
Auditor’s expert
An individual / organization Possessing expertise in a field Other than accounting or auditing Whose work is used by
auditor In obtaining evidence He may be auditor’s internal expert or external expert.
SA not applicable when

● Engagement team includes a member with expertise in specialized area of accounting auditing, or
● Auditor's use of management's expert. (SA 500 is applicable)
Auditor’s Responsibility
● Auditor has sole responsibility of his audit opinion.
● His responsibility is not reduced by using auditor’s expert.
● However, he may accept the work of auditor’s expert as evidence if he concludes that work of auditor’s expert
is adequate.
Objectives of auditor
To determine whether:
● to use the work of auditor’s expert, &
● that work is adequate for his purpose
Auditor's Procedures w.r.t determining adequacy of work of

auditor's expert
In case, auditors consider that using the work of auditors expert is necessary, he shall determine whether the work of
that expert is adequate by considering the following:
1. Competence, capability and objectivity of auditor's expert’s

○ He shall evaluate whether expert is having necessary skills & objectivity.
○ He should be aware of the relationships that may hamper expert's independence.
2. Understanding the field of expertise of auditor's (Through Discussion – This will help in evaluating adequacy)
3. Agreement with Auditor's expert - in writing – Nature scope & Objective – Roles & Respo. of Auditor & Expert
– Timing & Mode of communication – Confidentiality
4. Evaluating Adequacy of auditor's expert's work
○ By considering
i. Reasonableness of expert’s findings,
ii. Consistency of finding of that expert with other evidences,
iii. Reasonableness of assumptions used by expert,

also be given.

iv. Reasonableness & accuracy of source data used by expert.
5. If auditor determines that work of expert is not adequate, he shall perform further procedures.
Reference to auditor’s expert in auditor’s Report
In case of unmodified opinion

● Auditor shall not refer to work of auditor's expert in the report containing unmodified opinion unless required
by law / regulations to do so.
● If required by law/regulations, he shall indicate in auditors report that such reference does not reduce
auditor's responsibility for the audit opinion.
In case of modified opinion

● He shall refer to work of auditor’s expert if such reference is necessary for understanding the nature of
modification.
● He shall indicate that such reference does not reduce auditor’s responsibility for the opinion.

classes. www.neerajaroraclasses.com Amendments and updates will be taught in classes and videos. Extra notes and charts will also be given.

SA 710 - Comparative Information

Corresponding Figures and Comparative Financial
Statements

To get the best out of these notes visit www.neerajaroraclasses.com SA 710 | 1 / 6





What are the auditor’s responsibilities in respect of corresponding figures?
Answer -
● Write Scope of SA 710 - It deals with the..
● Also write Audit Procedures to be followed.
It was observed from the modified audit report of the financial statements of AS Ltd. for the prior period
(immediately preceding financial year) that depreciation of ₹ 2.50 crore that period 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 current period (Current Financial Year ), 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?
Answer
Auditor’s responsibility in cases where an audit report for an earlier year is qualified is given in SA 710 “Comparative
Information – Corresponding Figures and Comparative Financial Statements”.
● 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 financial
reporting framework, 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 qualified
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
○ 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
● In the instant case, if AS Ltd. does not correct the treatment of depreciation extent of rupees 2.50 crore for the
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 refer to the earlier
year’s modification.


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These notes are ​NOT FOR SALE. ​ These notes are incomplete without our videos.

1. Nature, Scope and Objective

Nature, Scope and Objective of Audit

Rules and Regulation For Accounting and Auditing

Why we need Rules for Accounting and Auditing

Lines Taken From ICAI Study Mat - ​www.icai.org

A brief About Audit

Overall Objectives of Auditor

● To obtain reasonable assurance about

Misstatements can arise from error or fraud.

Fraud is more difficult detect than error (True or False)

Concept of true and fair view

Audit required under law

Organisations which require audit under law are the following -

● In respect of such accounts, there is no basic legal requirement of audit.

Those charged with governance

Pre- Conditions for an audit

Judgement from audit point of view

Why Professional Skepticism?

Therefore, we do agree with the statement.

Inherent Limitations of Audit - SA 200

1. The Nature of Financial Reporting

● The preparation of financial statements involves judgment by management.

2. The Nature of Audit Procedures

3. Timeliness of Financial Reporting and the Balance between Benefit and

4. Other Matters that Affect the Limitations of an Audit

Auditor’s responsibility for failure to detect fraud and errors

Auditor WILL NOT BE considered as negligent

All this can be checked by AUDIT DOCUMENTATION.

Plant and Machinery (at cost) ₹ 4,00,000

Less: Depreciation till the end of ₹ 1,40,000

Depreciation for the year ₹ 26,000 ₹ 1,66,000

The assertions are as follows:

Aspects to be covered in Audit

What are the advantages of an independent audit?

Advantages of an Independent Audit

SA 210 - Agreeing the terms of Audit Engagement

Agreement on Audit Engagement Terms

The audit engagement letter is sent by the auditor to his client.

Limitation on Scope Prior to Audit Engagement Acceptance

Acceptance of a change in engagement

If, prior to completing the audit engagement,

Relationship of Auditing with other disciplines

Auditing and Accounting

Auditing and Law

Overview of Elements of System of Quality Control

Misc Topics Related To Standards

What are Standards on Auditing (SAs)?

Procedure for issuing SAs

Generally following procedure is followed for issuing the SAs

Question Standards collectively known as the Engagements Standards

Role of International Auditing & Assurance Standard Board (IAASB)

Objectives and Functions of AASB

Standard on Auditing (SA) 100-999

Standard on Review Engagement (SRE) 2000-2699

Standard on Assurance Engagement (SAE) 3000-3699

Related Services (SRS) 4000-4699

General Principles and Responsibilities 200-299

Risk Assessment and Response to Assessed Risk 300-499

Audit Evidence 500-599

Using work of Others 600-699

Audit conclusions and Reporting 700-799

These notes are NOT FOR SALE. These notes are incomplete without our videos.

Lines Taken From ICAI Study Mat - www.icai.org