Company Accounts

MODULE - I:
LIMITED COMPANIES
AUDIT OF

ChapterI

Company Accounts

Maintenance of Books of Accounts

Segment Reporting (AS-17)
Disclosure
J3 Criteria for Segment Reporting and
Required
1.4 Related Party Disclosures
1.S Divisible Profits
1.6 Dividends (Section 123 to 127)
1.7 Depreciation
I.8 Representations by Management
I.9 Exercises
 Vipul' Auditing -II (BBI)
Company Accounts 3
I. MAINTENANCE OF BOOKS OF ACCOUNTS:
(2What is required to be prepared and kept are books of
Section 128 of the Companies Act, 2013 provides for accounts, other relevant books and papers and financial
Maintenance of books of accounts under the new Companies Act.
statements/ Books of accounts are defined in clause 2(13),
The corresponding section 209 on "Books of accounts to be books and papers' in clause 2(12) and 'financial statement' in
kept by company" of Companies Act, 1956 dealt with the books of Clause 2(40). Both are required to be prepared and kept.
accounts required to be maintained to give a true and fair view of
the state of affairs of the company or branch office and to explain
(3)Books of accounts, books and papers and financial statements
its transactions and also specify the place of keeping and period
should explain the transactions effected at company's
for which such books to be kept by the company. The registered office and any branches.
responsibility for maintenance books of accounts was also fixed (4Records, books, papers and financial statements must relate
by this provision. to any specific financial year only.
The significant changes introduces in this section are as 15A
I5}A company engaged in Production, processing,
follows: manufacturing or mining activity, is also required to maintain
(a) books of accounts may also bekept in electronic form. particulars relating to utilization of material, labour or other
(b) it items of cost as the Central Government may prescribe for
should be preserved for 8 years (for more number of
years in case of any investigation). suchclass of companies. (Section 148)
(c) a director of the Company 6The branches of the company, if any, in India or outside India
can inspect the books of shall also keep
accounts of the subsidiary, only with the authority books of accounts in the same manner as
of the specified in sub-section (1), for the transaction effected at the
Board of Directors.
Maintenance of Books of Accounts: branch office. Further the branch offices are required to send
the proper summarized return made up-to-date to the
Maintenance of books_of
accountswould mean records company atits registered office or the other places as decided
maintained by the company_to record
the specified_financial
transaction. It has been specifically provided that:
by the board
Every company shall keep proper books of Books of accounts of the company shall be kept at the
accounts. This registered office of the company.
clause specifies the main features of
proper books of accounts 8In case of Books of accounts being maintained at any other
as under:
(i) The company must
place other than registered office in India, as may be decided
keep the books of accounts with by resolution of Board of Directors, company shall be
respect to items specified in clauses
(i) to (iv) of sub- required to intimate full address of such place to Registrar of
section 2(13) which defines "books
of accounts". Companies within 7 days.
(ii) The books of accounts
must show that all money
received and expended, sales/and 9 The maintenance of books of accounts and other books and
papers in electronic mode is permitted and is optional.
and the assets and liabilities purchases of goods
of the company. (Second Proviso to Clause 128(1).
(ii) The books of accounts
must be
according to the double entry kept on accrual basis and The person responsible to take all reasonable steps to secure
system of accounting. compliance by the company with the requirement of maintenance
(iv) The books of accounts
must give a true of books of accounts etc. shall be: (sub-section 6)
the state of the affairs of the and fair view of
company or its t) Managing Director,
branches.
(i) Whole-Time Director, in charge of finance
 Vipul's Auditing
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[
Company Accounts 5
Financial Oificer
(ii) Chief Bos
of a company charged by the Board Applicability of Consolidated Financial Statement (CFS):
liv) Any other person provisions of section 128
28.
wit
duty of complying with Private Limited Company,
Penalties: Public Unlisted Company, and
In case the aforementioned persons referred to in Listed Company.
-section
,
(6) (ie. Managing Director, Whole Time Director, Chief Fina Currently listed companies which are having subsidiary
Officer etc.) fail to take reasonable steps to ecure complianco o companies (Associate or Joint Venture is not included in the
this section and thus, contravene such provisions, they hey shall
shall in definition of Subsidiary Company) are required to
respect of each offence, be punishable with imprisonment for
prepare the
or a consolidated financial statements under the Securities
term which may extend to one year or with fine which shall and
not e Exchange Board of India (SEBI) Regulations.
less than fifty thousand rupees but which may
extend to five lath Now the Companies Act, 2013 requires every
rupees or both. Listed, or
unlisted public and private limited
Preparation and Presentation of Financial companies to prepare
Statements: consolidated financial statements which
As per section 2(40), Financial Statement
are having subsidiary
includes: companies as defined under Section 2 of the Companies
Act, 2013,
Balance Sheet. which includes Associate Company and
Joint Venture (Both in
Statement of Profit and Loss. India and Abroad).
Cash Flow Statement. Additional Disclosures:
Consolidated Financial The Company in addition to the
Statements (CFS) financial statements shall also
company has Subsidiaries in case a attach a separate statement containing
(subsidiary includes the salient features of the
company or Joint Ventures). associate financial statements of the subsidiaries.
Statement of changes Format of Financial Statement:
in Equity, if applicable.
Any explanatory note/s The Format of Financial Statement
forming part of of the Companies Act, 2013. shall be as per Schedule llI
Section 129 of above.
financial statements
the Companies Act, 2013
lays down that the Instruction for the preparation
affairs shall give a of Consolidated Financial
affairs ofof the C Company or
true and fair
view of the state of
Statement are given in the
Schedule lll
Accounting 1ll of the Companies
Companies
Companies which provides an option 2013
statements shall
Standards
and the comply with the subsidiaries to the companies to disclose Act,2
be as per Schedule format of those financial subsidiaries or associates the list of
or joint
Sub Section lll of Companies consolidated in the consolidated ventures which have have not
not been
mandates (3) of Section Act, 2013. financial statements alongDeet
every company 129 of
the Companies
the reason for not consolidating with
statement to prepare nies Act, 2013 the financial statements.
for all theCompanies
a consolidated Act, In case of non-Compliance
of Accounting Standards:
TheFinancial havingone financial
Board of Statements or more
ore
inan The Company shall disclose
Directors of the Company subsidian
subsidiaries. regard to any deviation from in its financial statements with
Meeting before npany shall the accounting standards along
for each financial the shareholders shall be laid by the
(Subsidiary year. at the Annual Gene
the reasons for such
deviation and the financial effects, with
includes arising out of such deviation. if any
oth Associate
in India and Companies
Foreign
country.) and
d Joint Ventur
C
 Vipul' Auditing- (BB
6 Company Accounts
129 of Companies Act,
Penalties for non-compliance of section 1.3 CRITERIA FOR SEGMENT
REPORTING AND
2013: DISCLOSUREREQUIRED:
of section 129
Ifany company contravenes with the provisions 1If business segment is primary then geographical segment
of Companies Act, 2013, the following officials viz., will be secondary.
(a) Managing Director. 10% Test: Those geographical segments are
to be reported
(b) Whole Time Director in charge of finance. whose revenue is more than 10% of total revenue.
(c) Chief Financial Officer.
Those geographical segments who pass 10% test are
the duty of required to disclose:
(d) Any other person authorized by Board with
complying with this provision. i) Segment Revenue.
(e) In the absence of any of the officers mentioned above, all i) Segment Assets.
the Directors shall be punishable. (iii) Cost incurred during the accounting period to acquire
Punishments: segment assets.
(2) If geographical segment is primary then business segment
(a) Imprisonment for a term which may extend to one (1) year
will be secondary.
or
(b)
10% Test:
Fine which shall not be less than Rs. 50,000 but which may
extend to Rs. 5,00,000 or B(i) Those business segments whose revenue from sales to
(c) With both. external customers is 10% or more of total revenue.
(ii) Those business segments whose segment assets are
10% or more of total assets of all business segments.
1.2 SEGMENT REPORTING (AS-17):
Those business segments who pass 10% test should
Segment Reporting helps in better understànding of financial disclose:
statements and in assessing riskánd returns of an enterprise
(a) Segment Revenue.
segment can be classified into:
(b) Segment Assets
(1 Geographical Segment: It can be classified on the basis of
(c) Cost incurred during the accounting period to acquire
location of company's assets, customers or main operations.
For Example: Geographical Segment of RIL can be
segment assets.
domestic segment and international segment. Af geographical segment is customer based.
2) Business Segment: It can be identified on the basis 10% Test: If revenue from such a customer is 10% or more
of products/services, types of customers, of nature of total revenue of enterprise.
nature of regulatory
environment etc. Disclosure Required.
For Example: Business Segments of RIL (i) Total carrying amount of segment..
petrochemicals, refining etc. can be oil and gas,
(i) Cost incurred during the accounting period to acquire
segment assets.
 Vipul's Auditing -l (B81)
8
PD
RELATED PARTY DISCLOsURES:
Company Accounts

Companies Act/Auditor should ensure that depreciation has been

1.4 influences/
that significantly calcylated and provided as per the provisions of Companies Act.
Related party refers to any party
decision-making process of the
controls the management on and
(important points to be considered while computing divisible
company profits:
transactions to the 1y Depreciation should be provided as per the provisions.
It's essential to disclose related party
shareholders. AS-18 deals with following related party years
(2) Dividends can be paid only out of the current
transactions: profits,br retained earnings of previous years available for
(1)Any company (directly or indirectly) through one
or more distribution as profits.
intermediaries control or is controlled under a common
3Dividends should not be paid out of the share capital.
management with reporting company. 4)Dividends cannot be paid in case of debit balance in profit
(2) Any individual who directly or indirectly through voting loss account.
&
power, controls the reporting company. (5)Dividends out of capital profits are allowed only in certain
(3 Associates/Joint Ventures of reporting company. circumstances.
(4) Key Management personnel and relatives of such If these provisions are not complied, auditor should inform the
personnel who have authority and responsibility of shareholders through his audit report.
managing the company.
AS-18 requires following disclosures: DIVIDENDS (SECTION 123 TO I27):
t Related party relationship. 6(1Dividends are allowed out of profits for the year or
2 Nature of related party transactions. accumulated profits or both.
Related party transactions include: (2) Depreciation to be provided in both cases as per Schedule ll.
1) Purchase/Sale of goods/assets. (3No provision to declare dividend without providing for full
(2) Services. depreciation.
(3) Hire purchase/leasing transactions. (4 Transfer to reserves at option of company.
(4) Licence agreements. (5)-Interim dividend can be declared out of CY profits or PL
(5) Any contracts etc. surplus.
(6) If there is loss in the current financial year upto ihe end of
earlier quarter when interim dividend is deciared rate
1.5PVISIBLEPROFITS: cannot exceed average of last 3 years.
Meaning of Divisible Profits:
It refers to the profits revealed by the income statement Rules issued for dividend out of reserves:
for the (1) Rate not to exceed average rate for last 3
years
current year, retained earnings of past years or profits
the (2) No dividend to be declared if company fails to
comply with
available for distribution according to
various judicial repayment of deposits.
pronouncements.) provisions related to acceptance and
Auditor should ensure that divisible profits (3) Transfer to IEPF (Investor Education and
Protection Fund) for
are calculated
ed
correctly because any mistake in its calculation Unpaid Dividend:
payment of dividends out of capital which would result in
is restricted under
 Vlpul' Auditing- (u
10 Company Account
Accounts 11
unpaid/unclaimed dividend, company j
(a) Along with has
on which dividend Depreciation will increase accordíng to the increase in
(5)
required to transser all the shares Education
the Investor number of shifts (refer table given below).
remained unpaid/unclaimed to
Following table gives a comparison of deprecíation provision
and Protection Fund (IEPF).
shares not required for under Cornpanies Act, 1956 and Companies Act, 2013:
(b) As per draft rules transfer of
dividend encashed for CompaniesAct, 1956
shares held in demat form and Particulars Companies Act, 2013
any out of 7 years.
1
(1) Governing Section 205& Section 350 Section 123
Section
Auditors Duties:
2
Auditor should ensure that the above mentioned provisions of Concept ates ofDepreciation Uoeful Life of Asset
complied by the company. In case
Companies Act, 2013 has been () 1Mcthod of Straight Line Method (SLM), Straight Line Method (SLM), Written
of any contravention, auditor should inform the board of directors Depreciation Written Down Value Method Down Value Method (WDv)
and shouldalso report the same in his audit report. (WDV)& Unit of Production
Method (UPM)

1 DEPRECIATION: (4 Applicability Rates are Prescribed Useful life is prescribed (Definition of

Depreciation refers to fall or diminution in the value of asset
on Tangible Useful Life-Useful life is the period
Assets over which an asset is expected to be
due to usc, wear and tear, passage of time etc. It's very important available for use by an entity, or the
to provide depreciation in books of accounts as per the provisions number of production or similar units
of Companies Act in order to determine the amount of divisible expected to be obtained from the
profits. asset by the entity]
Provisions of depreciation have undergone significant changes
-5 Applicability Rates are Precrbed Nothing is Prescribed, Treatment as
under Companies Act, 2013. on Intangible per Accounting Standard
Its majn features are as follows Assets
Schedule XIV Schedule I
Depreciation is to be charged on the basis of useful life of chcdule
mentioning
the asset. (Schedule I1) Previously rates of depreciation
Rates/Useful
were prescribed under Companies Act 1956. Life
A2) Company can follow SLM
or WDV method of (7)Flexibility in Companies have to follow
the
depreciation. Companies are allowed to follow
Rates/ Useful minimum rates prescribed Lower useful life of asset than
(3) In case company wants Life
to feels that the asset under under the schedule prescribed subject to following
consideration has lower useful life conditions
than what is prescribed
in schedule I1, it should
disclose it in its financial (a) Disclosure ofthesaid fact&
statements and should technically 6) Technical Justification for
justify it.
(4) According to component selection of different useful life
accounting concept, if the useful
life of a significant
component in the asset is
the useful life of the asset, different from
then depreciation. on sucn
component and deprecíation
calculated separately. on the asset should be
 Vipul'sAuditing -
(8
12 Company Accounts

Trere was no concept

c Minmum Residual Value of 5 i 13

(E) Residua
residua vaue t was
govemed dened rowEver companies ha ve (14) Rates of As perthe rates specified Working shall be done in following
Vave of Asset ccton to chocse higher residual Depreciation
as per As-6 manner:
vaue subjct to following conditions under WDV
Asset
1- (Scrap
Value of
a) Disdesure of the said fact &
WDV of Asset
)Technical Justification for selecte
ofdiferent usefu! life No. of Years
x 100
Component Accountng is voluntary
(9) Componena Ee nas no concepio tor financial year starting from
Auditor should ensure that provisions of Companies Act, 2013
Accounting Component Aocounting has been complied with. Where useful life of any aset as per
01042014 and it is compulsory from
management is different from the useful life prescribed as per
the financial year starting from
01/04/2015 As per Notfication schedule II, auditor should obtain certificate from technical expert
issued by MCA on August 29, and should also ensure that it is adequately disclosed in financial
2014Maaring of Component statements. He should ensure that concept of component
Accounting accounting as per companies Act, 2013 has been properly
-Companies wil need to identify art followed. Auditor should ensure that amount of depreciation
dapreciate significant components provided in profit & loss account is calculated as per Act.
With dierent useful Iives separatey
(16)Efeto
Wore tran
Speciic rates are prescribed for tis mentioned that value of
doubie and tiple shit depreciation shall increase by 50%
8 DuringREPRESENTATIONS BY MANAGEMENT:
the course of audit, managemernt makes many
Singe Shin for no. of days working in double shi representations to the auditor in respect of different queries raised
and by 100% for no. of days working by the auditor. Such representations serve as an evidence to the
in Triple shift auditor. ;However it should be noted that management
(11) Decrecatonreedto be 0ption is given to the management
00
Depreciationo provided in the first year itself decide matenality based on size of
representations does not reduce the liability of the auditorto
exercise reasonable audit procedures in order to determine the
Iowvave asset |ior asset having value lessthan he company and accordingly 100
E.000 reliability of different accournting information.
depreciation need to be provided for
such value cf assets subject to same
Auditor should obtain written management representations to
complement the audit procedures.
tact need to be disclosed in as partd
accounting policies For example: in case of related party transactions, after
(12) Revenue based Amorisation of Amortisation conducting adequate audit procedures, auditor should also obtain
will be done in
Amortisaicn of alintangble assets a written representation from management stating that all related
intangible accordance with Accounting
Standard 26 party transactions have been accounted and properly disclosed.
Assets
If representation made by the management is contradictory to
(13) Rates o As perthe rates specfed
Depreciation Working shall the audit evidence obtained, then auditor should further
be done in following
manner. investigate the matter the decide the reliance to be placed on the
under SLM
Value management representation.
Cost otAssetResidual
Costof Asset-
of Asset
at Asset
Usetul Life of Asset
100
 Vipul's Auditing-" (EEI)
Company Accounts
14 15
(k) Management representations serve
1.9 EXERCISES: as an evidence to the
auditor.
03JECTTVE QUESTIONS:
[Ans.: (a) False; (b) False; (c) False; (d) False: (e) False; () False;
(1) Fil in the blanks: company to (g) False; (h) True; () True; ) True; (k) True]
(a) 6would mean records maintained by the
THEORY QUESTIONS:
specified fnancial transaction.
record the
on a-al basis. (1) Explain the provisions regarding maintenance of books of accounts.
(b) The books of accounts must be kept (April 19)
(c) Books of accounts of the compay shall be kept at the
the compary. OR
i office of
Company shall be laid by the What are provisions of the Companies Act, 1956 regarding
() The Financial Statements of the maintenance of books of accounts?
B before the shareholders at the Annual General
Meeting (2) What do you mean by "divisible profits'? What the provisions
regarding dividends.
(e) No dividend to be declared if company fails to comply with
of deposits. (3) What main provisions auditor should verity in the course of audit of
provisions related to acceptance and IL dividends and
a depreciation.
( Auditor should obtain br management representations vaends
(4) What do you mean by Segment Reporting?
to complement the audit procedures.
(5) Write short notes on:
(g) is the amount of profit available for distribution of
dividend. (Net proft Before Tax, Depreciation, Divisible profit) (a) Segment reporting. (April 19)
[Ans.: (a) Maintenance of books of accounts; (b) accruat (b) Related party disclosures.
(c) registered: (0) Board of Directors; (e) repayment; () written (c) Dividends.
(g) Divisible Profit] (d) Financial statements.
(2) State whether the following statements are True or False: (e) Management representations.
(a) It is compulsory to maintain books of accounts only in physical
form.
(b) Books in electronic format should be preserved for at least
YV V
5 years.
(c) Cash flow statement is not a part of financial statements.|
(d) Related party disclosures are not compulsory.f
(e) Dividends can be distríbuted from capital of the company.
(9 Company as per companies act, 2013 can follow only straight
line method of depreciation.
(9 Representations from management can protect auditor from
his liability due to negligence.
(h) Company cannot pay dividends without providing full
depreciation. |
)Financial transaction with relative of CEO of the company s
covered under related party disclosures.
) Dividends out of capital profits are allowed only in certain
circumstances
 17
Company Audit
Vipul's Auditing - 1 (Ba
139 OF
2.1 APPOINTMENT OF AUDITOR: [SECTION
16 cOMPANIES ACT, 2013]
First Audítors:
appointed by the directors
Chapter 2 (1) The first auditor of a company is directors.
in the first meeting of the board of
within 30 days of the
2) Such meeting should be held
incorporation of the company.
Company Audit (3) If the directors fail to appoint
first auditors, the shareholder
90 days from the date of
can appoint them in EGM within
incorporation of the company.OrluF
ert'ai'e
conclusion of the first
Companies Act, 4) Such auditors hold their office till the
2. Appointment ofAuditor under the annual general meeting.
2013 (Sec. 139)
Companies Act, 2013 Appointments and Reappointment by Shareholder
Removal of Auditor under the
2.2 Appointments by Shareholder (Section 139(1)):
(Sec. 140) every company shall, at
Qualification of Auditor under Companies
Act, 2013 (1) Except in the case of first auditor,
2.3 an auditor who will
(Sec. 141(0)) each annual general meeting, appoint
the meeting until the
Disqualification of Auditor under Companies Act, hold office from the conclusion of
2.4 and thereafter
2013 (Sec. 141(3)) conclusion of the sixth annual general meeting
2.5 Remuneration of Auditors (Section 142) till conclusion of every sixth meeting.
144) become auditor of
2.6 Auditor not to Render Certain Services (Section (2Auditor has to give a written consent to appointment is in
stating that
2.7 Ceiling on Audits the company and certificateconditions.
2.8 Status of Company Auditor accordance with prescribed
eligible and not
2.9 Duties of Company Auditor (3)-Eertificate should also mention that auditor is
2.10 Rights of Auditor disqualified for appointment.
appointment and
2.11 Branch Audit (Section 143(8)) (4) Company should inform auditor regarding
Joint Auditors ROC within 15 days of AGM.
2.12 also file a form ADT-1 to
2.13 Special Audit
Reappointment (Section 139(9)):
2.14 Exercises a retiring auditor shall be
At any annual general meeting
reappointed, unless:
(a) He is not qualified for reappointment,
in writing his
(b) He has given the company a notice
unwillingness to be reappointed.
(c) A resolution has been passed at the
meeting appointing
him or providing expressly that he
somebody else instead of
been given of an
shall not be reappointed or where notice has
person in place of a
intended resolution to appoint some
 Vipul'" Auditing -u (BBI)
Company Audit
18 19
incapacity or
retiring auditor, and by reason of death, "Same network" includes the firms operating or
functioning
disqualification of that person, the resolution cannot
be hitherto or in future, under the same brand name,
trade name
proceeded with. or common control (explanation 1 to rule 6(3)(i)).
It should be noted that even for re-appointment
of retiring If a partner, who is in charge of an
meeting audit firm and also
auditor, passing of a resolution in annual general is certifies the financial statements of the company, retires
from
essentia the said firm and joins another firm of chartered accountants,
Rotatfon of Auditors: such other firm shall also be ineligible to be appointed for a
period of five years.
As per section 139(2) no listed company or companies as
Appointment in Case of Casual Vacancy (Section 139(8):
prescribed shall appoint or re-appoint:
An individual as auditor for more than one term of Casual vacancy can arise due to:
5 consecutive years; and (a) Death.
An audit firm as auditor for more than two terms of (b) Resignation.
5 consecutive years. (c) Disqualification.
Note: (d) Failure of ratification at AGM.
(1) Break in the term for a continuous period of 5 years will be (1) Where a vacancy is caused by the resignation of an auditor,
considered as fulfilment of criteria of rotation. (explanation the vacancy shall be filled only by the company in a general
2 to rule 6(3)(i). meeting.
(2) The period for which the individual or the firm has held (2) The board of directors may fill any casual vacancy
office as auditor prior to the commencement of the Act shall (e.g. arising due to death, disqualification etc.) in the office of
be taken into account for calculating the period of five an auditor within 30 days from the date of such vacancy
consecutive years or ten consecutive years, as the case may be However they cannot fill casual vacancy arising due to
(rule 6(3)) resignation of auditor.
Cooling period: 5 years from completion of tenure as said (3) While any such vacancy continues the
-
remaining auditor or
above. auditors if any may continue to act as the auditor or auditors.
Other persons who cannot be appointed as auditor Any auditor appointed in a casual vacancy shall hold office
Firm having a common partner to the other audit fim, whose until the conclusion of the next annual general meeting.
tenure has expired in a company immediately preceding the Appointment of Auditor in Casual Vacancy caused by by
financial year, shall be appointed as
auditor of the same resignation ISection 139(8) & Section 140(2) & (3)]:
company for a period of five years (1st proviso The Board of Directors shall consider and recommend the
to section
139(2). appointment of the auditor to the members and within 3 months
The incoming auditor or audit firm shall of such recommendation, convene a general meeting of the
not be eligible if -

such auditor or audit firm is associated

auditor or audit firm under the same
with the outgoing
network of audit
members who shall approve the appointment
casual vacancy by way
appointment of or the
way of ordinary resolution as recommendea
recommended by n
auditor in
tne audator
Dy
firms(rule 6(3)(i). the Board.
An auditor appointed in casual vacancy shall hold office upto
the date of next AGM.
 Vipul'sM Auditing- Il (BBn
Company Audit 21
20 company shall filo
resigned from the nareuy, acted in aTribunal
indirectly, manner or
fraudulent ca
manner abeted or
or abetted
etted or colluded in
or
The .auditor who has
from the date of
his resignation, a is
30 days any fraud and the
within a period of the company and
prescribed Form ADT-3 with auditor is required, then the Central Government may appoint
statement in the punishable with fine which
failing which he shall be another auditor in his place
the Registrar, which may extend t
shall not be less
than Rs. 50,000 but Appointment of First Auditor in Government Company:
Rs. 5,00,000. auditor at the case of Government Company, auditor is appointed by
than the retiring (CAG) under section
Appointment of auditor other has completed aomptroer and
Auditor.General of India tlhe ma
AGM (except where the retiring auditor CAG shall direct the auditor about
years or, as the case may be,
ten years) ).
consecutive tenure of five the accounts are to be audited and areas that need his special
Section 140(4)]: attention. Auditor report should be submitted to CAG including
By whom: Shareholders at the AGM the action taken by the auditor on aspects required by CAG.
Special notice shall De required Within 60 days from the date of receipt of audit report, CAG shall
Reauirement of special notice: a person
meeting for appointing as (if required) conduct a supplementary audit from
for a resolution at an annual general
a retiring auditor or proviaing authorized by him and comment upon the audit report or
auditor a person other than
expressly that a retiring auditor shall not be
re-appointed. supplement the audit report.
individually or
Such special notice shall be signed, either
collectively by such number of members holding not less than one 2.2 REMOVAL OF AUDITOR UNDER THE COMPANIES
holding shares on which ACT 2013 (SECTiON 140):
percent of total voting power or
aggregate sum of not less than Rs. 5,00,000 has been paid-up on Removal of auditor from his office before the expiry of his term
the date of notice. [Section 140(1)1:
When no auditor is appointed or re-appointed at the AGM An auditor may be removed from this office before the expiry
[Section 139(10)1: of his term only by shareholders' approval by way of special
the resolution with the previous approval of the Central Government.
The existing auditor shall continue to be the auditor of
shall be made to the Central
company. However, in case of non-ratification of auditor's An application in Form ADT-2
30 days from the date of passing of Board
appointment by the members of the company at any AGM Government within
60 days of receipt of Central Government
(pursuant to the first proviso to Section 139(1)), the Board resolution and within
of
passed in the general
Directors shall appoint another auditor after following the approval, the special resolution must be
procedure laid down under the Act. meeting.
What has changed: Under Section 224(3) of the Companies Act Under Section 225(4) of the Companies Act, 1956, a special
1956, the Central Government was given the power to apnoint an notice was mandatorily
required for removal of auditor before the
of his office term. However, the Companies Act, 2013 does
auditor when no auditor was appointed or re-appointed at the expiry
AGM. This power of Central Government has heen done away not speak about
any special notice for removal of auditor before
with under the Companies Act, 2013. his term expiry.
under the new Act,
Appointment of Auditor by Central Government [First proviso According to the author's understanding, the expiry o'
an auditor may be removed from his office before
to Section 140(5)]:
special notice at the prerogative of the cor npany's
Where the Central,Government makes an application to the term without
Roard of Directors where the auditor must C
Tribunal for removal of an auditor who has, whether
directly or
 Vipul's Auditing -l (ea
22 Company Audit 23
In case, the removal
of auditor
opportunity of being heard. requirement o Accordi
According to Provisions of Section 141(2) of the Companies
members, then the
being sought by the company's L15 ACt, 2013, a rirm including limited liability partnership who are
Special notice must be satisfied in accordance wiu O q
in Case ol a peci cnarterea accountants shall be authorised to act as auditor and
the Companies Act, 2013 and the procedure
sign on behalf of the such limited liability partnership or firm.
notice must be followed. Summary:
What has changed? A person shall appointed as an auditor if he is chartered
sufficient under the Companie
) An ordinary resolution was Accountants Act,
Act, 1965 for removal of an auditor before
the expiry of hi accountant_w1tnin the meaning of Chartered
2013 has stipulated tha 1999 and holding valid certificate of practice and acting in
term. But now the Companies Act, capacity as:
special resolution is necessary for such removal.
Individual.
(ii) A period of 30 days has been specified for making applicatio
to the Central Government after the passing of the Board
Partnership Firm.
resolution for removal of auditor before expiry of his term. Limited Liability partnership.
Removal of auditor who acted in fraudulent manner or abetted It has been further provided that only partners who are
or colluded in any fraud [Section 140(5)] Chartered Accountants will be authorised to sign on behalf of the
The Tribunal has the power to direct the company to change it firm.
auditors on being satisfied that the auditor of a company has
whether directly or indirectly, acted in a fraudulent manner a 2.4DISQUALIFICATION OFAUDITOR:
abetted or colluded in any fraud by, or in relation to, the compan According to Provisions of Section 141(3) of the Companies
or its directors or officers. Such an order may be made by the Act, 2013, following persons shall not be eligible as auditor of the
Tribunal either: company:
i) Suo motu, or (a)A body corporateother than LLP (limited liabilityy
(i) On an application made to it by the Central
Government partnership) registered under the LLP Act, 2008.
or (6) An officer or employee of the company.
(iii) By any person concerned. (A person who is partner or who in the employment, of an
officer or employee of the company.
2.3 UALIFICATION OF AUDITOR: (d) A person who or his relative or partner:
According to Provisions of Section 141(1) of the Companies (i) is holding any security/interest in the company or
its
Act, 2013 "a person shall be eligible for subsidiary or of its holding or associate company or
appointment as an auditor
a
of company only if he is a chartered accountant subsidiary of such holding company. It has been further
meaning of Chartered Accountants Act, within the
1949 and holds a valid provided that a relative may hold security or interest in
Certificate of Practice. the company of face value not exceeding one lac rupees.
It has been further provided (ii) is indebted to the company or its subsidiary, or its
that the firm shall also considered
to appointed by its firm holding
name whereof majority or associate company or subsidiary of such
practicing in India are qualified of partners
for appointment as holding company, in excess of Rs. 5 lacs rupees.
company. auditor of a
iii) has given guarantee or provide any secu
ity in
connection with the indebtedness of any third p. "son to
 Vipul'sM Auditing-Iil(B 25
Company Audit
24 associat
or its holding or office as such auditor and such vacancy shall be
the company or its subsidiary,
of holding company fo vacate his
such deemed to be casual vacancy in the officer of the auditor.
company or a subsidiary
1 lacs.
value in excess of Rs. indirectly) hae 2.5REMUNERATION A

a (whether directly or subsidiary 2.5 REMUNERATION OF AUDITORS: SECTION 142:

(A
(eA person or
or a firm who (whether
with the
is
company, or its subsidiary,
o
The remuneration of an auditor of a company may be fixed by
business relationship subsidiary of such
its holding or associate company or
company.
Subsidiay Suc the authority which appoints him. Following points should be
associate an noted:
holding company or
relationship shall be construed as (1) By Board of Directors: The board of directors can fix the
Here the business
commercial purpose except:
transactions enter into for a remuneration in case of the
transactions which are in the nature
oj
(a) Commercial
i) first auditors or
rendered by an
professional services permitted to be (ii) the auditors appointed in any casual vacancy caused
firm by the professional bodie
auditor or audit otherwise than by resignation.
regulated such members. courseoi Dynareholders: If the auditor is appointed by the
b) Commercial
transactions which are in ordinary shareholders at its general meeting, the remuneration shall be
business of the company at arm's
length price a fixed by the shareholders at the general meeting.
customer. (3) By Comptroller and Auditor General of India: In case of an
employmen
(0 A person whose relative isa director or is in the auditor appointed by the comptroller and auditor general of
a managerial personnel.
of the company a director or key India, the remuneration shall be fixed by the company in
person: general meeting.
g A or
i) who is in full time employment elsewhere 4 Remuneration includes expenses: Remuneration includes
(ii) a person or a partner holding appointment as its
audito reimbursement expenses incurred in the course of audit by
of
is at the date of such appointment or reappointmen the auditor.
holding appointment as auditor for more tha (5) Other Remuneration: An auditor may receive separate
20 companies. remuneration for services rendered other than the audit work
A person who has been convicted by a court of an offeno e.g. for attending income tax work, or for advice in company
hY law matters, management services etc. Such remuneration is a
involving fraud and a period of ten years has not elapse
from the date of such conviction. matter of arrangement with the board of directors and does
(i) Any person whose subsidiary or associate company or an not generally require the approval of the company at the
other form of entity is engaged as on the date of appointmen general meeting. .
consulting or specialised services in reference to provisio (6) Disclosure in Accounts: A separate disclosure of all. mounts
of Section 144 of the Companies Act, 2013. paid to the auditor in whatever capacity and whether as fees
Further According to Provisions of Section 141(4) of th or expenses, is required to be made in the Income statement
Companies Act, 2013, where a person appointed under Schedule VI, classified as below:
company incurs any of the disqualification
as auditor of t (a) As auditor,
141(3) of the Companies Act, 2013 after
mentioned in Sectio
his appointment, he sn
 Vipul'sM Auditing-Il (BB

26 Company Audit
Company Audit
or in any other capacity in respect of taxation 27
adviser
b aters,company law matters, and managementservice (2) ln case of fim of Chartered Accountants, ceiling spedfied
As
above is for each partner of the firm. {for e.g. if there are
and 2 partners in a firm, then overall ceiling for the firm will be
manner.
(c)Other amount paid in any other 20 x 2 = 40 company audits, out of which maimum
10x 2 = 20 companies may have paid up share capital of
AUDITOR NOT TO RENDER CERTAIN SERVICES
2.6 Rs. 25 lakhs or more)
(SECTION 144):
Auditor cannot provide following services to the company, its
a single hartered Accountant is a partner in number af
company: auditing fims, all these firms will be together entitled to
holding company or its subsidiaries, or associate 20 company audits on his account subject to ceiling of 10 large
1) Accounting and book keeping service; Internal audit; company audits.
Design and implementation of any financial information (4) A persorn who is in full time employment elsewhere cannot be
it system; appointed as an auditor of the company.
iii) Actuarial services; (5) While calculating the ceiling, following points should be
Aiv) Investmentadvisoryservices;Ins particularly taken into account:
A) Investment banking services; 6S When an auditor is appointed to audit even a part of
vi) Rendering of outsourced financial services; accounts, that part will be considered as a unit of audit
(vii) Management services; and for the purpose of calculation of ceiling
(viii) Any other kind of consultancy services. Joint audit will be considered as a unit of audit for the
purpose of calculation of ceiling.
Note: If auditor is providing such services before the
commencement of this act then he has to comply with the above Branch audits are not to be included in the specified
mentioned provision before the closure of the first financial year number stated above.
after the date of such commencement. Audit of accounts of foreign companies is not to be
included in the ceiling set up by Section 224(1B).
2.7 CEILING ON AUDITS: Even private companies are excluded from computation
As per Companies Act 1956:
of ceiling of number of audits.
Section 224(1B) provides ceiling on number of audits that can In exercise of the powers conferred by clause (i) of Part II of
be undertaken by a practicing Chartered Accountant with the the Second Schedule to the Chartered Accountants Act, 1949, the
main objective of preventing concentration of audits in council of ICAI specifies that a member shall be deemed to be
the hands guilty of professional misconduct if he holds at any
of few. ime
Its main provisions are as follows: appointment of more than specified number of audit assignments
of the companies under section 224 and section 228 of the
An individual cannot be auditor in more than twenty Companies Act, 1956. Number of audits specified by council of
at a time.
more than ten should be
Out of these twenty companies, not ICAI is 30 audits (including private companies) subject to ceiling
companies having paid up share of 10 companies having paid up capital of Rs. 25 lakhs or more.
capital of Rs. 25 lakhs or more.
 29
Vipul's Auditing -l1 (BB) Company Audit
28 accounts. He
statements are in agreemernt with the books of
As per Companies
Act 2013: has been should ensure that the financial statements exhibit true and
the basis of amount of share capital the enterprise. In case of any
audits includes even private
Ceiling on fair view of the state of affairs of
removed. This implies limit of 20 suspicion it is the duty of the auditor to investigate the matter
limited companies. in depth so as to ensure that there are
no frauds. However
suspicious mind
auditor should not conduct his work with a
COMPANY AUDITOR: should carry out
2.8 STATUS OF & it is only in case of suspicion, that he
shareholders: Auditor is appointed by inyestigation.
(1) An agent of
.

their representative who make a report to the

shareholders in the AGM. He is 3) Duty to report: The auditor shall
company. He is expected to him on
keeps check on directors
of the members of the company on accounts examined by
shareholders. He has to perform statement give
safeguard the interests of the every financial statements and report financial the
shareholders. the company's affairs at
his duties on behalf of the a true and fair view of the state of
some cases auditor is treated loss and cash flow for
(2) An officer of the company: In end of its financial year and profit or 143(2)].
officer of the company. He is completely aware about
the matters. [Section
s
the year and such other
company policies and audits the books of accounts. He has to
The auditor report shall also state:
represent the company in many circumstances. necessary
Whether he has sought and obtained all the
information and explanations,
2.9 DÚTIES OF COMPANY AUDITOR: Whether proper books of account have been kept,
Fhe statutory duties of a company auditorare fixed under the was sent to
Articles Whether the report from branch auditor
companies act, 2013. Such duties cannot be eliminated by him and the manner he dealt with it,
of Association by Memorandum of Association or by. passing a loss
Whether company's balance sheet and profit and
resolution in the general meeting. Statutory duties of the auditors agreement with books of accounts and
account are in
as fixed under the companies act are as follows:
returns,
(1)-Duty to carry out audit work skilfully: Auditor should carry
out his work using reasonable skill, care and diligence. He Whether financial statements comply with accounting
standards,
should be aware of various provisions of companies'act and
should also keep himself updated regarding the various The observations.or comments on financial
provisions of Companies Act and publications of Institute of transactions or matters which have any adverse effect
Chartered Acountants of India. He should be aware of: Whether' any directors is disqualified from being
(a) Accounting standards and generally accepted accounting appointed as director under section 164(2),
principles. Any qualification, reservation or adverse remark
Ab) Provisions of companies act 1956 and Companies Act, Whether company has effective internal control
2013. system and operative effectiveness, and
Se Any other statutory provisions applicable from time to Such other matters. [Section 143(3)]
time. Rule 11 of the Companies (Audit and Auditors) Rules 2014
(2)/Duty to verify financial records: Auditor prescribed that the auditor's report shall also include their
should verify the
books of accounts and should ensure
that the financial views and comments on the following matters, namely:
 Vipul's Auditing-i (BB) 31
Company Audit
30
impact, if any, a price less than that at which they were purchased by
(a) whether the
company has disclosed the
on its financial position in its the company.
of pending litigations
financial statement; (d) Whether loans and advances made by the company have
as required been shown as deposits.
(b) whether the
company has made provision,
standards, for material (e) Whether personal expenses have been charged to
under any law or accounting term contracts
foreseeable losses, if any, on long revenue account.
including derivative contracts; ( Where it is stated in the books and papers of the
delay in transferring company that any shares have been allotted for cash,
c) whether there has been any
amounts, required to be transferred, to the Investor whether such cash has actually been received in respect
company. of such allotment, and if no cash has
actually been
Education and Protection Fund by the account
received, whether the position as stated in the
UPDATE: For the financial years commencing on or after and not
shall state abotdt books and the balance sheet is correct, regular
1st April, 2015; the report of the auditor misleading.
controls system and
existence of adequate internal financial matters if his
its operating effectiveness. [Rule 10A] Auditor is not required to report on these
satisfied after the enquiry.
Fraud Reporting:
(5) Duty to certify Statutory report
(Section 165): It is the duty
If an auditor of a company, in the course of the matters in the statutory report,
of the auditor to certify certain
performance of his duties as auditor, has reason to believe which are as followS:
that an offence involving fraud is being. or has been company for cash or for
(a) Number of shares allotted by the
committed against the company by officers or employees of
consideration other than cash.
the company, he shall immediately report the matter to the the company in respect
Central Government within such time and in such manner as (b) Total amount of cash received by
may be prescribed. [Section 143(12)] of shares allotted.
(c) An abstract of receipts and payments of
the company.
(4) Duty to make enquiries u/s 227(1A) OF COMPANIES ACT
(6) Duty to certify profit and loss account
and other details in a
1956: Even under Companies Act, 2013, the auditor is company issues
prospectus (Section 56): when an existing
required to make enquires on certain special matters stated necessary that such
under 227(1A) of Companies Act, 1956, which are as follows: prospectus for fresh issue of shares, it is
or loss. It is
(a) Whether loans and advances made by the company on prospectus should contain a statement of profit dividends
details of
necessary that the company should give
the basis of the security have been properly secured and five years, and a statement
whether the terms on which they have been made are not paid in each year for the previous
the auditor to certify such
prejudicial to the interest of the company or its members. of assets and liabilities. It is duty of
statements in the prospectus.
(b) Whether transactions of the company, which are (Section 249): It is the duty of
represented merely by book entries, are not prejudicial to (7) Duty to help the investigator
appointed by the central
the auditor to help the investigator
the interest of the company.
government. Auditor should give his audit working papers
(c) Where the is not an investment investigator if necessary and
company within the
meaning of section 372 or a banking company and audit notebook to the manner.
whether should assist him in every possible
the parts of the assets of the company as
consist of
shares, debentures and other securities have
been sold at
 Vipul'M Auditing -i (B8I)

32 33
independence: It is Company Audit
(8) To work with
integrity, objectivity and
the duty of the auditor
to, 2.10 RIGHTS OF AUDITOR:
and sincerely. VStatutory rights and powers of a company auditor can
honestly be
(i) perform his work performance his
work and should enumerated as follows:
(i) be objective in his i.e. he should not get etc.
duties with full independence (1) Right to have access to books of accounts, vouchers
of Management or books of accounts,
influenced with the vested interests Auditor has the right to examine the
should not allow any bias to accounts.
any other person i.e. he documents, and agreements etc. relating to
Management cannot prevent the auditor to examine the
override his objectivity.
books of accounts maintained by the company.
9) To maintain confidentiality:
Auditor may come across lot of
course
confidential information regarding client's business during 2) Right to call for information and explanations: In the
for any information and
the course of his audit work. He should not
disclose suçh of his audit, an auditor can call purpose
for the of his
confidential information to the competitors or any other third explanations, which are necessary
executives of the company are
person unless there is any legal requirement. audit. AIl the officers and
there by
(10) To ensure compliance with Companies Act, 2013: Auditor required to provide necessary explanations and
work. This is a very wide power
should ensure that various provisions of Companies Act, 2013 assist the auditor in his audit
to enable him to form proper opinion on
which have a bearing on his audit, have been properly given to the auditor
if his right of the auditor is refused by the
complied with (refer annexure-1). the accounts and
company, auditor can state this fact in his audit report.
Relevant Case Laws: the
3) Right to receive notice of general meetings and to attend
Registrar of Companies Vs P. M. Hedge. same: Auditor has the right to receive notice of general
to
Deputy Secretary Ministry of Finance Vs S. N. Dass Gupta. meetings and to attend the same. Also auditor has the right
Re. Kingston Cotton Mills Co. make statement and give explanations at the general meeting
Re. City Equitable Fire Insurance Co. in connection with the accounts.
to visit
Principles laid down in these cases indicate the following (4) Right to visit branches: Auditor has the right
duties of the Auditor: branches to audit the accounts maintained by such branches.
(1) Auditor should know the provisions of Where the branch accounts are audited by another person the
Memorandum and
Articles of Association. company auditor can (a) visit the branch office, if he deems it
(2) Auditor should verify the fairness necessary to do so (6) have a right of access at all times to the
of financial statements and
should not confine his audit work in books and vouchers of the company maintained at the branch
just verifying the office.
arithmetical accuracy.
(3) He should ensure that assets to seek expert's opinion: Auditor can seek opinion
5Y Right different
have been correctly valued. from experts on technical matters like determining
(4) He should physically verify
the securities in the custody of
the Company or other authorized officers the remaining useful life of the asset for the purpose of
of the company. calculating depreciation.
(5) Auditor is liable to pay
damages, if on account of
of statutory duties, any party suffers his breach (6) Right to be indemnified: Auditor has the right to be
losses. indemnified against the losses and charges incurred by him in
defending himself against civil/criminal proceedings by the
company..This right exists only if:
 Vipul'sTM Auditing-l (BB1) .Company Audit 35
34
against him, or branch auditor shall prepare a report on the accounts of the
(a) He is acquitted of the charges
that the auditor has acted branch examined by him and send it to the auditor of the
(b) The court is of the opinion company who shall deal with it in his report in such manner as he
honesty in his dealings with the
company.
considers necessary. [Section 143(8) of Companies Act, 2013]
It is the right of the auditor to
(7) Right to receive remuneration: the company provided he has For the purposes of sub-section (8) of section 143, the duties
receive remuneration from
work undertaken by him. and powers of the company's auditor with reference to the audit
completed the
of the branch and the branch auditor, if any, shall be as contained
(8) Right to representation: A retiring auditor has the right to
in sub-sections (1) to (4) of section 143. [Rule 12(1)]
receive a copy of special notice received by the company for The branch auditor shall submit his report to the company's
proposed resolution at annul central meeting appointing a
auditor. [Rule 12(2)]1
person other than the retiring auditor. In such cases the
auditor has the right to be represented either in person or in The provisions of sub-section (12) of section 143 read with rule
shall
writing 12 hereunder regarding reporting of fraud by the auditor
also extend to such branch auditor to the extent it relates to the
(9) Right of lien: A lien is the right of one person to satisfy a 12(3)]
concerned branch. [Rule
claim against another by holding others property as security.
Statutory auditor has a right of lien on the working papers.
Audit working papers are the property of the auditor and he 2.12 JOINT AUDITORS:
can retain it. In_many business organizations, two or more auditors are
(10) Right to sign audit report: Auditor has the right to sign audit appointed for smooth conduct and completion of audit work.
report, balance sheet and profit/loss account including al1 Appointment of joint auditors particularly helps in timely
documents attached to or annexed therewith. The above is a completion of audit work. This practice of appointing joint
right as well as duty of auditor. auditors in prevalent in large sized companies, whose business
extends over a large area. In such cases joint auditors have joint
responsibility for the entire audit unless they have mutually
2.1L BRÁNCH AUDIT (SECTION 143(8): agreed to divide the work amongst themselves and declaration to
"Branch" under Companies Act:
this effect is included in their audit report. In such cases, each
Sec.
2(14) of the Companies Act, 1956
defines a branch office as auditor will separately prepare report on financial statements of
any establishment described as "branch"
by the company. the division for which he is responsible. All such reports are then
Appointment of Branch Auditor: compiled into a final report.
Where a company has a branch office,
the accounts of that Liability of Joint Auditors:
office shall be audited either
by the auditor appointed for the The main recommendations of the statement on the
company (herein referred to as the
company's auditor), or by any responsibility of joint auditors issued by ICAI are as follows:
other person qualified for appointment (1) Joint auditors should divide the work amongst themselves so
as an auditor of the
company, or where the branch office far as practicable. Each auditor should be held liable for the
is situated in a country
outside India, the accounts of
the branch office shall be audited portion of work done by him as per the arrangement agreed
either by the company's auditor or
by an accountant or by any upon. Actual division of work should be communicated to
other person duly qualified to act the client.
as an auditor of the accounts
with the laws of that country. of
the branch office in accordance
The
 vipul' Auditing - I fee
Company Audit 37
36
cannot be specifical.
ally
In case where the
work is such that it There could be many instances and hence special audit is done
(2)
work amongst the joint audito
divided then division of for specific instances.
time basis or arny other specific basis (for eg
should be on
can be done by one auditor and
audit of sales and purchases 2.14 EXERCISES:
audit of assets and liabilities by another auditor). Details of
OBJECTIVE QUESTIONS:
such work distribution should be intimated to the client. In
(1) Fill in the Blanks:
such cases auditor will be responsible for the audit wort
(a) First auditor of a company shall be appointed by the
performed only by him.
(3) Final audit report is prepared jointly. In
case of an (b) An auditor who is an_individual can be appointed for one term
disagreement amongst the joint auditors With regard to of maximum 5 consecutive years.
report, each one of them should expres their own opinion (c) In case of Government Company. auditor is appointed by
through a separate report. hu d ltier
Thus it can be said that each joint auditor will be responsible (d) A firm including P who are chartered accountants
shall be authorised to act as auditor.
only for the part of audit work done by him. If the work cannot be
(e) An auditor can audit maximum . companies.
clearly divided, then all joint auditors will be responsible. Thus it
[Ans.: (a) Board of Directors; (b) 5; (¢) Comptroller and Auditor
can be said that each joint auditor is jointly and severally liable
General of India (CAG): (d) limited liability patnership; (e) 201
depending upon the circumstances and appointment terms.
(2) State whether the following statements are True or False:
(a) First auditors are appointed by members of the company.
2.13 SPECIAL AUDIT: (b) Company can appoint/reappoint an individual as an auditor for
Generally there are many kinds of audits 1 term of five years.
-
Statutory audit,
Internal Audit, Management audit, Operational audit, Special (c) Auditor of a government company is appointed by CAG.
audit etc. Statutory audit is required as per statute (d) Remuneration of statutory auditor is determined by BOD.
like company
law board, internal audit is
required for the growth of (e)Statutory auditor has no right to visit branches if separate
organization, management audit is for branch auditor is appointed by the company.
ensuring the management () In case of casual vacancy due to resignation of auditor, new
actions are right, operational
audit is for the improvement of the auditor can be appointed by BOD. E
operations.
In addition the special (g) Auditor has right of lien on his audit working papers.
audits are done by organization this > (h) Statutory auditor can give accounting services to the company.
done for various situations and
is done for the specific objectives () Statutoy auditor can be appointed as internal auditor of the
(a) when there company.
is a general indication
areas; of fraud in spedine b
Actuarial services can be provided by the statutory auditor.F
)
(6) when the organization (k) Auditor has a right to receive notice of Annual General
wants to acquire another compa
in such case they Meeting.1
may ask for a special
acquiring audit betore () For re-appointment of retiring auditor, pasing of a resolution in
(c) in the case annual general meeting is not essential.
of public organization
may want to audit the donor communi (m) As per the Companies Act, 2013 special resolution is
before making necessary for removal of the auditor.
(d) when some donations etc.;
organizations
may ask the organízation like income tax, excise, custo
to conduct the
special audit.
 (BA
Vipul'sTM Auditing-l
39
Liabilities of Auditors
38 reimbursement
not include Dto
Remuneration of the auditor does by the auditor.
(n) course of audit
expenses incurred in the receive notice of AG
auditor includes the right to
Power of an
(o)
(p) Private companies are excluded in
calculation of ceilina
Chapter 3
auditor.
number of audits of an notice of Annual Gener
(g) Auditor has a

()The
Meeting.
board
7
right to receive

is empowered to declare
interim dividend only.
. ra

Liabilities of Auditors
(c) True; (d) False; (e) False; () Fals
[Ans.: (a) False; (b) Tue; True
(g) True: (h) False; (i)
False; ) False; (k) True; () False; (m)
True; (q) True; () False
(n) False: (o) True; (p)
THEORY QUESTIONS: 3.1 Introduction
(1) What are the
qualifications and, disqualifications of compan 3.1.1 Liability of the Auditors to Whom?
auditor? 3.1.2 Liabilities of Professional Accountants
OR
disqualification of company auditor. 3.2 Civil Liability for Negligence
Explain the qualification and
of company auditor? 3.3 Civil Liability under Statute (Misfeasance)
(2) What are the rights
(3) What are the duties of company auditor? (April 19) 3.4 Criminal Liability under the Companies Act
(4) What are the Auditors duties regarding? 3.4.I Legal Cases on Criminal Liability
(5) What are the provisions relating to appointment of the compan) 3.5 Default Under Companies Act
auditor?
3.6 Liabilities Under Income Tax Act, 1961
(6) Explain the appointment procedure of:
3.7 Liabilities Under Companies Act, 2013
(a) First auditor.
(6) Appointment in case of casual vacancy. 3.8 Exercises
(c) Appointment of auditor, other than retiring auditor.
(d) Government Company.
(7) Write short notes:
(a) Remuneration of auditor. (April 19)
(b) Removal of auditor.
(c) Branch auditor.
 Vipul's Auditing - Il (Bp
40 Liabilities of Auditors 41

3.1 INTRODUCTION: negligence only has been examined by the courts in a number of
Accountant has to perform laro.
A practicing Chartered Ises.
holds himself responsible
variety of professional services. He In the past, it has been held that the audítor has no
qualified to undertake professional
the public as an accountant poslDy toward persons with whom he had no privity of
is appointed under
assignments. Therefore when an auditor in Commissioner of Income-tax
Vs. G. M.
statute to carry out any professional work it
is presumed that heDandekar, it was
reasonable
shall carry out the assignment with reasonable ana diligenc
care and lngene ea t was held
held that since the
not employed by the Income-tax department,
defending
he
accountant
was not
was
was
liable to
as expected from a member of the profession.
it. However many recent judgements of the Courts in U.K. and
ln Lanphire vs Phipos, it was observed by J. P. Eddy tha U.S.A. do not accept the above view. They take a broader viewof
person
"Every who enters into a learned profession undertakes to an auditor's liability.
bring to the exercise of it a reasonable degree of care and skill. He According to Lord Denning the auditors owe a duty of care not
does not undertake, if he is an attorney, that at all events he shal only to their clients, but also to all those whom they know will
gain his case, nor does a surgeon undertake that he will perform rely on their accounts. Lord Denning's viewpoint was upheld
to cure, nor does he undertake to use the highest degree of skill later in another case - Hedley Byrne and Co. Ltd. Vs. Heller and
There may be persons who have a higher education and greater Partners.
advantages than he has, but he undertakes to bring a fai, It has now been accepted that an auditor should realize that the
reasonable and competent degree of skill". balance sheet and other statements which are certified by him will
Thus professional accountants are expected to maintain a be read by the third parties and if they rely on such statements
reasonable level of skill and performance is discharging their and consequently suffer losses because the statements were
duties. Therefore it can be said that'either absence of requisite skillmisleading, then he will be responsible for the losses suffered by
or failure to exercise reasonable skill can give rise to an action for third parties although there is no privy of contract.
damage for negligence. Auditor is liable for the losses suffered by A statement of the Council of the Institute of Chartered
the client and others due to his negligence. Accountants in England and Wales also recognises that a liability
3.1. Liability of the Auditors to whom? to third parties may arise "whenever a professional person dose
An auditor has a duty to the shareholders work for his client in circumstances where he knows or ought to
who appoint him know:
because he has a direct contractual relationship
with them. This i5
known as "Privy of contract". However, (i) that his work is liable to be relied upon by a third party;
although the auditor is
liable to shareholders as a body, he and
has no duty to an individual
shareholder. Cii) that third party may suffer financial loss if the work in
It is a controversial legal question has been done negligently. Liability will arise
question as to whether an auditor 5
liable to third parties like bankers, when the work in question of a kind which was reasonable
tax
investors etc. who may rely on statements authorities, potentia for the third party to rely on for its particular purpose."
of a fraud, any person, whether audited by him. In case
or not he is in In short, an auditor is liable for negligence not only to his
can file a case against contractualients
relationship with the auditor, hut also to third parties relying on his
clients but also us work.
wo
But whether an auditor is the auditor
liable to third parties
in case o
 Vipul's'M Auditing-" (B8 Liabilities of Auditors 43
42
Accountants (4) However, an auditor is not liable for any damages if the
3.1.2 Liabilities of Professional
heads: company has not suffered any loss due to his negligence.
It falls under the following (Liverpool & Wigan supply Association Ltd.)
(i) Civil liability for
negligence.
(5) Thus it can be concluded that an auditor may be required to
statute (misfeasance).
(ii) Civil liability under the pay compensatory damages or an action can be initiated
Companies Act, 2013. against him only when he performs his duties negligently
ii) Criminal liability under
tax Act, 1961. resulting in losses to the company.
(iv) Liabilities under Income

3.3 CIVIL LIABILITY UNDER STATUTE (MISFEASANCE):

3.2 CIVIL LIABILITY FOR NEGLIGENCE:
it is proved that his clients (1) The term "Misfeasance" means breach of trust or breach of
(1) Liability of an auditor arises where
professional negligence. In duty imposed by law or negligence in the pertormance ot
have suffered losses due to his duties, which has resulted in loss or damage to the Company.
such cases, he is liatble to make good that loss on an action
Misfeasance is a simple procedure under Companies Act,
being taken against him by the concerned party.
2013 for bringing action against persons, associated with
(2) An auditor is appointed by shareholders and he is expected promotion or management of the company, who, it is
to safeguard the interests of the shareholders. He should apprehended, have misapplied or are wrongfully retaining
exercise reasonable degree of skill and care in performance of any property of the company or are guilty of breach of duty.
his duties. (2) An auditor like any other official of the company is liable, in
(3) If he fails to perform his duties as per the expected levels the course of winding up of a company for acts of
from a professional accountant, then he is liable for the losses misfeasance. According to this section, when a company is in
suffered by the concerned party. liquidation, all its past and present directors, promoters,
Hudson Vs. Official Liquidator, Dehradun, Mussouri managers or officers and auditors are liable to make good all
Electric Tramway Co. losses suffered by the company if they are found guilty of
In this case it has been held that "if an misfeasance.
auditor fails to
show as much skill and diligence as is expected of a man of (3) It should be noted that an auditor is required to make good
ordinary prudence, he must suffer the consequences". the losses suffered by the Company only if such losses are
Similarly in Commissioner of Income tax Vs. G. M. due to his professional negligence. Where the loss was due to
Dandekar, the auditor was held liable for negligence negligence of directors, failure on the part of auditor to verify
in not the asset was considered to be only technical and only
verifying cash in hand. The learned Judge commented, "he
should know that he is paid for auditing nominal penalty was imposed (London Oil Storage Co. Ltd.
the accounts of the Vs. Seear Hasluck & Co.)
company (to detect frauds, defalcations
and errors etc.) ana
as such, he should discharge his
duties with due care and
(4). Liability for Misstatement in Prospectus -

diligence and according to the generally Under Section 35 of the Companies Act, 2013
accepted standards
of performance".
(1) Where a person has subscribed for securities of a
company based on any statement or matter, in the
 Vipul' Auditing - Il
44
suffered any los
prospectus which is misleading and has
the company and every (1) Under Section 34: An auditor is criminally liable for making
or damage as a consequence,
person who:
(a) Is a director of a company at the time of issue of the
prospectus
(b) Has authorized himself to be named and is name in
the prospectus as a director of the company, or has
agreed to become such director, either immediately
or after an interval of time;
c) Is a promoter of the company;
d) Has authorized the issue of the prospectus; and
(e) Is an expert as per Section 26,
Shall, without prejudice to any punishment to
which any person may be liable under Section 36, be
liable to pay compensation to every person who has
suffered such loss or damage.
(2) No person shall be liable under sub-section (1), if he
proves:
(a) That, having consented to become director, he (3)
withdrew the consent before issue of the prospectus
(B8
Liabilities of Auditors 45
any misstatement in prospectus However the charges against
him will fail if:
he had not authorized the issue of prospectus
(ii) statement complained of is immaterial or
(ii) he had reasons to believe and in fact he did believe up to
the time of issue of prospectus that the statement was
true.
(2) An auditor, as an officer of the company can be held
criminally liable if with the intend to defraud or deccive any
person, he
destroys, mutilates, alters or is privy to mutilation,
i)
alteration, falsification etc. any books, papers or
securities or
(i) makes or is privy to the making of any false or
fraudulent entries in any register or books of account or
document belonging to the company.
(Re: Rash Behari Das)
Criminal Liability for making false statements- Section 448
If in any certificate, balance sheet, prospectus or any other
-

and it was issued without his authority or consent, document any person makes a statement:
or
Which is false in material particulars, knowing it to be
(b) That the prospectus was issued
without his false?
knowledge or consent, and that on becoming aware
of its issue, he forthwith gave a public
Which omits any material fact knowing it to be material?
notice that i
was issued without his knowledge or consent. he shall be liable under Section 447.
If convicted, he can be punished with imprisonment fo
3.4 CRIMINAL LIABILITY UNDER term extending to two years and also with a fine.
THE COMPANIES ACT (4)
Under the Companies Act, an auditor Punishment for Fraud under Section 447:
officer of the company. The circumstances is considered to be
an
in which an auditor can Without prejudice to any liability including repayment of
be prosecuted under Companies any debt under this Act or any other law for the time being in
Act, as an officer, and the
penalties that can be levied against force,
him are as follows:
Any person who is found guilty of fraud, shall be
punishable with imprisonment for a term which shall not
 Vipul'sTM Auditing -Il(B
Auditors 47
46 Ves iabilities of
months but which may extend to 10
be less than 6 3.5DEFAULT UNDER COMPANIES ACT:
and auditor of a company, though an officer, is not liable for
fine which shall not be less that t The
Shall also be liable to may extend jany aeaults Dy the company for any failure to comply with the
amaunt involved in the fraud, but which
multifarious requirements of the Companies Act. An auditor is
involved in the fraud. under
3 times the amount a an oficer ot the company only for defaults
Provided that where the fraud in question invol
le
ec O ne Act. Ihus it can be said that auditor is not
public interest,the term of imprisonment shall not be
than 3 years. day functioning of the company.
(5) If convicted, he can be
imprisoned for a term which ma

extend to seven years and also he may be liable to a fine. LIABILITIES UNDERINCOME TAXACT, 1961:
3.6
The provisions of this section can be invoked only whe
A Chartered Accountant often acts as the authorized
the company is being wound up. representative of his clients and attends the proceedings before
Auditor can be prosecuted for falsification of books undlncome tax authorities or the appellate tribunal. His liabilities
Section 477A of Indian. Penal Code, 1860 even when tunder Income Tax Act, 1961l are as follows:
company is not being wound up. (1) Under Section 288:
(6) An auditor, as an officer, is liable to be prosecuted if he, as (a) A person convicted of any offence connected with any
past or present auditor, has been guilty of offence in relatio Income Tax proceeding or on whom a penalty has been
to a company. imposed under the said Act is disqualified from
3.4.1 Legal Cases on Criminal Liability: representing an assessee for such time period as Chief
(1). Dambell Banking Co. Ltd: In this case the directors a Commissioner/Commissioner of Income Tax may
auditors of the company were prosecuted for issuing fa determine
balance sheets, knowing them to be false in mater (b) A Chartered Accountant found guilty of professional
particulars, with an intention to deceive and defrav misconduct in his professional capacity by the council of
shareholders of the company. ICAI cannot act as an authorized representative for such
(2) Farrow's Bank Ltd.: In this case
there was considerable wn time as the council may determine.
up ot assets with an intention to show more profits availat(2) Under Section 278: Any person who acts or induces another
for dividends. Auditor was held criminally person to make and deliver to the Income tax authorities a
liable for fa
entries in the balance sheets. false account, statement or declaration relating to income
(3) Rex Vs Lord Kylsant
and another: In this case the cha chargeable to tax which he knows to be false is liable under
against the auditors was for making this section.
misleading statements
the prospectus. (3) 1nder Rule 12A of Income tax rules: Where a Charteea
Under Rule Chartered
Accountant has conducted an examination of accournts and
records of the assessee, he is required to submit a report to
the Income Tax Authorities within the meaning of Section 277
of the Income tax Act. If the report so submitted contains any
 Llabilitles of Auditors
Vipul'sM Auditing-l h 51
4S
Account (2) Section 147(3):
infornmation which the Chartered
false or untrue If the auditor is convicted under any of these sectíons, he shall
it be false, he would be liable to rigoro
believes years arnd to a fin be laoe to Teuna the remuneration received by him from the
sanment whiclh may extend to seven company and pay for damages to the company or to any other
persons tor loss arising out of incorrect or misleading statements
LIABILITIES UNDER COMPANIES
ACT, 2013: made in audit report.
3.7
Lord Justice Topes had
once famously remarked that "li (3) Failure to disclose fraud:
anditoris a watchdog and not a bloodhouna.opesA As per section 143(12), an auditor is liable to report to the
Or stringe central government (in case amount of fraud is Rs. 1 croreor
2013 does not seem to echo this thouglit! The kina
measures prescribed in the companies Act 2013 against audita above) or Audit Committee or Board in other cases (in case
sives the picture that the Act indeed expects the auditors to amount of fraud involved is less than Rs. 1 crore), if in the course
bloodhounds in discharging their duties and not merely as Waté of audit, he has reasons to believe that an offence involving fraud
dogs. The Satyam saga seems to have cast a very looming imag has been committed against the company by the officers or
in the minds of regulators as far the auditors are concerned. employees of the company.
In the current write up, we have bróught out the pen In case of any failure on his part to comply with this duty, he
provisions and the actions which can be initiated by vario shall be punishable with fine which shall not be less than
regulatory and non regulatory authorities in case of any lapse o Rs. 1,00,000 but which may extent to Rs. 25,00,000.
the part of the Auditors in discharging their duties effectively. (4) Professional misconduct:
(1) Liability under Section 147- Non-compliance with any National Financial Review Authority (NFRA) shall have power
the provisions contained in Sections 139, 143,144 and 1450 to investigate into the matters of professional or other misconduct
the Act: committed by any member or firm of Chartered Accountants.
Section 139 contains provisions regarding appointment t Where professional or other misconduct is proved, NFRA shall
auditors, Section 143 regarding power and duties of auditor have power to make order for:
Section 144 regarding certain services which an auditor cann
(a) Imposing penalty o
render and section 145 regarding signing of audit report and othe
documents by auditor. (i) Not less than Rs. 1,00,000 but which may extend to
Auditor shall be punishable with fine which shall five times of the fees received, in case of individuals.
not be les
than Rs. 25,000 but which may extend to Rs. 5,00,000. (ii) Not less than Rs. 10,00,000 but which may extend to
If an auditor has contravened ten times of fees received, in case of firmns.
such provisions knowingly
wilfully with the intention to
deceive the company or (b) Debarring the member or firm from engaging in practice
shareholders or creditors or tax
authorities, he shall be punishabi for a minimum period of 6 months or for such higher
with imprisonment for a term
which may extend to 1 year a period not exceeding 10 years.
with fine which shall not be
less than Rs. 1,00,000 but which m
extend to Rs. 25,00,000.
 Vipul's Auditing -n
Liabilities of Auditors
51
EXERCISES: (4) When can an auditor be prosecuted
3.8
under Companies Act, 1956 as
OBJECTIVE QUESTIONS: an officer of the Company?
ONE sentence: (5) What are the different types of liabilities
(1) Answer in of an auditor opr
Misfeasance? Professional Accountant? (April 19)
(a) What is
negligence? (6) Discuss liabilities of Auditors under the Companies Act,
(b)Whatis Civil liability for 1956.
(7) Explain the term "Misfeasance". When can an auditor
(2) Fill in the blanks: be held liable
for Misfeasance?
(a) Direct contractual relationship between auditor a

shareholders is called as u COnleei (8) Write short notes on:

(b)NLeTris breach of trust orduty imposed by law. (a) Liabilities of auditor under Companies Act, 2013.
elatoniihprospectus.
() Auditor is liable for A VYY
(d) Misfeasance is a liability in the Companies
1956.
OneCin
(e) Fraud and Deception is a liability in the Compan
MIsiepon eogens icack o t on
Act. )Ihe tera
[Ans.: (a) Privy of Contract: (b) Misfeasance; (c) Misstateme
(d) Civil;: (e) Criminal]
(3) State whether following statements are True or False:
nequgx Dr oiure
to third partied like banks, creditors Lae
(a) Auditor is not liable
client.
oft
h y dar
b) Auditor is liable only if there is a loss to the party.
(c) Auditor is not liable if he withdraws his consent to prospe
in writing within stipulated period.

[Ans.: (a) False: (b) True; (c) True]

(Cel eAS L
THEORY QUESTIONS:
(1) Under the Companies Act, 1956 an auditor may be held liable
for negigence and misfeasance. Do you agree? Give reasons.
(2) Explain the liabilities of a Chartered Accountant under Income
Act, 1961.
(3) Is auditor liable to third parties like bankers, tax authorities, pote
investors etc. who may rely on statements audited by him or
liable only to his client? Discuss.
 53
Vipul's Auditing -u (e Audit Report
existence due to which there exists
52 or in the internal controls in fact in his
possibilities of frauds to occur, he has to mention the
means for the
reports and suggests remedies and also ways and
Chapter 4 betterment of the affairs of the company.

4.2 CONTENTS OF AUDIT REPORT:

per the provisions of
Audit Report An audit report should be prepared as
Section 143(3) of Companies Act, 2013 and
SA 700, Forming an
-

Opinion and Reporting on Finandial

Statements.
It should include the following matters:
Introduction (a) Whether they obtained all the
information and explanations,
4.1
belief were
which to the best of their knowledge and
Report
4.2 Contents of Audit
Types of Audit Report necessary for the purposes of audit;
4.3 Auditor's Report
Reading and Inspection of account as re ired by law have
4.4
View (b) Whether proper books of
Concept of True and Fair examination
been kept by the company so far as appe. from
s
4.5 Report) Order, 2016
4.6 Annexure-I- Companies (Auditor's
AAS-28
Annexure - I1- Main Provisions
of of the books of the Company;
4.7
(c) Whether the Balance sheet, Profit and
Luss Account and the
4.8 Exercises
Cash Flow Statement dealt are in agreement with the Books
INTRODUCTION: of Account of the Company.
4.1 Loss account and
shareholder to collect the re (d) Whether the Balance sheet, the Profit and
An auditor is appointed by the
Auditori Cash Flow Statement comply with the Accounting Standards
information of the state of affairs of the company.
accounts an to the extent applicable.
required to carry out critical examination of books of
other relevant evidence to form his opinion on the finanai (e) Whether
financial statements give information required by
position and profitability of the company. Companies Act, 2013, in the manner so required and present
As per Section 143 of Companies Act, 2013 it is the duty of true and fair view in conformity with the accounting
ma principles generally accepted in India:
auditor to report to the shareholders. Reporting is one of the
important objective of auditing. Auditor is expected to form G) in case of the Balance sheet, of the state of affairs of the
opinion and to report on the correctness and reliability of Company
books of acounts and other financial records of the enterprise (ii) in case of the Profit and Loss account, of the profit for the
Audit report is the instrument or a medium through which year
auditor express his opinion to the shareholders of a company iii) in case of Cash Flow Statement, of the cash flows of the
his report the auditor has to state whether on the basis of Company
inrormation supplied and the explanation given to him, in (0 Whether proper returns adequate for the purpose of audit
opinion whether the accounts are fair and give true informa have been received from branches not visited by him.
regarding the financial condition of the concern as required byyt
Companies Act 2013. If the auditor
is not satisfied witn
accouits and if he finds any loopholes (weakness)
in the acco u
 (B8n
Vipul'sM Auditing- " Audit Report 55

54 branch office auditoted PROFORMA OF UNQUALIFIED AUDIT REPORT

on accounts of any company ha Report of the Auditors to the Members
Whether the report auditor of the has
of
(g)
other than thè main it. We have audited the attached Balance sheet of SUPER coOL
by a person
to him and how
he has dealt with ERIGERATORS LIMITED
aed Balance sheet
REFRIGERATORS LIMITED, as at 31st March, 2017 and also the annexed Profit
been forwarded Qualification, reasons fo and Loss Account and the Cash Flow Statement of the Company for the year
report contains any ended on that date. These Financial statements are the responsibility of the
audit
(h),Where the Company's management. Our responsibility is to express an opinion on these
such qualificaion. disqualified from being
appointed financial statements based on our Audit.
Whether any director is
G) Companies Act, 2013. (1) We conducted our audit in accordance with auditing standards generally
under section 164 (2) of Companies (Auditors accepted in India. Those standards require that we plan and perfom the
statement on matters specified in Government, so far
audit to obtain reasonable assurance about whether the financial
(j) A statements are free of material misstatements. An audit includes
issued by the Central
report) Order, 2016 company. examining. on a test basis, evidence supporting the amounts and
to a particular class of
they are applicable on
as disclosures in financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management
as well as evaluating the overall financial statement presentation. We
4.3 TYPES OF AUDIT REPORT: believe that our audit provides a reasonable basis for our opinion.
(1) Clean audit report. (2) As required by Section 143(3) of the Companies Act, 2013, we repot that,
(a) We have obtained all the information and explanations, which to the
(2) Qualified audit report. best of our knowledge and belief were necessary for the purposes of
(3) Negative audit report. our audit
(4) No opinion report. (b) In our opinion, proper books of account as required by law have been
is a report given kept by the company so far as appears from our examination of the
(1) Clean or Unqualified Report: A clean report books of the Company;
by an auditor when he accepts all the figures of financial (c) The Balance sheet, Profit and Loss Account and the Cash Flow
statements without any adverse remark or reservation. Clean Statement dealt with by the report are in agreement with the Books of
of the company are as per Account of the Company.
report is given when the accounts
(d) In our opinion, the Balance sheet, the Profit and Loss account and
the requirements of law and the financial statement are
Cash Flow Statement dealt with by this report comply with the
drawn in conformity with the books of accounts and Accounting Standards specified under Section 133 of the Act, read
the requirement of the Companies Act, 2013, and he is of the with Rule 7 of the Companies (Accounts) Rules, 2014.
opinion that financial statements give a true and fair view. (e) On the basis of the written representation received from the directors
as at 31st March, 2017 and taken on record by the Board of Directors,
A clean report indicates the following: we report that none of the Directors are disqualified as on 31st March,
2017 from being appointed as a director in terms of Section 164(2)
of
(a) That he has received all the information and explanations.
the Companies Act, 2013.
(b) That the books are maintained as per the requirements of law In our opinion and to the best of our information and according to the
and that the financial statements are drawn in compliance explanations given to us, the said financial statements, read together
Act,
with notes thereon, give information required by Companies
with the provision of law.
2013, in the manner so required and present true and fair view
in
conformity with the accounting principles generally accepted India
in
That the generally accepted accounting principles are
in case of the Balance sheet, of the state
of affairs of the
properly adopted. (i)
(d) That there is no violation of any portions of articles and Company as at 31st March, 2017,
of the profit for the year
(1) in cas of the Profit and Loss account,
memorandum of association of the company. ended on that date, and
(e) That there is no violation of any of the cash flors of the
provisions of Companies Ac (ii) in case of Cash Flow Statement,
2013. Company for the year ended on that date.

( That the financial statements given a "true and fair" view.

 Audit Report 57
56
For and on behalf of (i) the banks and the financial institutes may try t» make
M's XYZ & Co. speedy recoveries of their loans and advances or may be
Chartered Accountants uwilling to provide further loans.
(iii) the share price of the Company, in the stock exchange may
Mr. Aryan Gupta get adversely aftected etc.
Partner
Membership No. How Qualify Audit Report:
to
Whenever the Auditor qualifies his audit report, he must
Mumbai Date ensure that his qualitying statement is direct and informative so
that there is no scope for any doubt in the minds of the public. He
must keep in mind the following points:
Qualified Report: (1) It should be tree from all types of anmbiguity. Qualification by
the accounts presented
When the auditor is not satisfied with way of reference to notes should be avoided.
to him or if he finds some major
discrepancy in the treatment of be
report is given when (2) It should be precise and specifie (vague statements should
some items he gives a qualified report. This avoided) so that there is no confusion in the minds of the
he finds that although the profit and loss account
and the balance
affairs of the company, readers of the report.
sheet give true and fair view of the state of qualification.
material contravention of (3) It should clearly state the reasons for the
there are some material discrepancies or like 'subject to' or
which must be intimated to the (4) Auditor should specifically use the words
accepted accounting principles that his audit report
'except that' in order to clearly indicate
shareholders of the Company. Whenever the auditor gives the like "read with
qualification. Use of expressions
qualified report he should also state the reason for the contains
not be
qualification mentioned in his report. Before giving qualified notes thereon" or "together wvith notes thereon" should
report.
report the auditor should ask the director to put the matter right used while making a qualification in the audit
However if the management is not willing to rectify the position (5) Auditor should qualify the audit report only
in case of any
provision(s) which has a
then he is required to qualify his report. Special focus on reporting material contravention of any
of fraud. significant bearing on financial statements.
(6) Auditor should indicate, in terms of rupees, the
effect of his
If in the course of audit, auditor has reasons to believe thata
account for the year.
fraud has been committed against the company by the officers, he qualification on protit and loss
report because of
should immediately inform the central govermment but not later For e-g. if auditor has qualified the audit qualification should
than 60 days from the date on which auditor came to know about over valuation of closing stock, then the
overvaluation of stock on the profits
such offence. Auditor should also bring it to the notice of Board state the impact of such stock of
report should state "closing
directors and Audit committee and on the basis of their reply of the Company. Audit which the
Rs. 2,00,000 due to
qualify the audit report. the company is overvalued by
company are overstated by Rs. 2,00,000".
A qualified report is normally not necessary unless the amoun profits of the
qualification in audit report then the
involved is substantial. Whenever a qualified report is given " It there is more than one
the total effect of all
results into very serious consequences for the Company like, effect of each qualification and also
accounts should be stated. In case
(i) the reputation of the companyy ana and its management
management qualifications on profit and loss computations, then auditor
exact
suffer severel
likely to suffer severely. if it is not possible to make
 SS Vipul'sM Auditing-I (BA
should check the estimates made by the management and give
much information as possible.
Reasons for Qualified Reports:
The matter in respect of which the auditor qualifies his repon
is as follows
(1) Inadequate provision for bad and doubtful debts.
(2- No provision or inadequate provision for tax liability.
(3) Inadequate provision has been made for depreciation
fixed assets.
(4) The closing stock may have been valued at cost price, whid
is higher than the market price.
(5) Contingent liability, may have been omitted or treated a
actual liability.
(6) Assets may be undervalued or overvalued.
(7 The secret reserve may have been secretly created.
(8) Provision of companies act may not have been complied with
(9) He may not have received proper explanation that wa
necessary for the purpose of his audit.
(10) Revenue expenses have been shown as capital expense a
vice-versa.
Where to mention Qualification:
(1) In Audit report itself and not in notes to accounts: Audita
should indicate his qualifications in audit report itself and nd
in notes to accounts. Notes to account are explanatory note
given by management in respect of different items aPpearin
in the financial statements. These notes should not contain th
opinion of the auditor. If any qualification is included i
notes, then too the auditor should re-include tha
qualification in his audit report.
(2) Qualification not in a separate report to
Directors: Sind
auditor is required to report to shareholders of the compan
he should include all qualifications in his audit repo
Informing the directors about various discrepancies
accounts and about his qualification in a separate repo
would not be sufficient compliance of the provisions0
reporting and auditor would be required to reproduce ths
Audit Report
59
qualification in his audit
report also. Similarly auditor, cannot
in his report, state that
his audit report should read subject
the qualifications he has to
stated
directors. Since Shareholders do in a separate report to
separate reports given to directors,not have access to such
state his qualifications in audit reportauditor should precisely
itself.
(3) No reference to earlier reports:
Auditor should not qualify
his audit report by making a reference to
his earlier years
audit report. Current years audit report should be self-
contained. Thus the auditor should not state "the position
in
respect of loans to Z Ltd. remains same as stated in our report
of previous year". Auditor should reproduce his qualification
clearly & precisely in current years audit report.
Examples of Qualified Report: Although there is no particular
form. of expressing qualification in audit report, following are
some of the examples:
(1) "Plant& Machinery as appearing on the Balance sheet
includes a sum of Rs. 90,000 being interest paid (for deferred
payment facility) which should have been charged to revenue
but has been capitalized". Due to this profits of the company
for the year are overstated by Rs. 90,000. This is contrary to
the generally accepted accounting principles.
Subject to the above reservation, we report that balance
sheet shows true and fair view.
(2) "The balance of Chennai branch in the books of Head office
does not agree with the corresponding balance in the books of
Chennai branch to the extent of Rs. 2,50,000"
Subject to the above reservation, we report that
 Vipul' Auditing - (B
60 Audit Report 61
AUDIT REPORT
PROFORMA OF QUALIFIED financial statemets, read
Members togeher w nctes erec, ge
Report of the Auditors to the information required by Companies A 2013. in he mziner so
attached Balance sheet of SUPER CO required and present true ard tar vien n corionmity witn me
We have audited the March, 2017 and also the annexed Pro accounting principles generaly 2ccepted in
REFRIGERATORS LIMITED, as at 31st Company for the ve: hdz
Cash Flow Statement of the
year (1) in case of the Balance sheet c ne sate c a#airs d te
and Loss Account and the statements are the responsibility of the Company as at 31 March, 2017.
Financial
ended on that date. These express an opinion on thet
Company's management. Our responsibility is to (2) in case of the Proft and Loss eccours, cf the proft far me yaar
Audit. ended on that date, and
financial statements based on our genera
conducted our audit in accordance with auditing standards (3) in case of Cash Fiow Stztemert ci the cash fous cf the
(1) We th
that we plan and perfom
accepted in India. Those standards require financia
Company for the year ended on that date.
reasonable assurance about whether the
audit to obtain
An audit include
statements are free of material misstatements. For and on benalf cf
examining. on a test basis, evidence supporting the amounts an
the M'sXZ& Co
disclosures in financial statements. An audit also includes assessing Crarerec Accountars
accounting principles used and significant estimates made by managemen
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. Mr.Anyan Gpta
(2) As required by Section 143(3) of the Companies Act, 2013, we report that, Partner
Membersip No..
(a) We have obtained all the information and explanations, which to the
best of our knowledge and belief were necessary for the purposes d
our audit Mumbai: Dats
(b) In our opinion, proper books of account as required by law have been
kept by the company so far as appears from our examination of the expresses his
books of the Company: (2) Negative or Adverse Report: When an auditor
concern does not
(c) The Balance sheet, Profit and Loss Account and the Cash Flow opinion that the financial statement of a
fair view of the state of affairs in that
Statement dealt with by the report are in agreement with the Bookss d exhibit true and or an
Account ot the Company.
concen, his report is said to be a negative report the auditor
(d) In our opinion, the Balance sheet, the Proft and Loss account and is made when
adverse report. This kind of report
Cash Flow Statement dealt with by this report comply Accounting
is of the firm opinion that he has
got the definite material to
Standards specified under Section 133 of the Act, read with Rule 7 d regarding the state of afair
the Companies (Accounts) Rules, 2014. substantiate his negative opinion
expressed by its account. In
(e) On the basis of the written representation received from the directors of the concern under audit as should have substantial
as at 31st March, 2017 and taken on record by the Board of Directors submitting such a report the auditor
we report that none of the Directors are disqualified as on 31st March expressing such an opinion in his
2017 from being appointed as a director in terms of Section 164(2) df evidence and reason for his
the Companies Act, 2013. report. Sometimess it
(Disclaimer of Opinion):
(0 Stock-in-trade has been valued at market price which is higher than (3) No Opinion Report may not be available for
the cost price due to which the profits of the company are overstale the books
to the tune of Rs. 6,80.000 & may happen that part of auditor is not capable of forming his
verifications etc., and the and such a
Provision for depreciation on fixed assets is inadequate to the
cannot express his opinion
extent of Rs. 2,00,000. This has resulted in profits of opinion therefore, he case the auditor
the Company opinion report. In such
being further overstated by Rs. 2,00,000.
report is called no any opinion about the
These are against the generaly accepted accounting practices responsibility of expressing
resuting in overai overstatement of profits of the current year y give up the
Rs. 8,80,000. financial statement.
Subject to above reservations, in our opinion and to :e best of
information and according to the explanations given o
to us. the sa
 Vipul's Auditing-l l6
63
of Audit Report
62 access to books of accounts
ao. an
may not get tax
ax aun
authorities. of the company's
e.g. auditor seized by income whether balance sheet gives true and fair view and loss account
have been over with no option
on & profit
records as they
will be left
but affairs at the end of the financial year
auditor company's profit or loss for the
such cases gives true and fair view of
opinion.
disclaim his financial year.
the meaning and
Signingof Audit
Report:
Compani Act, 2013, tho Therefore it is essential to understand
145 of the view. The expression
According to
Section
company or where
where a firm significances of the concepts of true and fair
auditors of the iss accounts must be presented in
appointed as practicing India ma true and fair' would mean that the
appointed, only a partnerin
the firm in may:
such manner that they are fair
from the point of view of
authenticate any other document of t should ensure that
the auditor's
report &
signed/authenticated h shareholders, investors, creditors etc. Auditor
law to be such a manner that they are fair
company required by the accounts must be presented in
shareholders, investor, creditors etc
from the point of view of
auditor. firm accounts, besides being
be signed by the partner of the Auditor should ensure that the
Audit report should state of affairs of the
Chartered Accountants firm, for and
on behalf of the fim
arithmetically. correct, also reflect fair
accounts. concern.
appointed to audit company's
accounts statements would
True and fâir presentation of
AND INSPECTION OF AUDITORS require the following
44
4.4 READING agreement with the books
REPORT (a) Financial statements should be in
report must be read before the shareholders of
the of accounts.
Auditor's as per the provisions
company in general meeting and should be kept open
fu (b) Financial statements should be prepared
inspection of every member of the company. of the Company's Act, 2013.
(c) There should not be any under valuation
or over valuation of
Auditor is not required to send a copy of his report or t
allow its inspection by each member of the compan assets and liabilities.
(d) Stocks should be properly valued
and the method of
individually. Also it's not the duty of the auditor to see u
valuation should be consistently followed.
his report is read before the company
in general meeting be provided on fixed assets.
Duty of the auditor, after (e) Proper depreciation should
signing the audit report
annexed to balance sheet, is
confined only to forwarding (f) There should not any secret reserves.
between revenue and
report to the secretary of
the company. It's the duty of t (g) Proper distinction should be made
secretary or the directors
of the company to convene a capital expenditures.
meeting and send 5 for RDD, expected losses,
members entitled
the balance sheet
and report to
h (h) Proper provision should be made
to receive it. outstanding liabilities etc.
(Re. Allen Craig occurring after the balance
& Co. (London)
Ltd.) i) Contingent liabilities and events
disclosed.
sheet date should be properly
45 CONCEPT OF TRUE AND FAIR
On the basis of the accounts VIEW
towhether the accounts show
auditor
true
eaa irepot
has to prepare
thecompanies act, 2013, and fair view.
requires the Sectio.rep
auditor to state in
 Vipul'sM Auditing-I1 (BBI
Audit Report 65
REPORT ORDER, 2016
4.6 COMPANIES AUDITOR'S (I11) Matters to be included in CARO, 2016:
(CARO, 2016):
provisions of Section 143 of the Paragraph 3 of CARO, 2016 states that following matters are
In aontance with the
rejport of certain comnpanies to be reported upon by auditor in his audit report:
Companies Act, 2013, the auditor's
Companics Auditor Report Order, 2016 (1) Fixed assets:
hould be prepared as per of Corporale Affairs. Every
(CARO 2016) issued by Ministry Records of fixed assets showing quantitative details and
for the finanncial ycar starting on or situation of fixed assets.
report made by the auditor
April, 2015 should be prepared as per
CARO, 2016.
alter 1 Physical verification of fixed assets by management at
) Companics Covered under CARO, 2016: regular intervals and accounting of any material
CARO is applicable to every company including forcign discrepancy.
ompany defimed in Section 2(42) of the Companies Act, 2013. Whether the Title Deeds of immovable properties are
Forcign company means a company incorporated ouside held in the name of the company
India and having place of business in India cither by itself or Whether there is any disposal of substantial part of
through an agent or thronugh any other physical or electronic fixed asset affecting going concern.
mode and conducts business activity in India in any other (2) Stock-in-trade:
manner.
Physical verification of inventory by management at
a) Companies excluded from CARO, 2016:
regular intervals by adopting reasonable and adequate
Provisions of CARO, 2016 do not apply to: procedures.
(a) A banking Company defined under Banking Regulation
Maintenance of proper records of inventory and
Act,
accounting of material discrepancy, if any.
(b) An insurance conmpany defined under Insurance Act, (3) Loan obtained / granted:
(c) Companies registered with charitable purposes
under Whether the company has granted any loans, secured or
Section S of the Companies Act,
unsecured to Companies, firms, LLPs or other parties covered
(d) A one person company defined
under Section 2(62) of the in the register maintained under Section 189 of the Act. If so,
Companics Act,
Whether rate of interest and other terms& conditions are
(e) A small company
defined in Section 2(85) of
the prejudicial to the interest of the company.
Companies Act,
Whether payment of principal amount and interest is
( A private limited company,
not being a subsidiary or regular.
holding of a public company
having: If the amount is overdue exceeds state the total amount
Paid-up capital and overdue for more than 90 days and whether reasonable
reserves
than Rs. 1 Cr. as on the Balanceand surplus not more steps have been taken by the Company for its
Sheet date,
Total borrowings less recovery/payment.
than Rs. 1 Cr. at any
time during the financial point or (4) Public deposits:
year, and
Total revenue less
than Rs. 10 Cr. If company has accepted any deposits from public,
financial year as per
financial statements.
during the whether there was compliance of:
(a) Directives issued by RBI and
 Vipul's Auditing - ll {BB) 67
Audit Report
66
Sections 73 to 76 or any
other relevant
Provisions of (10) Nidhi Companies:
(b) Companies Act.
provisions of the A Nidhi Company is a company which can accept fixed
contravention, if any deposits,n Tecurring deposits and savings deposits from
Details of records: Whether proper
records and its members in accordance with the directions of
the
(5) Maintenance of Cost maintenance of cost Central Government. The aggregate of such deposits is
maintained, where
books have been government u/s referred to as "Deposit Liability".
prescribed by Central
records has been has
148(1) of the Companies Act,
2013. Auditor needs to check whether the Nidhi Company
Funds to Deposits ratio of
complied with the Net Owned
(6) Statutory Dues:
undisputed 1:20 to meet the liability.
Whether company is regular in depositing
statutory dues like provident fund, investors
education (11) Transactions with related parties:
are in
and protection fund, employees state insurance, income Whether all transactions with related parties 188 of the
Section
tax, sales tax, wealth tax, custom duty and other
dues compliance with Section 177 and
with appropriate authority. Companies Act, 2013.
disclosed in the financial
Details of arrears of dues, if any The details have been accounting
If any statutory dues have not been deposited on account
statements as required by applicable
of any dispute, then the amount involved and the forum standards.
where the dispute is pending. (12) Preferential Allotment:
made any preferential
Application of Money raised by public issue and term loan: Whether the company has
(7)
of shares or fully or partly
Whether money raised by way of initial public offer or by allotment or private placement
year.
debt instruments and term loans were applied for the convertible debentures during the
whether requirements of
purposed for which those are raised. If such allotment is done, been complied and
Act have
Section 42 of the Companies
If not, details together with delays or default and allotment is used only for the
subsequent rectification, if any amount raised from such
(8)
purposes for which it was raised.
Fraud: directors:
(13) Non-cash transactions with
.Whether any fraud by the company or any fraud on the entered into any non-cash
company by its officers or employees has been noticed or Whether the company has persons connected with
reported during the year. transaction with directors or
him.
If there is such fraud the nature
and the amount involved Section 192 have been complied
should be reported by the auditor. Whether provisions of
(9) Managerial Remuneration: with in this case.
(14) Registration with RBl:
Whether managerial remuneration
has been paid or required to be registered under
provided in accordance with the Whether the company is yes, whether the
provisions of Section RBI Act, 1934 and if
197 and Schedule V of the Companies Section 45-IA of the
Act. obtained.
If not, the auditor needs to state the registration has been
amount involved and
steps taken by the company for
getting refund of the
same.
 Vipul'sM Auditing -I
68
CERTIFICATE:
AUDIT
AUDIT REPORT vls Audit Report
Audit Certificate
Meaning
Audit report is the medium
refers to a written
/lt through which theauditor
confirmation certain facts
of express his opinion to the
shareholders of acompany
Scope
covers only specific items
It It is wide in scope and
covers entire account, books
and has a limited scope
and vouchers.
Responsibility
Auditor confirms the truth Auditor expresses his
and correctness of a fact, figure opinion about the general
or a statement. reliability of financial
statements. He does not givee
any guarantee in his report that
the accounts are free from
errors and frauds.
Form
It depends upon the
Form of audit report is
requirements and there may
standard and prescribed by
not be any prescribed format law.
by law.
Qualification
Qualification in certificate is
Auditor can give a Qualified
not possible. report
Appointment
Certificate can be submitted
Audit report is submitted
by the auditor or any other
Chartered Accountant only by the auditor appointed
by directors (in some cases) and
appointed. By management
this purpose forshareholders of the company
(BB
Audit Report 69
Users
Certificates are used only by Audit report is used by
the Client or the specific user. many parties like shareholders,
creditors, lenders, workers,
government agencies etc.
4.7 SA 700 (REVISED) FORMING AN OPINION AND
REPORTING ON FINANCIAL STATEMENTS:
(1) The purpose of this Standard on Auditing is to establish
standards on the form and content of the auditor's report
issued asa result of an audit performed by an auditor.
(2) While preparing audit report, auditor should:
(a) considering whether the financial statements have been
prepared.
(b) in accordance with accepted standards.
(c) financial statements comply with the relevant
statutory
requirements.
expression
(3) The auditor's report should contain a clear written
of his opinion on the financial statements of the given entity.
(4) The auditor's report includes the following elements and
should ordinarily be in the following layout:
(a) Title;
(b) Addressee;
(c) Opening or introductory paragraph:
(i) identification of the financial statements audited;
(ii) a statement of the responsibility of the entity's
management and the responsibility of the auditor;
(d) Scope paragraph (describing the nature of an audit):
a reference to the auditing standards generally
accepted in India;
(ii) a description of the work performed by the auditor;
(e) Opinion paragraph containing:
(i) a reference to the financial reporting
framework
used to prepare the financial statements and
 Vipul' Auditing - I! (Be
70 Audit Report 71
expression of opinion on the financial
statement.
nts,
(ii) an The auditor's report should describe the audit as including
( Date of the report; (a) Examining, on a test basis, evidence to support the amounts
(g) Place of signature; and and disclosures in financial statements;
(h) Auditor's signature. b) Assessing the accounting principles used in the preparation
Title: of the financial staterments;
ma
The auditor's report should have an appropriate title. It th (c)Assessing the significant estimates made by management in
be appropriate to use the term "Auditor's Repor" in the title the preparation of the financial statements; and
distinguish the auditor's report from other reports. (d) Evaluating the overall financial statement presentation.
Addressee: The report should include a statement by the auditor that the
The auditor's report should be properly addressed as per the audit provides a reasonable basis for his opinion.
legal requirements and terms of engagement. Report is normally An illustration of these matters in a scope paragraph is:
addressed to the authority appointing the auditor. "We conducted our audit in accordance with the auditing standards
Opening or Introductory Paragraph: generally accepted in India. Those Standards require that we plan and
The auditor's report should identify the financial statements of perform the audit to obtain reasonable assurance whether the financíal
the entity that have been audited, including the date of and period statements are free of material misstatement. An audit includes
covered by the financial statements. examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
The report should include a statement that the financial
mda the accounting principles used and significant estimates made by
statements are the responsibility of the entity's management and
management, as well as evaluating the overall financial statement
statement that the responsibility of the auditor is to express an
presentation. We believe that our audit provides a reasonable basis for
opinion on the financial statements based on the audit.
0ur opinion."
An illustration of these matters in an opening (introductory
paragraph is: Opinion Paragraph:
should clearly
"We have audited the attached balance he opinion paragraph of the auditor's report
sheet of XYZ Ltd. as at indicate the financial reporting framework used to prepare the
o31st March, 2017 and also the proit
and loss account for the year endel financial statements and state the auditor's opinion as to whether
on that date annexed thereto. These accordance
financial statements are the
responsibility of the entity's management.
Our responsibility is o with that financial reporting framework
a
the financial statements give a true and fair view in
and, where appropriate,
express an opinion onthese financial statements statutory
based on our audit." whether the financial statements comply with the
Scope Paragraph:
requirements.
The auditor's report should describe opinion, "give a true and
The term used to express the auditor's
stating that the audit was conducted the scope of the audit Dy other things, that the auditor
in accordance with auditing fair view", indicates, amongst material to the financial
standards generally accepted in Considers only those matters that are
India. The reader needs this
assurance that the audit has t
been carried out in accordance th statements.
established standards. WI an opinion paragraph is:
An illustration of these matters in information and
The report should include a the best of our
planned and obtain reasonable statement that the audit w In our opinion and to given to us, the financial statements
statements assurance
nce whether financial
the financa according to the explanations
dtements are free of material miee
misstatement.
 Vipul's Auditing - (B
72 Audit Report
with the accountin,
give a true and fair view in conformity Emphasis of matter.
principles generally accepted in lndia:
state of affairs of th (b) Matters That Do Affect the
(a) In the case of thhe balance sheet, of the Auditor's Opinion
March 2017; and Qualified opinion.
ABC Ltd. as at 31st
Disclaimer of opinion.
(b) ln the case of the profit and loss account, of the profit/loss f
the year ended on that date. Adverse opinion.
In addition to an opinion on the true and fair view, the Uniformity in the form and content of each
type of modifiec
auditor's report may need to include an opinion as to whether the report will enhance the user's understandine of
such reports.
financial statements comply with other requirements specified by Matters that Do Not Affect the Auditor's Opinion:
relevant statutes or law. In certain circumstances, an auditor's report may be modified
Date of Report: by adding an emphasis of matter paragraph to highlight a matter
The date of an auditor's report on the financial statements i affecting the financial statements which is included in a note tc=
the date on which the auditor signs the report expressing an the financial statements. The addition of such an emphasis o
opinion on the financial statements. The date of report informs the matter paragraph does not affect the auditor's opinion. The
reader that the auditor has considered the effect on the financial paragraph would preferably be included preceding the opiniom
statements and on the report of the events and transactions of paragraph and would ordinarily refer to the fact that the auditor's
which the auditor became aware and that occurred up to that opinion is not qualified in this respect. For example:
date. (1) The auditor should modify the auditor's report by adding a
Since the auditor's responsibility is to report on the financial paragraph to highlight a material matter regarding a going
statements as prepared and presented by management, the concern problem where the going concern question is not
auditor should not date the report earlier than the date on which resolved and adequate disclosures have been made in the
the financial statements are signed or approved by management. financial statements.
(2) The auditor should consider modifying the auditor's report
Place of Signature:
by adding a paragraph if there is a significant uncertainty
The report should name specific location, which is ordinarily
(other than going concern problem), the resolution of which is
the city where the audit report is signed.
dependent upon future events and which may affect the
Auditor's Signature: financial statements.
The report should be signed by the auditor Matters that Do Affect the Auditor's Opinion:
in his personal
name. Where the firm is appointed as opinion
the auditor, the reporn An auditor may not be able to express an unqualified
should be signed in the personal name of
name of the audit firm.
the auditor and in the
The partner/proprietor signing the aud
when either of the
auditor's judgment,
following
the effect
circumstances
of the matter
exists
n and, in the
is material to the
report should also mention the membership financial statements:
number assigned by
the Institute of Chartered Accountants (a) there is a limitation on the scope of
the auditor's work; or
of India.
What is a Modified Audit Report? management regarding the
(b) there is a disagreement with the method of
selected,
An auditor's report is considered
to be modified when " acceptability of the accounting policies financial statement
includes: adequacy of
their application or the
(a) Matters That Do Not Affect disclosures.
the Auditor's Opinion
 Vipul's Auditing - 1 (BB
74 Audit Report 75
to a qualifiod
described in (a) could lead (c) Audit report is the instrument through which
The circumstances opinion. The circumstances described
expresses his the auditor
opinion or a disclaimer of opinion or an adverse opinion. to the shareholders.
qualified (d) Audit certificate refers to
(b) could lead to a audit of certain facts.
opinion should be expressed when the Ans.: (a) Reporting (b) Members/shareholders of the company
A qualified cannot be expressed bi (c) Opinion (d) confirmation.
opinion
concludes that an unqualified management is
disagreement with not so (3) State whether following statements are TRUE or FALSE:
that the effect of any opinion, (a) Auditor is supposed to report to the board of directors.
material and pervasive as to require an adverse or

so material and pervasive as to requirea (b) Qualified report is given when auditor is not satisfied with major
limitation on scope is not
disclaimer of opinion. A qualificd opinion
should be' expressed a matters in financial statements.
effects of the matter to which (c) Auditor should give submit qualifications to financial statements
being 'subject to' or 'except for' the in a separate report.
the qualification relates. (d) If auditor gives qualified report he has to give reasons for
A disclaimer of opinion should be expressed when the possible qualifications.
effect of a limitation on scope is so material that the auditor has (e) Auditor is required to send a copy of his report to each member
not been able to obtain sufficient appropriate audit evidence and of the company individually.
is, unable to express an opinion on the financial statements. () Auditor can give qualified certificate.
An adverse opinion should be expressed when the effect of a (g) Unqualified report is also known as clean report.
disagreement is so material and pervasive to the financial Ans.: (a) False (b) True (c) False (d) True (e) False (1) False
statements that the auditor concludes that a qualification of the (g) True.
report is not adequate to disclose the misleading or incomplete (4) Match the Following:
A B
nature of the financial statements.
Whenever the auditor expresses an opinion that is other than (1) Audit Report (a) No true & fair
unqualified, a clear description of all the substantive reasons (2) Audit Certificate (b) True & Fair financial statements
should be included in the report. (3) Clean Report (c) No opinion on financial statements
(4) Qualified Report (d) Opinion on financial statements
4.8 EXERCISES: (5) Disclaimer of Opinion (e) Confirmation of facts
OBJECTIVE QUESTIONS:
(1) Answer in ONE sentence: Ans.: (1-d); (2- e); (3-b); (4-a); (5-c)
(a) What is an Audit Report?
THEORY QUESTIONS:
(b) What are the major types of audit report? in brief, different types of audit
(7) What is an audit report? Explain
(c) What is Unqualified/clean report?
report.
(d) What is qualified report?
(2) Under what circumstances
should an auditor qualify his audit
(e) What is negative/adverse report? considerations to be borne in mind by
report? What are the special report?
qualifying his
What is disclaimer of opinion? or
what is no opinion report? the auditor at the time of Draft an
(g) What is Audit Certificate? appointed as an auditor of X Ltd.
(8) You have been submission to the shareholders of X Ltd.
(2) Fill ln the blanks: unqualified audit report for
(a) at AGM.
is the mostimportant objective
(b) Itis the duty of the auditor to report to of auditing () What are the contents
of an audit report?
thehaNe oD
 Vipul'Auditing
76
-Ia
(April 19)
reports. Audit of Banks 77
different types of audit
(5) Discuss the AUditors cetificate
Auditors repori and MODULE I:
(6) Distinguish between pertaining to report to membe
Enumerate auditor's duties ans. on cle
(7)
company. [Hint: refer to the
report. If the ans. is for 15
points mentoned in
marks then even include the AUDIT
(Auditor's Report) Order, 20
OF BANKING COMPANIES
per Companies.
reported upon as
refer annexure -1)) CARO
(8) Explain the duties of
an Auditor to issue report under Chapter5
with respect to:
(a) Loan taken.
(b) Intemal audit system.
(9) Write a note on: Audit of Banking Companies
(a) Reading and inspection of auditor's report.
(b) Signing of audit report.
(c) Concept of true and fair view.
5.1 Banking Sector In lIndia
(d) Qualified report
5.2 Special Features of Banks
(e) Unqualfed Report
5.3 Laws Applicable to Banks
5.4 Financial Statements of Banks
5.4.1 Signatures on Financial Statements
5.5 Audit of Accounts
5.6.1 Appointment of auditor
5.6.2 Remuneration of auditor
5.6.3 Qualifications and disqualifications of auditor
5.6.4 Powers/rights of auditor
5.6.5 Audit report
5.6.6 Performance of audit work
5.6 Internal Controls in a Bank
5.7.1 General
5.7.2 Cash
5.7.3 Clearings
5.7.4 Bills purchased and discounted
5.7.5 Loans and advances
5.7.6 Inter-branch accounts
5.7.7 Credit card operations
5.7 Verification of Assets and Liabilities
Assets:
5.7.1 Cash and Balances with RBI
RB1)
5.7.2 Balances with Banks (Other than
 Vipul's Auditing- (ee Audit of Bonks VV"Y 79
78
Notice 5.1 BANKING SECTOR IN INDIA:
5.7.3 Money at call and Short
At present, the Indian Banking Sector comprises of Four
5.7.4 Investments
categories of Banks
5.7.5 Advances
(1) Commercial Banks.
5.7.5.I NPAs
Advances (1) Regional Rural Banks (RRBs).
5.7.5.2 Classification of
5.7.5.1 Audit Procedure (III) Cooperative Banks.
5.7.6 Fixed Assets (IV) Development Banks.
5.7.6.I Premises
() Commercial Banks: These banks perform basic/traditional
5.7.6.2 Other Fixed Assets banking functions of accepting deposits and lending money.
5.7.7 Other Assets They also provide many modern technology based facilities.
Liabilities: They are further divided into Public Sector Banks and Private
5.7.8 Share capital Sector Banks.
5.7.9 Reserves and surplus (1) Public Sector Banks: They include,
5.7.10 Deposits Nationalised Banks,
5.7.11 Borrowings
State Bank of India (SBI), and
5.7.12 Other liabilities
7 Subsidiaries of SBI.
5.7.13 Contingent liabilities
(2) Private Sector Banks: The ownership of these banks in in
5.8 Concurrent Audit
5.8.1 Introduction Private hands. They include:
5.8.2 Scope Scheduled Banks: These banks are those banks
5.8.3 Appointment which are included in the Second Schedule of RBI
Act, 2013
5.8.4 Remuneration Act. They are registered under Companies
are also known as
5.8.5 Reporting or earlier Companies Act. They
5.9 Long Form Audit Report (LFAR) Banking Companies.
5.9.1 Introduction Non-scheduled Banks: These banks are the banks
Schedule of RBI
5.9.2 Format of Long Form Audit Report (LFAR) which are not included in Second
5.9.3 Contents of Long Form Audit Report (LFAR) Act.
incorporated in foreign
5.9.4 Points to be considered while drafting Long Foreign Banks: Banks
India are Foreign
Form Audit Report (LFAR) country but having branches in
5.9.5 Significance of LFAR Banks.
These banks are for the
5.10 Exercises
Regional Rural Banks (RRBs):
They provide credit for
development of rural economy. commerce, industry etc. in
aevelopment of agriculture, trade,
rural areas.
on cooperative basis.
Cooperative Banks: These banks run
l better rate of interest on deposits
than commercial
hey offer
 Vipul's Auditing -I (e Audit of Banks
80 81
rate of interest on lendine.
banks. At the same time their FINANCIAL STATEMENTS
These banks are iskier th 5.4
higher than commercial banks. OF BANKS:
h commercial banks. There can three types or cooperat,Section 290) and (2) of Banking Regulation 1945
arovisions for presentation of Financial Statements
pro
banks of Banks.
states that financial statements
. Central Cooperative Banks: They have operati Section 29(1) are to be prepared in
throughout the country theform given in Third schedule of the Act. This provisionis
in applicabie o roregn bankS also. As per the Third Schedule the
State Cooperative Banks: They have operations financial statements have to be prepared Vertical Form. Form A
particular state. of
EVEs TOTmat of Balance Sheet of the bank Earm R
Primary Cooperative Banks: They have operations gives format
in hira ututEof Profit and Loss A/c of the bank.
particular region i.e. district or tehsil.
Signatures on Financial Statements:
gnatures
(IV) Development Banks: They are established to provide lon4Section 29(2) provides that Financial Statements
call are to be
term finance for development purposes. They are also signed by
as Term Lending Institutions.
() Manager or Principal Officer and
(i) At least 3 Directors, if there are less than 3 directors by All
5.2 SPECIAL FEATURES OF BANKS: directors
(1) Banks have custody of large volume of monetary items i:
(ii) In case of Foreign Banks Manager or Agent of Principal
-

Cash and Negotiable instruments. Office in India

(2) They are engaged in large volume and variety of transaction
iv) In case of Branches Branch Manager
-

in terms of both number and value.

(3) They operate through wide network of branched whi State
geographically scattered.
(4) Banks are regulated by government authorities.
5.3 LAwS APPLICABLE TO BANKS:
There are many laws applicable to different banks. Some audited by a person duly qualified under any 1aw i0r ue u
these laws are:
(1) Banking Regulation Act, 1949
(2) Banking Companies (Acquisition and Transter
Undertakings) Act, 1970 and 1980
(3) State Bank of India Act, 1955
(4) State Bank of India (Subsidiary Banks)
Act, 1959
(5) Regional Rural Banks Act, 1976
(6) Companies Act, 2013
(7) RBI Act, 1934
(8) Information Technology Act, 2000
Provisions of this Section are applicable to Nationalised Banks,
Bank of India, its subsidiaries and Regional Rural Banks.
5.5 AUDIT OF ACCOUNTS:
Section 30(1) of Banking Regulation Act, 1949 requires that the
Balance Sheet and Profit and Loss Account of the Bank should be
Deing in force to be an auditor of companies.
S.5. Appointment of Auditor: These
Different provisions are applicable to different banks.
Provisions are as follows:
Companies: Auditor is
Scheduled Banks or Banking
Annual General Meeting with
appointed by Shareholders in
the approval of RBI.
 Vipul's Auditing- Audit of Bonks 83
82 Audit Report:
5.5.5 Audit
Auditor is aPpointed by the b
(2) Nationalised Banks:
ed 5anks Board of Directors with (1) Nationalised Bainks: Audit report of Nationalised bank has to
acting through its
concerned be submitted to the Central Government and should state the
approval of RBI. Comptro following8
Auditor is appointed by
(3) State Bank of India: consultation with Cen (a) Whether in his opinion, balance sheet is full and fair
of India in
and Auditor General balance sheet containing all necessary particulars and
Government. expresses True and Fair view of state of affairs.
is appointed by State R
(4) Subsidiaries of SBI: Auditor (b) Whether in his opinion, Profit and Loss A/c express True
India. and Fair view of balance of profit or loss for the period
(5) Regional Rural Banks:
Auditor is appointed by Bank w covered by this account.
Government. or explanations called by him
the approval of Central Whether any information
State Bank of India Act, 1955
provides for appointment of t is given and whether it is satisfactory.
or more auditors. Even
nationalised banks and subsidiaries ofs
(d) Whether or not, the transactions of the banks which have
generally have joint auditors. to his notice, have been within the powers of the bank.
5.5.2 Remuneration of Auditor: are applicable to difen (e) Whether or not, returns from offices or branches are
case also, different provisions adequate for the conduct of the audit work.
Inthis
bariks. ( Any other matter he considers necessary to brought to
(1) Scheduled Banks or Banking Companies: The remunerat the notice of the Central Government.
Meeting
is fixed by the shareholders in Annual General 2) State Bank of India: All matters to be included in
the audit
accordance with the provisions of Section 142 of Compan included in the audit
report of a Nationalised Bank should be
Act, 2013. report of SBI and it has to be submitted to Central
1
(2) Nationalised Banks and State Bank of India: Government only.
Cent
remuneration is fixed by RBI in consultation with the (3) Subsidiaries of SBI: All matters to be included in the audit
in the audit
Government report.of a Nationalised Bank should be included
(3). Subsidiaries of SBI: State Bank of India fixes remuneration SBI but it has to be submitted to SBI
report of subsidiaries of
auditors of subsidiaries of SBI. and not Central Government.
the audit
(4) Kegional Rural Banks: Bank fixes remuneration with (4) Regional Rural Banks: All matters to be included in
Bank should be included in the audit
approval of the Central Government. report of a Nationalised
to the bank.
5.5.3 Qualifications and Disqualifications of Auditor: report of RRBs but it has to be submitted
Provisions of Section 141 of the Companies Act, 2013, (5) Banking Company:
the audit report of a
applicable for qualifications and disqualifications of audito All matters to be included in
bank also. (Refer Unit 1) included in the audit report of a
Nationalised Bank should be
to be submitted to the
5.5.4 Powers/Rights of Auditor of Bank: Banking Company but it has
The auditor of bank has same powers as that of com shareholders.
auditor. (Refer Unit 1)
 Vipul'sM Auditing -Il(e
Audit of Banks 85
84
Section 143(3)(e).
uld
should also report that as per the In large organization auditor is not able to check all the
He Einancial
Financial Statements are i transactions in the course of his audit work. He has to rely on the
Companies Act, 2013, the
Standards. internal control system. If internal control system is strong he may
accordance with Accounting
(LFAR): check less number of transactions but if it is weak he may have to
Long Form Audit Report check more number of transactions. For this reason he has to
of auditor Public Sector Bant.
As per terms of appointment
Banks as well as their branche evaluate and check the internal control system. He has to check
Private Sector Banks, Foreign Report. whether such system is in existence and it is performing properly.
should furnish LFAR apart from Audit Internal audit is one major areca of internal control system. Banks
The matters to be included in
LFAR are specified by RBI.
generally have a well-organized system of internal audit. The
5.5.6 Performance of Audit Work: statutory auditor should evaluate internal audit and concurrent
(1) Preliminary Work: audit system of the bank. This helps him to decide the nature,
He should acquire knowledge about various aspects d timing and extent of checking to be done by him.
business. (3) Preparation of Audit Program:
He should get acquainted with the regulato Depending on scope of audit, audit program is prepared by the
environment in which the bank is operating. He should auditor. He has to give due weightage to those areas where
be well-versed with provisions of Banking Regulation internal controls don't exist or they are weak. At branch level,
Act and Companies Act, 2013. basic banking operations should be checked by the auditor. At
He should be having knowledge about economi head office level, the job of the auditor is to consolidate returns
environment i.e. economic policies, economic systems received from various branches, verification of the investment,
and economic conditions prevailing in the country. verification of fixed assets etc.
He should have knowledge about books and recor 4) Preparation and Submission of audit report:
maintained by bank. (a) Branch auditor: He has to forward his report to the statutory
He should know the terminology used by banks auditor. It is better for the statutory auditor if branch auditor
describe types of transactions and operations. follows standard pattern of preparing audit report which is as
He should familiarize himself with foreign exchange and follows:
derivatives business of the bank. (i) Assets.
(2) Evaluation of internal control system: (ii) Liabilities.
Internal Controls are the plans of the organization (ii) Income.
and all tn
methods and procédure adopted by the management of an enti iv) Expenditure.
to assist in achieving management objectives b) Statutory Auditor: He has to give two reports
of ensuring orderi
and efficient conduct of the business. There returns from branch
can be 2 types (i) Main Report: He should consolidate
controls: report. It should
offices and should prepare the main
(1) Accounting Controls: Controls requirement.
that
accounting system are called accounting related
to tht cover matters dealing with statutory
(2) Administrative Controls:
controls. i) LFAR (Long Form Audit Report):
Controls other than accountin" appointment of auditor. Publhc
controls are administrative controls. As pér terms of Banks, Foreign anks as
Sector Banks, Private Sector
 Vipul's Auditing-"(Ba Audit of Banks 87
86 apa
branches should furnish LFAR apan Payments should be made only after the vouchers are passed
well as their
for payment by proper officer.
from Audit Report.
LFAR are specified b 5.7.3 Clearings:
The matters to be included in
Cheques received by the bank in clearing should be checked
RBI.
included in the main
report should b with list accompanying them.
.Matters Total number and amount of cheques sent out by the bank
elaborated in LFAR.
report and not th should tally with total of the clearing pay-in-slips.
It is a subordinate to the main
substitute. 5.7.4 Bills Purchased and Discounted:
Sufficient margin should be kept while purchasing or
BANK: discounting a bill.
5.6 INTERNAL CONTROLS IN A
If the bank is unable to collect a bill on due date, immediate
5.7.1 General:
shifted from one position t steps should be taken to recover the amount from the drawer.
.The staff and officers should be All irregular outstanding accounts should be reported
to H.O.
another from time to time and without prior notice. financial year, the
The work of one person should be checked by
another In case of bills outstanding at the end of the
should be correctly divided between two
person, usually by an officer in the normal course of work. discount received
years.
All bank forms (e.g. cheque books, DD books, traveller'
cheque etc.) should be kept in possession of an officer
and 5.7.5 Loans and Advances:
after verifying the
stock of the same has to be taken frequently. The loan should be granted only
creditworthiness of the borrower and after obtaining sanction
The mails received in the office or branch should be opened
by responsible officer.
from proper authorities.
(e.g. agreemernt, letter of
The powers of officers of different grades should be clearly All necessary documents
hypothecation etc.) should be executed by the parties before
defined.
the sanction of loan.
Internal audit team should conduct surprise inspections between the security
Sufficient margin should be kept
head office and branches at regular interval.
accepted and the amount of loan.
5.7.2 Cash: in joint custody of two
All securities should be kept
Cash
officers.
should be kept in safe custody of two responsib responsible officers.
registration should be registered in
All securities requiring documents
In addition to normal checking by cashier, it should be te or accompanied by
checked daily and counted in full occasionally by responsio the name of the bank
bank.
officer Sufficient to give title to the hypothecated
made in respect of
The cashier should not have access to customers' ledg8° Surprise checks should be
of the bank.
accounts. g0ods not in possession reviewed at least
loan given should be
The counterfoils of pay-in-slips used by depositors should The operation in every
signed by proper officer along with the cashier. once every year.
 Vipul's Auditing - l (B8
Audit of Banks 89
8S Therefore, he should do this work as close to the
Accounts:
5.7.6 Inter-Branch adjusted on the basis
of advices balance sheet date as possible either before or after.
The accounts should be If the counting of cash is done before or after the
branches.
received from other preferably by central balance sheet date, then reconciliation of transactions
should be taken
Prompt action
are not responded to by any branch incurred between these dates should be prepared. In
authority, if any entries such a case auditor is supposed to check this
within a reasonable time. reconciliation statement.
Operations:
5.7.7 Credit Card Cash balance physically verified should be equal to
effective screening done at the time of issue
There should be the balance of cash shown in the balance sheet.
of credit cards. (b) Balance with RBI:
storage and issue of cards.
There should be strict control over Banks maintain accounts with RBI. However, only
prompt reporting by the
There should be a system of few selected branches are designated to have
merchants of all settlements accepted by
them through credit
account with RBI. So this has to be checked only in
cards. respect of those branches.
Reimbursements to merchants should be made only
after reference to
Auditor should verify balance with reconciliation
verification of validity of merchant's acceptance of cards. confirmation certificates from RBI and
sent
There should be a system to ensure that statements are statements.
regularly and promptly to the card holders should pay more
In reconciliation statement auditor
There should be a system to monitor and follow-up clients attention to:
payments. transactions.
i) Unresponded cash
Items overdue beyond reasonable period should be identified adjustment or write
(ii) Revenue items requiring
and attended to carefully. offs.
outstanding balances remaining
(iii) Old more than one
5.7 VERIFICATION OF ASSETS AND LIABILITIES: unexplained or unadjusted for
( ASSETS: year.
(1) Cash and Balances with RBI: RB):
(2) Balances with Banks (Other than
procedure that is followed for
(a) Cash:
Auditor should follow same
Auditor should count the complete cash on hand. checking of Balance 1with RBl.
supPposed to check all those
The cash balance physically verified should tally
In reconciliation statement he isbalances with RBl. But apart
case
with balance shown in cash book. tnings that are checked in that.
check
He should count such cash at the close of tne trom that he should also outstanding.
credit for interest is
business on the last working day of the financial yea No debit for charges or outstanding.
or before commencement of business of the ne
( received in clearing is
(i) No cheque sent or collection and
year. outstanding cheques sent for subsequently.
(ii) All bills or date are credited
However it is practically not possible for the audito outstanding as on closing
to visit the branches during the specified time
 Vipul's Auditing (B
Audit of Banks
90 91

In case of balance with

banks outside India auditor shol buld
Audit Procedure:
is followed for checking
follow same procedure that .The Basic thing that the auditorshould check is the existence
Balances with banks in India. converte and valuation of the investments.
see that the balances are
Apart from that he should .The auditor should check the instructions of RBI and should
exchange rate prevailing on th
into Indian currency at the verify whether the bank has followed them.
date of the balance sheet. . He should also check whether the policies of the bank
(3) Money at call and Short Notice: confirm with RBI guidelines
Money lent for one day is called as Money
at Call. Money len
Authorization: Auditor should check whether bank has
for more than one day but for less than
14 days is called as Mone
in money at call
authority to invest in those securities, in which, it has
at Short Notice. Securities are generally not taken invested
and short notice. Money is generally borrowed to meet the
are Commercial Physical Verification: Auditor should physically verify the
requirements of CRR and SLR. The participants existence of the securities with reference to D-Mat Account,
Banks, Cooperative Banks, Mutual Funds, Financial Institutions
lending are generally taken at Head deposit certificates etc.
etc. The decisions about such
Office and then communicated to the branches. Method of Valuation: Auditor should check the method of
valuing the investments. The method should be in accordance
Auditor's duty is to check whether there is prope
with RBI guidelines. In case of stock exchange securities
authorization for such lending.
auditor should check the market value of the shares.
He also has to check whether the instructions or guidelines of (5) Advances:
head ofice are followed properly.
(A) (a) Bills purchased and discounted.
He should examine subsequent repayments received from
(b) Cash Credits, Overdraft and loans repayable on
borrowing banks to verify amounts shown under this head a
demands.
the end of the year.
(4)
(c) Term Loans.
Investments:
(B) (a) Secured by Tangible Assets.
Investments of a bank are classified as follows:
i) Investments in India:
(b) Secured by bank or Govt. Security.
(c) Unsecured.
Government Securities.
(C) Advances in India:
Other Approved Securities.
(i) Priority Sectors.
Shares.
(ii) Public Sector.
Debentures.
(iii) Banks.
Subsidiaries and Joint Ventures.
(iv) Others.
Others.
(D) Advances outside India:
(ii) Investments outside India:
() Due from Banks.
Government Securities.
(ii) Due from others.
Subsidiaries and Joint Ventures. discounted.
(ii) Bills purchased and
Others.
 Vipul's Auditing - I (B8 Audit of Banks 93
92
Amount of liquidity facility remains overdue for more
(yii)
(iv) Syndicated Loans. than 90 days in çase of securitisation transactions.
(v) Others. A credit card account is treated as non-performing asset if the
Audit Procedure: minimum amount due is not paid fully within 90 days from the
amount due to the bank.
Auditor should check total next statement date. The gap between two statements should not
there are no month.
Auditor should ensure that be more than a
advances. Classification of Advances:
Amount of advances is duly
supported by loan document There are Four categories of Advances of a bank
to the nature of advances.
and other documents applicable i) Standard Assets: There is no problem of recovery on these
is appropriate. advances. Principal amount as well as interest is received
He should ensure that valuation
given are disclosed, is not considered as non-performing asset.
in time. It
He should also see that advances one
classified and described in accordance with GAAP
GAAP (i) Sub-standard Assets: A sub-standard asset is the
the bank and NPA for a period of less than or equal
accounting standards accounting poliies of which has remained
non-recovery on such
relevant statutory and regulatory requirements. to 12 months. There are chances of
He should also verify the amount of advance and the
amount assets.
asset is the one which has
of security taken for the same. They should be in proportion (iii) Doubtful Assets: A Doubtful for a period of
to each other. remained in sub-standard category
improbable or questionable
been 12 months. They are highly
He should verify whether appropriate provisions have of non-recovery.
and there are maximum of chances
made as per RBI norms. the one where loss has been
(iv) Loss Assets: Loss asset is
Non-Performing Assets (NPAs):
identified by
An asset becomes non-performing when it ceases to generate
loan (a) The bank or
income for the bank. A Non-Performing Asset (NPA) is a external auditors or
where (b) The internal or
(i) Interest and/or instalment of principal remain overdue for (c) The RBI inspection
been written off wholly.
a period of more than 90 days. but the amount has not
NPAs:
(ii) The account remains "out of order" in respect of overdrat Provisioning requirements on
or cash credit. Provision required
Asset Classification to Agriculture |
0.25%
(iii) The bill remains overdue for a period of more than 90 days (a) Direct
advance
|Standard Assets
in respect of bills purchased and discounted. and SME sector
(overdue up to Commercial Real Estate
sector 1.00%
(iv) The instalment of principal or interest thereon remains (b)
90 days) 0.40%
overdue for two crop seasons for short duration crops.
(c) Other advances
(v) The instalment of principal or interest thereon remains
overdue for one crop seasons for long duration crops.
(vi) The overdue receivables representing positive mark to
market value of derivative remaining for period of more
than 90 days in case of derivative transactions.
 Vipul's Auditing-lI(B Audit of Banks 95
94
15% (6) Fixed Assets:
Sub-standard assets Secured Portion
Unsecured portion 25% The main objective of the auditor while checking fixed assets is
can be categorized
Unsecured portion of to verify the existence and valuation of it. They
as follows:
Infrastructure Loan 20%
(i) Premises:
year1 25% . Auditor should verify opening balance of premises with
Doubtful (NPA for Secured up to
1-3 years 40% reference to schedule of fixed assets and register of fixed
more than 12
Above 3 years 100% assets.
months)
Unsecured 100% Auditor should check the title deeds and relevant
documents checking ownership of bank over the
|Loss Asset: 100% provision required premises.
Audit Procedure: case of acquisition of new premises verification should
Banks have to create provisions based on the category of be done with reference to authorization, title deeds,
advance as per prudential norms of RBI. Auditor should records of payment etc.
be
check whether proper provisions are created by the bank or When the premises are under construction it should
not. seen that they are shown under a separate heading
In case of sale or purchase of NPAs by the bank, the auditor premises under construction'.
for depreciation is
should examine the policy laid down by the Board of The auditor should see that provision
Companies Act, 2013.
Directors in this regard relating to procedure, valuation and as per requirements of the
delegation of powers. (ii) Other Fixed Assets:
motor vehicles etc.
In case of sale of NPA auditor should ensure that: They include furniture, fixtures,
oOnly such NPAs are sold by the bank which has owned by the bank.
remained NPA for at least 2 years. conditions like its ownership,
Auditor should verify thedisclosure.
The NPA has been sold at cash basis only. possession, valuation and
On sale of NPA it has been removed from the books of checking can be followed which is
O
Same procedure for
accounts of the bank followed for checking of premises.
The bank has not purchased an NPA which it had for depreciation is as per
He should see provision Act, 2013 on this type of
originally sold. requirements of the Companies
In case of purchase of NPA auditor should
ensure that:t assets also.
o The NPA purchased has been 7) Other Assets:
subjected to the
provisioning requirements as per the G) Inter office Adjustment:
classification. adjustment it is
Any recovery related to the purchased balance of inter office
adjusted against the acquisition cost
NPA is first If there is debit
and only amount im shown on assets side. system of record is
excess of acquisition cost is recognized that proper
as profit. Auditor should verify well as at the head office.
branches as
maintained at the
 Vipul's Auditing - l1 (BB)
Audit ofBanks
96 97
speedy identification and (ID LIABILITIES:
He should see that there is sent by the braches.
statements 1) Share capital: The bank has to provide following
correction of errors in the statement if there particulars
the reconciliation in respect of capital in the balance sheet:
He should also check balances. (i) Nationalised Bank: The capital owned by the Central
is difference in the
Government on the date of the Balance Sheet should be
(ii) Interest accrued:
of interest accrued but shown.
Auditor should check that amount
not collected or not received on the advances as well as (ii) For banks incorporated in India: It should be
categorised into Authorised, Issued, Subscribed, Called-
on the investments.
positions of these up and Paid-up capital. Amount of calls unpaid should
He should also check the recovery be added and amount of forfeited shares should be
interests especially on the advances. deducted from called up capital to arrive paid-up capital.
books if
He can also check the treatment given in the (ii) For banks incorporated outside India: It includes capital
there is non-recovery of interest.
brought in by the banks by way of start-up capital as
He should check that the bank complies with guideline of prescribed by RBl. Amount of deposit with RBI under
RBI in this respect. Section 11(2) of Banking Regulation Act, 1949 should also
(iti) Taxes paid in advance and TDS: be disclosed here.
Generally, this item is dealt with at the head office level Auditor's duty:
only and would not appear in the balance sheet of a Capital with
Auditor has to check opening balance of Share year.
branch except TDS on fixed deposits with the branch. reference to audited balance sheet of previous
The auditor can check amount of taxes paid in advance the bank with banking
He has to check compliance of of capital in
and TDS with reference to tax challans as well as requirement
regulation act and disclosure
certificates issued by the income tax department like TDS balance sheet.
capital the auditor should
certificate etc. In case of increase in authorized
resolution of the shareholders and
(iv) Other Assets: examine the special
These assets include stationery and stamps which consist memorandum of association. checked
during the year it should be These
of cheque books, travellers' cheques, pay orders, demand If there is issue of capital documents.
regard to relevant
drafts etc. by the auditor with include share application form,
Auditor should see that there is no misuse of these relevant documents allotment of shares, bank account,
documents. resolution passed for
.He should verify that the cost of stationery and sta brokers, records, etc.
consumed during the year is only debited to Profit and (2) Reserves and surplus:
Loss A/c. Statutory Reserve Banking Regulation Act, 1949 provides
Section 17 of the to declaration of
He should physically verify stock of stationery, cheque
20% of the profits prior statutory reserve.
books, pay orders etc. that at least transferred to the
He should see that these assets especially unused are dividend must be increased to 25% in the year 2007
has
kept in safe custody as there are many chances of misuse The percentage
 Vipul' Auditing -il (88) Audit ofBanks 99
98
presen. It should be shown He should check whether all legal provisions relating to
which is followed at However, the Central reserves and surplus are compiled with.
separately from other reserves.
RBI, may exempt
Govermment on recommendation ot If any amount 1s transterred to any of the reserves, it should
restriction if the amount of reserve have authority of proper resolution. Auditor can check the
any bank from this
premium is at least equal to the copies ot such resolutions that are passed.
fund together with share
required by RBI, the Scheduled
paid up share capital. As (3)Deposits:
Banks have to transfer 25% of their disposable profits . Current A/C:
after adjustment/provision for bonus with effect from
Auditor's duty:
the year ended March 31, 2001. The Central Government,
in consultation with the RBI can change this provision Auditor should verify balance with individual A/C on
depending on the economic situation. sampling basis.
If any amount from this fund is appropriated or used, He should check calculation of interest on the balances in the
banks should report to RBI within 21 days of such A/C on sampling basis.
appropriation. Auditor should ensure that debit balances in current accounts
o The appropriation should have. authority of board are properly included under the head advances.
revived only
resolution. In case of inoperative accounts they should be
Capital reserve: with proper authority.
Surplus arising out of sale or revaluation of fixed assets is Savings A/C:
called Capital Reserve. Auditor's duty:
individual A/C on
Share premium or securities premium: Auditor should verify balance with
o When shares are issued above the face value it is called at sampling basis.
on the balances in the
Issue at Premium. This extra money collected is called as He should check calculation of interest
Securities Premium which is to be transferred to Share
A/C on sampling basis.
Premium or Securities Premium. special attention to inoperative
The auditor should pay
Revenue reserves: savings bank accounts.
o Profit generated during the year out of normal business
Term Term deposit:
activities is to be transferred to Revenue Reserve.
Auditor's duty:
o They include reserves available for distribution by way receipts issued are serially
of dividend e.g. General Reserve, Profit and Loss Auditor should check that deposits
A/c. numbered.
Balance in Profit and Loss A/C: over the unused
there is proper control
o After creating the above reserves if any profit remains, He has to ensure that
is shown under Balance in Proit and Loss
it forms of deposit receipts. registers.
A/c. with relevant
Auditor's duty for reserve and surplus: He should verify deposit should examine that
deposits auditor
Auditor should check opening balances of various reserves case of all types of Your Customers (KYC) and Anti-
Know
with reference to audited balance sheet of the
previous year.
per procedure for
Money Laundering measures is in
place.
 Banks
Vipul's Auditing-I (BBI) Auditof 101
100
The auditor should check the terms of
deposits and borrowings. various types of
(4) Borrowings:
instruments should be
Borrowing form RBI, other financing He has to check the amount of interest accrued.
confirmation certificates and other
verified with regard to He can also enquire into reasons for non-payment of the
supporting documents. interest.
Borrowings on money at call and short notice
should have
proper authorization. So the auditor has to check such Other provisions:
authorization. o The provisions may include Provision for Income Tax,
Provision for depreciation, Proposed dividend, Provision
Interest paid or payable on these borrowings should be for Doubtful debts, Provision for Contingency funds etc.
checked by the auditor.
Auditor has to check their compliance with various laws.
The auditor should examine whether the amount shown in
the branch accounts is properly classified based on security or oO Accounting for this is mostly done at the head office and
otherwise.
would not be part of balance sheet of a branch.
(5) Other liabilities: (6) Contingent liabilities:

Bills payable: They are not part of balance sheet but shown as notes
to balance sheet. It includes:
o Bills payable of. the bank includes drafts, mail transfers,
travellers' cheques etc. o Liabilities not acknowledged as debts.
Auditor should check internal controls over bills payable. Auditor can check minutes of board meetings
wherein there are discussion that such contingent
oHe should verify the bills payable with appropriate
register. liability may arise.
relevant evidences like
Inter office adjustment: He can examine the
Correspondence with lawyers, claimants, workers/
o If balance is on credit side inter office adjustment should etc.
officers, unions
be recorded on liability side. agreements relating to these
Though the transactions might be taking place between He can also contracts,
two branches head office should have record these liabilities.
the list of pending legal
transactions. Auditor should check proper system of o He should also go through
record keeping with Head Office. Case against the bank.
o There has to be speedy identification and correction of Partly paid investments: on which part
some investments
errors in the statement of the branches. o There may be on shares.
calls
If there are differences in the balance Reconciliation of payment is made e.g. uncalled amount is shown as
statements can be prepared by the bank staff which has check
Auditor has to
to be checked by the auditor. Contingent Liability.
Interest accrued: Forward Exchange Contracts:register maintained by the
the
o It includes interest remains to be paid on
deposits and O Auditor can checkforward exchange contracts.
borrowings. bank for recording
 Banks 103
Vipul'Auditing -
l ofBanks
Auditof
(88yAudit
102
contracts for Verification of procedures and document for opening a new
net position on these
He should check
in which the bank has entered A/C including current, savings and term deposits accounts.
each foreign currency Foreign exchange transactions in case of the authorized
into. branches.
Guarantees given: All frauds prone areas.
thesc guarantees were
Auditor has to ensure thatconcerned authorities. Verification of high value transactions.
having Proper Sanctions of
the adherence to limits sanctioned. Procedure for TDs.
o He should also forms.
is proper control over Procedure for safe custody for security
He should see that there complaints.
unused guarantee forms. Treatment of customer's
obligations: Appointment:
Acceptances, endorsements and other 5.8.3 internal
over the of the management to have
Auditor can check the internal controls .It is at the discretion
O
custody of or external concurrent auditor.
issuance of letters of credit and over concurrent auditor be well1
well
auditor is appointed he should
unused letters of credit forms. If internal impartial and not involved
o Balance can be checked by the auditor from
relevant experienced, well trained, senior,
register. in operations. 1 year which
appointed his term is for
If external auditor is an auditor could
3 years after which
5.8 cONCURRENT AUDIT: may be extended up to branch subject to satisfactory
5.8.1 Introduction: be shifted to another
as performance. should
It means audit conducted concurrently or as continuously appointment of concurrent auditor
frauds The cancellation of
transaction takes place. It is conducted to verify errors and ICAL
in transactions with in shortest possible time. This
ensures early be reported to RBI and
the
detection of errors and frauds. Internal staff is allowed to do 5.8.4 Remuneration: in consultation with
audit but he should not be involved in operations. Even the
Tt is fixed by
management of the bank
(ACB).
external auditor can be appointed. RBI has issued guidelines for
Audit Committee of Board
of Directors
guidelines are mandatory and
conduct of concurrent audit. These 5.8.5 Reporting by Auditor: branches and not at
all banks are required to cover 50% of the total deposits and 5U70 should be done at the
Concurrent audit
of the total advances under this audit. Therefore all the banks
zonal offices. those can be asked
have to put their large branches under this audit. irregularities or errors,
if there are minor
5.8.2 Scope of Concurrent Audit: to
to be rectified immediately. be reported
irregularities they shouldoffices
Daily Cash transactions and mainly the abnormal receipts ces.
if there are major offices or head
and payments. But branch manager or
controlling findings
reporting of theformat should be
of the
Purchaseand sale of shares,securities etc... proper
There should be structured
Examination of capital expenditure on purchase of capital auditors. For this
Concurrent
assets and sale of such assets. barnk.
prepared by the
Verification of overdrafts, cash credit, term loans, guarantees
 104

5.9
5.9.1
audit department.

LONG FORM AUDIT REPORT (LFAR):

Introduction:
. Vipul'sM Auditing - (B

Follow up action on the concurrent audit reports shouldana

given high priority by the controlling office/inspection

As per terms of appointment of audítot, Public Sector Banks

Private Sector Banks, Foreign Banks as well as their branches
should furnish LFAR apart from Statutory Audit Report. The
statutory audit report issued by the bank auditor doesn'
represent all the functioning of a bank that's why RBI has issueda
notification by which bank auditor has to issue an additional
report known as LFAR report in addition to statutory audt
report. RBI, the apex body governing the banks has issued a
Audit ofBanks

d) Profit and Loss Account.

(e) General.
(a) Capital: Capital of a bank comprises
Government, member societies
shareholding of Government in the total
of Share capital from
and individual and
capital. The auditor
has to verify all the points in relation to Capital, Changes
made in Opening and closing capital.
A) Liabilities: Liabilities include Deposits
from various persons,
Loan taken from RBI, Contingent liabilities and other
liabilities. Auditor has to check whether loans are repaid on
time or not, Interest calculated on loan is proper or not etc.
c) Assets: Assets of a bank includes advances given to various
persons, Cash balance, investments, Balance with RBI and
other banks, money at call or short notice and other assets.
105

format of LFAR. Bank auditors are required to issue a separate Auditor has to verify that whether receipt of principle and
report of LFAR to the management of banks. interest are regular or not, Whether cash balance is up to the
5.9.2 Format of Long Form Audit Report (LFAR): limit or not etc.
The format of LFAR is not constant it's changing according to (d) Profit and loss Account: This account includes interest
changes made in banking industry. The latest format of LFAR is income, Facility related income, interest expense, various
effective from 31st March, 2003. The statutory auditors of banks charges etc. Auditor has to check whether interest income and
are required to comply with that format only. There are two types expenses are properly calculated at appropriate rate or not,
of formats issued by Reserve bank of India: whether all the incomes and expenses are provided for or not
(1) LFAR format for Central Statutory etc.
Auditors of Bank like
(Head office) e) General: In general the miscellaneous points are included
accounts, appropriate
(2) LFAR format for. Branch
Auditors of Bank (Branch office) inter branch accounts, proper books of
control etc. Auditor has to verify
The format of LFAR report is in questionnaire controls, adequate internal
format. If there acounts are kept or not, whether
is any important point which is not covered
by the questions whether proper books of
etc.
mentioned in format then in such situation appropriate controls are placed or not
auditor has to ais drafting Long Form Audit
specify that point in LFAR report. 7.4 Points to be considered while
5.9.3 Contents of Long Form
Audit Report (LFAR): Report (LFAR): drafting
cértain points at the time of
The format is in a questionnaire
manner. Mainly the questo ALditor needs to consider
in this format are divided into fiveparts the LFAR.
format but the
parts: is questionnaire
he format of LFAR report
(a) Capital. (1) answers to
their
required to limit well.
necessarily
(b) Liabilities. uditor is not their opinion as
YESor NO, he/she can express
(c)Assets.
 Audit of
Banks
Vipul's Auditing -1 (BB)
107
106
5.10 EXERCISES:
a part of
(2) The LFAR report is neither a substitute or nor 0BJECTIVE QUESTIONS:
statutory audit report. Fill in the blanks:
carefully read the LFAR (1)
(3) The Central statutory auditor should (a) Banks included in the Second Schedule
report issued by various branches of Bank before issuing the of RBI Act are called
bank. as (Scheduled, Commercial,
LFAR report for Head office of a Foreign)'
LFAR report should be (b) Banks have custody of large volume of instruments.
(4) The qualifications expressed in (Commercial, Negotiable, Transferable)
supported by appropriate evidences.
(c) Auditor of SBl is appointed by (Shareholders,
(5) The central statutory auditor can also get any information Central GovM., CAG)
from the branch management.
(d) There should be effective screening done at the time of
5.9.5 Significance of LFAR of credit cards. (cancellation, issue, payment)
LFAR serves as an important check list for audit planning. It is
(e)Money lent for one day is called as Money at
.
of utmost importance to the management as well as the central (short notice, cal, intraday)
auditors. Money
(0 lent for more than one day but for less than 14 days is
Preparation of LFAR is useful in: called as Money at (short notice,call, intraday)
(1) verifying that accounting of capital is proper done especially (g) An asset is called as when it ceases to generate
when there are changes in opening and closing capital. income for the bank. (bad debts, non-perforrming asset,
(2) checking whether loarns are repaid on time or not and interest irrecoverable)
calculated on it is proper. (h) O % is required in case of Loss assets. (100, 50, 0.40)
(3) finding whether payment of principal and interest In case of () balance of inter office adjustment it is shown on
loans is regular. assets side. (Debit, Credit, Nil)
(4) checking whether interest income and expenditure are Statutory Reserve should be created at _% of current
properly calculated at appropriate rate or not. year's net profit. (20, 25, 15)
(5) creating an impact on the bank management about the (k) In case of all types of deposits
auditor should examine
quality of work carried out. (KYC, A/c opening, A/c closing)
procedure.
(6) finding out that reconciliation
statement has been prepared in () LFAR is mandatory for
Companies, Banking
case of differences in balance in account held with RBI, SBI Companies, Insurance
(Limited
and other banks. Companies, Non-profit organization)
(7) knowing that branch do not of its profit to Reserve fund
hold any investments on behal (m) A bank must transfer .
(25%, 30%, 50%)
of the head office. belore declaring dividend.
been classified as NPA for
(8) finding out the overdue or
matured investments. (n) A asset is one which has
years.
a period exceeding 2
Standard)
(Doubtful, Loss, Substandard,
 Vipul's Auditing - (BB Banks
108 Auditof
109
of a co-operative bank is QUESTIONS:
(o) The appointment of the auditor THEORY
governed by the relevant What is theposition of banking sector in India?
(Companies Act, RBl, Co-operative Societies
Act, 5anking ()
(2) Why is audit more important for banks? Explain with
Regulation Act) reference to its
features.
Ans.: (a) Scheduled; (b) Negotiable; (c) CAG; (d) issue; (e) cal ) Write a brief note on financial statements of a bank.
(i) Debit; (i) 25.
() short notice; (g) non-performing asset; (h) 100; provisions for appointment of auditor
(4) Expla legal of a bank.
(k) KYC () Banking Companies (m) 25% (n) doubtful (o) Banking
Regulation Act.
Explain legal provisions in respect of remuneration of auditor of a
bank.
(2) State whether following statements are True or False:
IWhat are the qualifications of auditor of a bank?
(a) Cooperative banks provide higher rate of interest on deposits
than commercial banks.
mWhat are the disqualifications for auditor of a bank?
(b) Balance Sheet and Profit and Loss Account of the Bank need (e) What are the nignis of the auditor of a bank?
not be audited every year by a person duly qualified. (9) Describe the steps in conduct of audit of a commercial bank.

(c) Provisions of Companies Act, 2013 are applicable regarding (10) Explain the contents of audit report of a bank

qualification and disqualification of auditor of a bank.
(d) Statutory audit report need be prepared if LFAR is prepared.
(e) The staff and officers of a branch should be permanentily kept
in the same branch.
() Amount of loan can be more than the value of security
accepted.
(1) What is LFAR? What should be its contents? (April 19)
(12) What is Long form Audit Report? Explain its significance.
(13) How would you evaluate the intemal control system of the bank?
(Hint: Write the Evaluation of Intemal Control System first and then
General Controls in a bank) (April 19)
(14) How would an auditor audit business income of a bank?

(g) Cash should be counted physically at the end of year. (15) How would an auditors evaluate intemal control system of a bank?

(h) All branches have account with RBI. (15) Explain the concept of Non-Performing Assets of Banking
(i) A Doubtful asset is the one which has remained in sub- Company.
7) How would the auditor vouch/verify items appearing the financial
slandard category for a period of 12 months. in

) A bank cannot sell its NPAs. statements of a bank:

(k) Debit balance of inter office adjustment it is shown on liabilities (a) Cash in hand.
side. (6) Balances with RBI.
() Any transfer to and from reserve should have proper authority. ()Balances with banks other than RBI.
m) Internal auditor cannot perform concurrent audit. (d) Money at call and Short Notice.
(n) NOSTRO account is maintained by insurance company. (e) Investments.
(o) A sub-standard asset does not pose any recovery problems ( Advances.
and is well within the normal risk associated with banking
(9) Non-performing Assets (NPAs).
business.
(h) Fixed Assets.
Ans.: (a) True; (b) False: (c) True; (d) False; (e) False; () False
(g) True: (h) False: (i) True; ) False; (k)
False; () True;
0Inter office Adjustment
(m) False; (n) False (o) False. )Interest Accrued.
(k) Other Assets.
 Vipul Auditing-i
110
"(88ditef Insurance Companies
111
Share
Share Capital
MODULE
(m) Reserves and Surplus. II:
(n) Deposits. AUDIT OF INSURANCE
(o) Borrowings
P) Contingent Liabiities. COMPANIES
(Other kabilities.
(18) Write short notes:
(a) Concurrent Audit.
(b) LFAR.
Chapter 6
(c) Non-Pertorming Assets. (April 19) (Hint:
Eplain meaningang
audt praceature)
Audit of Insurance Companies
6.1 Introduction
6.2 Legal framework
6.3 Important provisions of The Insurance Laws
(Amendment) Act, 2015:
6.4 Important amendments made by Insurance
Regulatory and Development Authority act, 1999
(IRDA Act, 1999):
6.5
Structure of insurance companies
6.6 Reglstration
6.7 Licensing of Insurance agent
6.8 Special Polnts in Life Insurance Company Accounts
6.9
Final Accounts of Life Insurance Companies
6.10 Final Acounts of General Insurance Companies
6.01
Appllcablity of Accounting Standards
6.12
Audit of accounts
6.13
Appointment of auditor
6.14 companies
Internal controls In Insurance
6.14. Underwrlting
6.14.2 Premlumn
6.14.3 Commlsslon
 Vipul's Auditing- Insurance Companies
112 Auditof
113
6.14.4 Reinsurance INTRODUCTION:
&.
6.14.5 Claims
Insurance is a financial service. It is pooling
6.14. Underwriting antract of insurance, of risks. In a
the insurer undertakes in consideration
6.15 General audit procedure ofmoney to make good the loss suffered by
sum
of a
specificd the insured
6.15. Preliminary Work gainst a risk or any other contingency.
There are two
6.15. Audit of Incomes arties to an insurance contract, insurance company
and the
6.15. Audit of Expenses insure party. The document laying down the terms
of the
contract is called insurance policy. The property,
6.15.1 Audit of Reinsurance which is insured,
6.15.1 Miscellaneous Items
isthe subject matter of insurance. It may be insured against loss
arising from uncertain events in the form of destruction
6.16 Audit of major items in financial or
statements damage to the property or death or disablement of a person.
6.16.1 The
Premiums interest, which the insured has in the subject matter of insurance,
6.16.1 Claims is known as insurable interest. Depending upon the subject
6.16.1 Commission matter, the types of insurance are life insurance and general
6.16.1 Reinsurance insurance. In case of life insurance a specified amount
becomes
6.16.1 Reserve for unexpired risk
payable on the death of the insured or upon the expiry of
a
specified period. General insurance covers losses caused by fire,
6.16.1 Coinsurance accident and marine adventures.
6.16.1 Investments
Until 1999, insurance services were provided in India
6.16.1 Expenses of management by two
6.17 monopolistic public sector organisations namely, Life Insurance
Auditor's report
Corporation of India and General Insurance Corporation of India.
6.18 Exercises In order to
provide better insurance cover to citizens and also to
ensure the flow of long-term sources of
financing infrastructure
government opened up the insurance sector and also set up a
Satutory lInsurance Regulatory and Development Authority in
1999.

hy
by
class of insurance business in India canbecarried out only

(i) A public limited company

(i) A cooperative
society;
(ii) An insurance cooperative society;
havin paid
up capital of Rs. 100 crores in which no body
orate holds
whos
whose more than 26 per cent of its paid up capital and
solepur in India.
Ppurpose is tocarry on insurancebusiness
Thus, carry
Out an only Indian Insurance companies are permitted to
Out any commencement of
class of insurance business after the
 oflnsurane Companies
Vipul's Auditing- Auet 115
114 company carrying
Audit: Every Ccompany
1999. An IndianInsurance Company is defined a. (D
)
Audit: carri on Insurance Business
ts accounts audited as per
IRDA Act Companies Act should get its requirements of
company formad/negistered under the Companies Act, 2013.
Approved Investments: A company carryving on General
Approved
5)
6.2 LEGAL FRAMEWORK: Insurance business must invest its funds only in approved
govemed under two import securities.
The Insurance Sactor in India is
(Amendment) Act, 2015 and T
acts ie. The Insurance Laws Act, 1999. s 1 (6) Payment of or Commission Authorities Agents:
commission to Authorities Acenh The Act
Authority
Insurance Regulatory and Development Drohibits payment ot commission to any person other than an
there are some other Acts also that
have to be taken in authorized agent, subject to a mavimum of 15% of the
consideration. Ihey are: premium.
(1) The Insurance Regulatory and
Development Authori
Regulations framed under the IRDA Act, 1999.
6.4 IMPORTANT AMENDMENTS MADE BY INSURANCE
(2 The Companies Act, 2013. REGULATORY AND DEVELOPMENT AUTHORITY
3) The General Insurance Business (Nationalisation) Act, 1972 ACT, 1999 (IRDA ACT, 1999):
to prepare a Balance Sheet,
(1 It is mandatory for every insurer
MPORTANT PROVISIONS OF THE INSURANCE Profit and Loss Account, a Separate Receipt and Payment
6.3
6.3
Account and a Revenue Account in respect of
shareholder's
LAWS (AMENDMENT) ACT, 2015:
hunds.
Forms of Final Accounts: Every insurer carrying on Li#
(2) The accounts are to be prepared
for every financial year
Insurance Business must prepare the Revenue Account
form A-RA, Profit and Loss Account in Form A-PL and th instead of calendar year.
Balance Sheet in Form A-BS. Every insurer carrying 3) accounts relating to fuunds
Every insurer must keep separate
General nsurance Business must prepare the Revenu of shareholders and policyholders.
Account in Form B-RA, Profit and Loss Account in Form investing either directly or
PL and the Balance Sheet in Form B-BS. Insurers are prohibited fromIndia.
indirectly their funds outside
commission on fire and marine
(2) Register of Policies: Every insurer must maintain a Kegist
( raises
of Policy in respect of policies issued. It should contain detais neAmendment
of every policy like names and addresses of policy holder policies from previous 10% to 15%.
solvency margin. The margin
date of issue of policy and record of any transfer, assignmer(6) Insurers are required to keep a
liabilities.
or nomination of policy. Tefers to excess of assets over returm of
a prescribed
3) Register of Claims: The insurer must also maintain a Regis 7Every insurer must submit IRDA. This return has to be
of Claims. It should record date of the claim, the name a margin to
laintenance of such business and
address of the claimant, date of discharge of claim etc. In cas/ of life insurance
of rejected claims it should mention date of rejection a
c ified by an Actuary in case insurance business.
general
reasons for the same.
an Auditor in case of general insurance business should
Every insurer carrying on potential
Reserve" to meet future
Create a Catastrophe
 Vipul' Auditing -
116
I(ebAudit of Insurance Companies
117
iabilityagainst insurance policies in torce. 1nis reserve is noy (4) Separate applcaion has to be made for
created for any specific or known purposc. insurance business like fire, marineetc. each class of ceneral
genera
) If application is rejected by IRDA
the same applicant can
6.5 STRUCTURE OF INSURANCE COMPANIES: apply after 2 years for different class
of general insurance
Generally structureof General Insurance Companies in Indiai business.
as follows: (6) Certificate granted to the insurer
should be renewed
At the Lowest level there are Branches. They carry on basie annually.
operations like selling of Insurance Policies, Collection o Suspension of Certificate of Registration:
Premium, Settlement of Claims etc. IRDA has power to suspend a class or classes
of general
Number of branches taken together becomes a division. insurance business of an insurer for such period as may be
has a divisional office. It controls the branches coming prescribed.
under its jurisdiction.
Insurer ceases to operate from the date of suspension or
When number of divisions are taken together they are cancellation of certificate of registration.
clubbed under a region which has regional office.
controls various divisions coming under its jurisdiction.
It A due opportunity of presenting his case should be given to
the insurer before cancelling the certificate.
At the highest level there is Head Office
which controls all
regional offices. Major policy decisions are
Head Office. taken at the 6.7 LICENSING OF INSURANCE AGENT:
Section 42 of The Insurance Laws (Amendment) Act, 2015
6.6 REGISTRATION:
AA
Section 3 of The Insurafce Laws
(Amendment) Act, 2015
requires every Insurer to obtain a Certificate
states that a person wanting to become an Insurance Agent
must possess requisite qualifications and practical training for
a
period not exceeding of 12 months.
commencement of business of General of Registration betore Tt
has to comply with IRDA (Licensing of Insurance Agent)
1Insurance. The registration Regulations, 2000 also.
has to be done under IRDA (Registration
of Insurance
Indian
Companies) Regulations, 2000.
Procedure of Registration: 6.8 SPECIAL POINTS IN LIFE INSURANCE COMPANY
(1) Insurer intending to ACCOUNTS:
obtain a certificate of
give requisition for registration
to IRDA.
registration shoulo REINSURANCE: Reinsurance is aO form of an insurance cover
several insurance companies come
(2) Every application for
registration ch
Or the insurance, where simiiar to underwriting
manner and shall be accompanied shall be made in su ener to issue on a single risk. It is
by such documents as ma ds insurance companies go in for
reinsurance so that they can
be specified by the regulations.
potential loss. Every insurer can
(3) IRDA after conducting POcct themselves from the such percentages not
enquiries as it may consider necessa Teinsure with Indian reinsurer as
for the grant of
certificate, may sum assured on each olicy
registration. grant certificate o CCeding 30 per cent of the an ins irer can
IRDA. However,
y be specified by the
 Vipul'sTM Auditing- (B8 Audit of Insuronce Companies
118
119

on any policy in excess of th RONUS TO POLICYHOLDERS: Life insurance company

reinsure the entire sum assured chould maintain a life fund for
Insurance companv an participating policyholders.
percentage specified by IRDA. An The surplus is distributed to the policyholders
comparny as well as
take reinsurance from other insurance in the form of
company. When an Insuranca Bonus. The rate of Bonus is to be fixed by the company. The
can accept reinsurance of other company i amount of bonus is credited to policyholder's
company takes reinsurance from other insurance Account. The
Dav premiums may be outstanding from the policyholders and
is called as "Reinsurance Ceded." In this case it has to
the amount of bonus can be adjusted against Premium
reinsurance premium and it can get commission from other that is
insurance company. On the other hand, when an insurance known as Bonus in reduction of Premiums. The amount is
debited to Bonus Account and credited to premiumns
company accepts reinsurance from other insurance company,
it is called as "Reinsurance Accepted". In this case, it gets Accounts.
premium from other insurance company and has to pay (4) ANNUITIES: Annuity is a term used in respect of pension
commission for accepting reinsurance. Reinsurance is plans of life insurance companies. Under these plans,
permitted in life as well as general insurance business, but it premiums are paid for a specific term and on the completion
is more popular and common in general insurance business. of the term, the policyholder gets a certain sum of money
(2) SURRENDERS: This term is used in case of life insurance every year or month as a pension. The amount of pension is
. companies. In case a policyholder is not
in a position to pay called "Annuity'. Thus, Annuities are in the form of pension
the future premiums on his policy, he may surrender or in which insurance company makes a series of periodic
cancel his rights under the life insurance policy to the payments which are included in the 'Benefits Paid' and part
company. The insurance company will pay him the surrender of Revenue Account. On the other hand, consideration for
value of the policy as per rules. The amount so paid is an annuities granted is the amount saved by the insurance
expense of the insurance company, which becomes part of company by paying Annuities in lumpsum which is treated
benefits paid' in the Revenue Account. Surrender value 15 as income in the Revenue Account.
calculated as follows: (5) LIFE INSURANCE/ASSURANCE FUND: It represents the
Surrender Value Factor x Paid up Value excess of revenue receipts over revenue expenditure relating
V. = 100 to life insurance business. This fund is available to meet
Paid up value is the value of life insurance aggregate liabilities on all outstanding policies. While
policy, which > preparing Revenue Account, the opening balance of life
calculated as follows:
Paid up value = insurance fund is the starting point. Items of revenue income
are credited to the fund while items of revenue expenditure
(Number of years are debited. The balance arising out of this is the closing
premium paid Sum (Bonus Rate Sum Balance of Life Insurance Fund.
Policy term Assured) * 1000 Assured BOOKS TO BE MAINTAINED:
Loan value is the value (1) required to prepare their
of policy for which loan Lite Insurance Companies are
available from the insurance Profit and Loss
eligible to take loans on
company. Policyholdersa are
ancial statements ie. Revenue Account,
their policies subject certain rule Account
If loan is not repaid
the loan plus interest
to and Balance sheet. every
from the claim money
ted
will be deducte is to be ascertained aler
at maturity. Tofit in case of life insurance valuation Balance St et. The
twoyears by preparing a
 Companies
Vipul'sT Auditing-I(B Audit of Insurance
120 121
transferred to Lifa aining 5% has to be utilized for such
remaining
Balance in Revenue Account is to be
'

Assurance Fund at the end of the year.
(3) Income from Interest Dividend and
rent is to be shown in
However
Revenue Account after deducting tax therefrom.
provision for taxation has to be made by taking the income at
gross figure.
Expenses or incomes not related to a particular Insurance
(4)
business should be shown in Profit and Loss account.
(5) The assets of Insurance Companies should be invested in the
following manner:
(a) 25% in Government securities.
(b) Not less than 25% 'in Government or other approved
securities.
(c) The balance in any approved investment. subject to the
limitations, conditions and restrictions.
VALUATION BALANCE SHEET:
The Balance in Life Assurance Fund cannot be taken as profit
of life insurance business. The insurance should calculate Net
Liability on all outstanding policies. Such calculation is
done by
Actuaries.
For this purpose, present value of future liability on all policies
purposes as Government
may determine.
FINAL ACCOUNTS OF LIFE
6.9 INSURANCE
COMPANIES:
The IRDA regulations relating to the preparation of financial
ctatements, management report and auditors report
are given
below:
(a) Accounting Principles:
Every balance sheet, revenue account, receipt and payment
account and profit and loss account of an insurer should be in
conformity with the Accounting Standards issued by the ICAI to
the extènt applicable in insurers carrying on life insurance
business. The premium should be recognised as income when it is
due. Premium deficiency should be recognised if the sum of
expected claim costs, related expenses and maintenance costs
exceeds related unearned premiums. Acquisition costs, if any
should be expensed in the period in which they are incurred. The
ultimate cost of claims should comprise the policy benefit amount
and claims settlement costs, wherever applicable. The estimation
of liabilities against life policies in force should be determined by
une appointed actuary of the insurer pursuant to his annual

in force and present value of future premium to investigation of the life insurance business. The value of
be received on all
policies in force is calculated. The excess of present investment property should be determined at historical cost,
value of future years. Debt
liability over present value future premium ulbject to revaluation at least once in every three
is called as Net securities and redeemable
Liability. Securities including government
Prererence shares should be considered as held to maturity
After this, Net liability is compared to amortisation.
with Life Assurance Fund cost subject
to ascertain the amount of profit/loss. curities and measured at historical that are traded
The profit or loss of lite equity securities and derivative instruments on the balance
insurancebusiness is ascertained by preparinga statement ed at fair value
as "Valuation Balance Sheet."
Valuation Balance Sheet as on to
called
ve markets should be
sheet date.
measured

Net Liability as per Actuary (b) Disclosures:

valuation to surplus (Net Profit)
by Life Assurance Fund as pe as part of financial
Balance Sheet by Deficit (Net should be disclosed
Loss). following notes to the balance sheets:
state
As per Section 28 of Life
of the profit of life
Insurance Corporation Act, 1956, 9570 ents by way of
(1) Continge as partly paid
investments,
insurance business should
policyholders by way of be distributed to ontingent liabilities suchcommitments claims other than
"Bonus" on with-profit
policies anu urstanding underwriting
 Vipul'sM Auditing l
- (B
Companies
122 Audit of Insurance **
123
as debts, guaranteee
those under policies, not acknowledged Risks assumed in excess of the statutory provisions should be
company, statutory demand r
given by or on behalf of the ceparately disclosed indicating the amount of
premiums
liabilities disputed not provided for reinsurance obligations
involved and the amount of risks covered.
etc.
mAny debit balance of the profit and loss account should be
(2) Actuarial assumptions for valuation of liabilities for life shown as deduction from uncommitted reserves.
policies in force. Report:
(d) Management
(3) Commitments made and outstanding for loans, investments
and fixed assets. A management report duly authenticated by the management
should be attached to the financial statements. The report includes
(4) Basis for amortisation of debt securities.
the following:
5) Claims settled and remaining outstanding for a period of
(1) Confirmation regarding the continued validity of the
more than six months on the balance sheet date.
registration granted by the IRDA.
6) Operating expenses relating to insurance business.
(2) Certification that all the dues to the statutory authorities have
(7) Computation of managerial remuneration. been duly paid.
(8) Basis of revaluation of investment property. shareholding pattern and
3) Confirmations to the effect that the
(9) Historical costs of those investments valued on fair value any transfer of shares during the year are in accordance with
basis. the statutory requirements.
directly or
(cGeneral Instructions: (4) Declaration that the management has not
funds of the holders of
(1) The corresponding amounts for the immediately preceding indirectly invested outside India the
financial year for all items shown in the balance sheet, profit policies issued in India.
has been
and loss account should be given. 5) Confirmation that the required solvency margins
(2) The figures in the financialstatements may be rounded oft to maintained.
of all the assets have
the nearest thousands. l6Certification to the effect that the valuessheet.
balance
(3) Interest, dividends and rentals receivable
in connection with been received on the date of the
an investment should be stated at the gross amount, the Certification to the effect that no part of
the life insurance
amount of income tax deducted at source should be included or indirectly
applied in
funds have been directly the insurance Act.
under advance taxes paid and taxes deducted at source. Contravention of the provisions of
(4) The expression provision' overall risk exposure and
should mean any amount written
Dsclosure with mitigate regard to the
off or retained by way of providing for the same.
depreciation, renewals Strategy adopted claim
in value of assets. The expression
'liability' should include al trends in average
liabilities in respect of expenditure 9) Agir of claims indicating the five years.
contracted for and a" ging preceding
disputed or contingent liabilities. ettlement time during the performance of investment in
and real estate, loa
(5) The company should (10)
Review of assets quality loans,
make all provisions for damages unde
lawsuits where the management is
eview
terms of portfolios,
po
separately in terms of
of the opinion that the
award may go against the insurer. investments, etc.
 Vipul'y Auditing - (83 AUdt ef
Insurance Companies 125
124
(e) Fair value of investnment property and basis therefore.
(e) Preparation of Financial Statements:
)General Instructions: In addition to the general instructions
A life insurance company
should prepare the revenue accoun:
sheet in Form A-RA, Form relating to life insurance business, income from rent should
profit and loss account and the balance m
not include any notional ren.
the Act.
A-PL and Form A-BS as prescribed in
account and balance shet 0Management Report: A management report, containing all
An insurer should prepare revenue
separately for ordinary life, general annuity, pension and health the information included in the management report relating
insurance. The Insurer should also prepare separate receipts and to life insurance business duly authenticated, by the
managenment, except the certification to the effect that no part
payment Account in accordance with the direct method
prescribed in AS-3 of insurance fund has been directly or indirectly applied in
contravention of the provisions of the lnsurance Act, should
Statements.
be attached to the Financial
6.10 FINAL ACCoUNTS OF GENERAL INSURANCE Statements: A General Insurance
(5) Preparation of Financial
COMPANIES: Profit and
Company should prepare the Revenue Account,
Xéneral Insurance covers losses caused by fire, accident and Form B-RA, Form B-
Loss Account and the balance sheet in
nmatine adventures. A contract of general insurance is an annual the Act. The Revenue
PL and Form B-BS as prescribed
in
contract or for a particular period/voyage. It also includes for Fire, Marine, and
miscellaneous insurance such as theft or any other risk. Account should be prepared separately
Miscellaneous Insurance Business and separate schedules
(1) Accounting Principles: Every Balance sheet, for Marine Cargo, Marine other than
receipt and should be prepared
payments accounts and profit and loss account of the general classes of miscellaneous
Marine Cargo and the following Workmen's
insurance company should be in conformity with the business namely Motor,
insurance Public/product liability
Accounting standards issued by ICAI to the extent to the Compensation, Engineering,
insurers carrying on business of general insurance in India. insurance and others.
aviation, Personal accident, health
(2) Disclosures: The
following should be disclosed as part of Contingent Liabilities:
Financial Statements by way of notes
to the balance sheet in (1) Partly paid investments.
addition to the disclosures to be
shówn by life insurance not acknowledged as debt.
companies:
Claims other than against policies
(a) Actuarial assumptions outstanding.
for claims liabilities in the cases ot 5) Underwriting commitments
policies exceeding four years. of the company.
Guarantees given by or on behalf
(b) Claims, less reinsurance,
paid to claimants in dispute, not provided for in
India. and outside Statutory demands/liabilities in
accounts.
(c) Ageing of claims distinguishing between claims extent not provided for in
Reinsurance obligations to the
-

outstanding for more than 0

six months and others.
(d) Extent of premium accounts.
income recognized based
risk patterm category-wise on varying (7) Others.
therefore, including whetherwith basis and justification
external evidence. reliance has been placed O
 Companies
Audit of Insurance
VIpul' Auditing -Il (BBI) 127
126
Claims settle
lement costs include legal expenses,
urveyor fees,
RESERVE FOR UNEXPIRED RISK: transport expenses, etc.
A reserve for Unexpired Risk' is
created every year in order to
business. Such The insurance company also has to make provision for
ascertain the profit in case of general insurance outstanding claims. such liability on outstanding claims will be in
outs
company
reserve represents the income received by the insurance respect of:
Premiums. The insurance
in advance in the form of insurance (i) Amounts unpaid on reported claims and
company charges Premium in advance and the risk may happen
to carry forward a
on any day in future. Therefore, it is necessary Gi) Claims Incurred But Not Reported (IBNR).
part of the premium income received by the insurance company
during a particular year to the next year for meeting any loss that
6.11 APPLICABILITY OF ACCOUNTING STANDARDS
may arise in respect of policies issued during the preceding year.
ACCOUNTINGG STANDARDS ACCOUNTING
The provision against unexpired risk should be 100 percent of the (1)
STANDARD (AS) 3-CASH FLOW STATEMENTS:
net premium in case of marine insurance business and 50 percent
of the net premium income in case of other insurance busingss. Objective:
However, an insurance company may keep additional reserve if it of information about the
The Standard deals with the provision
so feels necessary. and cash equivalents of an enterprise by
historical changes in cash cash flows
Standard classifies
PREMIUM: means ofa cash flow statement. The financing activities.
investing and
(1) According to Section 64VB of The Insurance Laws during the period in operating,
(Amendment) Act, 2015 no risk can be assumed by an insurer Information:
Benefits of Cash Flow enables users
unless premium is received in advance. A cash flow statement
provides information that
assets of an enterprise in cash and
(2) Such premium can be collected by cash/cheque/bank to evaluate the changes in net purpose of
equivalents are held for the
overdraft and even through Debit Card, Credit Card, e- cash equivalents. Cash
commitments.
transfer etc. meeting short-term cash
Statement:
(3) Premium shall be recognized as income over the .contract Presentation of a Cash Flow
period or the period of risk whichever is appropriate. 6) Operating Activities: operating activities
flows arising from
(4) Premium received in advance which means premium The amount of cash business to maintain its
received before commencement of the risk, should be shown generated by the make newv
naicate the cash dividends, repay loans andfinancing.
separately under the head "current liabilities". pay
Operating capability to sources of
on external
(5) Uneaned premium should be shown separately under the nvestmernts without depending activities are:
from operating
and the rendering
flows off
head "current liabilities". Examples of cash goods
of
(6) However, premium received in advance should not be from the sale
a) Cash receipts commissions and other
included in unearned premium and should be shown services; royalties, fees,
separately. receipts from
oCash goods and
services
es;
CLAIMS: revenue; suppliers for employees;
payments to
Claim is the major expense for insurance company. Cost o (c) Cash pa on behalfof
payments to and
claims includes claims under policies and claims settlement costs aCash
 128 Vipul' Auditing-i1 (BBI)
Audit of Insurance companies
(e) Cash receipts and cash payments of an insurance 129
enterprise for premiums and claims, annuities and other (a) The direct method, whereby major
classes of gross. cash
policy benefits; receipts and gross cash payments
are disclosed; or
( Cash payments or refunds of income taxes etc. (b)The indirect method, whereby net profit or
loss is adjusted
(ii) Investing Activities: for the effects of transactions of a non-cash
deferrals or accruals of past or future nature, any
Cash flows from investing activities represent the operating cash
total receipts or payments, and items of income
expenditure made in the resources that will generate future or expense
associated with investing or financing cash flows.
income and cash flows. Examples of cash flows
arising from
investing activities are: The direct method provides information which may be useful
(a) Cash payments to acquire in estimating future cash flows and which is not available under
fixed assets (including the indirect method and is, therefore, considered more
intangibles);
(b) Cash receipts from disposal appropriate than the indirect method.
of fixed assets (including
intangibles); Reporting Cash Flows from Investing and Financing Activities:
(c) Cash payments
to acquire shares, warrants An enterprise should report separately major classes of gross
instruments of other enterprises or debt
and interests in joint cash receipts and gross cash payments arising from investing and
ventures;
(d) Cash receipts from financing activities
disposal of shares, warrants
instruments of other enterprises or debt (2) ACCOUNTING STANDARD (AS)9 Revenue
ventures; and interests in joint Recognition:
(e) Cash advances
and loans made to third Introduction:.
( Cash receipts from the parties;
repayment of advances and This Standard deals with the bases for recognition of revenue
made to third parties etc. loans
in the statement of profit and loss of an enterprise. The Standard
(iii) Financing Activities:
is concerned with the recognition of revenue arising in the course
Cash flows from financing of the ordinary activities of the enterprise from:
providers of funds (both activities indicate
cash flows fromm
Examples of cash flows capital and borrowings) to the business. (a) The sale of goods
arising from financing (6) The rendering of services, and
(a) Cash proceeds activities are:
instruments;
from issuing shares C The use by others of enterprise resources yielding interest,
or other similar
(b) Cash proceeds royalties and dividends.
from issuing debentures, Definitions:
other short or long-term loans, bonds, and
(c) Cash repayments borrowings; and of cash, receivables or
of amounts borrowed. Kevenue: Revenue is the gross inflow
the course of the ordinaryy
Reporting Cash other consideration arising in
Flows from Operating the sale of goods, from the
An enterprise Activities: dctivities of an enterprise from others of enterprise
should report from the use by
activities using
either: cash flows from dering of services, and dividends. Revenue
operatin8 esources yielding interest, royalties and customers or clients for
Smeasured by the charges maderendered to
to. In an agency
80ods supplied and services amount of commission and
Clationship, the revenue is the
 Companies
Audit of Insurance 131
Vipul'sM Auditing !I (BBI)
130
patterns of performance and accordingly revenue is
not the gross inflow of cash, receivables or other recognised when the sole or final act takes place and the
consideration. service becomes chargeable.
(2) Completed service contract method: It is a method of
ACCOUNTING STANDARD (AS) 13 ACCOUNTINNG
accounting which recognises revenue in the statementof INVESTMENTS:
FOR
profit and loss only when the rendering of services under a
contract is completed or substantially conmpleted. This Standard deals with accounting for investments in the
(3) Proportionate completion nmethod: It is a method of financial statements of enterprises and related disclosure
accounting which recognises revenue in the statement of requirements.
profit and loss proportionately with the degree of completion Definitions:
of services under a contract.
Investments are assets held by an enterprise for earning
Revenue recognition is mainly concerned with the timing of income by way of dividends, interest, and rentals, for capital
recognition of revenue in the statement of profit and loss of an appreciation, or for other benefits. Assets held as stock-in-
enterprise. The amount of revenue arising on a transaction is trade are not 'investments'.
usually determined by agreement between the parties involved in is by its nature
(ii) Current Investment is an investment that
the transaction. When uncertainties exist regarding the intended to be held for not more than
readily realisable and is
determination of the amount, or its associated costs, these on which such investment is made.
one year from the date
uncertainties may influence the timing of revenue recognition. other than a current
(iii) Long Term investment is an investment
Rendering of Services: investment.
Revenue from service transactions is usually recognised as the iv) Investment property is an
investment in land or buildings
occupied substantially for use by,
service is performed, either by the proportionate completion that are not intended to be enterprise.
method or by the completed service contract method. or in the operations of, the investing
for which an asset could be
(v) Fair value is the amount
(i) Proportionate completion method: Performance
consists of knowledgeable, willing buyer and a
the execution of more than one act. Revenue is exchanged between a length transaction.
recognised
proportionately by reference to the performance of each act. knowledgeable, willing seller in an arm's from the sale of an
obtainable
The revenue recognised under this method V) Market value is the amount expenses necessarily to
would be net of
determined on the basis of contract value, associated costs, nvestment in an open market,
disposal.
number of acts or other suitable basis. For practical purposes, be incurred on or before
when services are provided by an indeterminate Forms of Investments
number of diverse reasons. For some
acts over a specific period of time, revenue
is recognised on a investments for
straight line basis over the specific
period.
Enterprises investment activity is a significant element the
hold of
enterprises, performance of
(ii) Completed service contract
method: Performance consists of assessment of the this
the execution of a single act. Alternatively, Operations, and depend on the results of
services are enterprise maylargely, or solely,
performed in more than a single act, are
performed are so significant in relation
and the services yet to be activity. no physical existence and
have documents
taken as a whole that performance
to the transaction Gi) Some investments certificates or similar
been completed until the execution
cannot be deemed to have Tepresented merely by
of
completed service contract method is those acts. The
relevant to these
 Vipul'sM Auditing-I (BBI) Audit.of Insurance Companies
132 133
in a physical form fnvestment is normally reduced
investment
while others exist
(e.g., shares)
(e-g, buildings).
thev clearly represent a recoverybyofdividends receivable only
a part of the cost.
Awhen right
shares offered are subscribed
(ii) The nature of an investment may be that of a debt, other thann for, the cost of the
a short or long term loan or a trade debt, representing a
right shares is added to the carrying
holding. If rights are not subscribed amount of the original
monetary amount owing to the holder and usually bearine for but are sold in the
market, the sale proceeds are taken
interest. to the profit and loss
(iv) For some investments, an active market exists from which a statement.
market value can be established. For such investments, fair Disposal of Investments:
value can be determined from market valuc. For other G On disposal ot an investment, the difference
investments, an active market does not exist and other means between the
carrying amount and the disposal proceeds, net of expenses,
are used to determine fair value.
is recognised in the profit and loss statement.
Cost of Investments: i) When disposing of a part of the holding of an individual
i) The cost of an investment includes acquisition charges such investment, the carrying amount to be allocated to that part is
as brokerage, fees and duties. to be determined on the basis of the average carrying amount
(ii) If an investment is acquired, or partly acquired, by the issue of the total holding of the investment.
of shares or other securities, the acquisition cost is the fair
Disclosure:
value of the securities issued. The fair value may not
necessarily be equal to the nominal or par value of the The following disclosures in financial statements in relation to
securities issued. investments are appropriate:
(iii) If an investment is acquired in exchange, or (a) The accounting policies for the determination of carrying
part exchange,
for another asset, the acquisition cost of the amount of investments;
investment is
determined by reference to the fair value of the asset given (6) The amounts included in profit and loss statement for:
up. ) Interest, dividends, and rentals on investments showing
(iv) Interest, dividends and rentals
receivables in connection with separately such income from long term and current
an investment are generally regarded investments.
as income, being the
return on the investment. However, in of income tax
some circumstances, (i) Gross income should be stated, the amount
such inflows represent a recovery of included under Advance Taxes
cost and do not form deducted at source being
part of income. For example,
when unpaid interest has Paid;
accrued before the acquisition of current investments and
of an interest-bearing (1i) Profits and losses on disposal
investment and is therefore included amount of such investments;
investment, the subsequent
in the price paid for tne changes in carrying of long term investments
receipt of interest is allocated (iv Profits and losses on disposal
between pre-acquisition and amount of such investments;
pre-acquisition portion is
post-acquisition periods; the and changes in the carrying ownership, realisability
deducted from cost. When c) Significant restrictions on the right of
(e)
dividends on equity are declared income and proceeds of
a similar treatment may
from pre-acquisition profitS investments or the remittance of
apply. If it is difficult investments,
an allocation except to make suc disposal;
quoted and unquoted
nvestments,
on an arbitrary (d) The agET amount of investments;
basis,the cost or gregate quoted
market value of
6Ving the aggregate
 134 Vipuls Auditing -I (BBI Insurance Companies
ydit of
Aud
(e) Other disclosures as specifically required by the relevant 135
Enterpprise revenue is revenue
(iv) from
statute governing the enterprise. ustomers as reporte in the statement sales to external
(4) ACCOUNTING STANDARD (AS) 17-SEGMENT Segment revenue is the aggregate of: of profit and loss.
((v)
REPORTING: The portion of enterprise
revenue that is
Objective: attributable to a segment, directly
The objective of this Standard is to establish principles for (h)The relevant portion of enterprise revenue
allocated on a reasonable basis to a that can be
reporting financial information, about the different types of segment, and
de) Revenue from transactions
products and services that an enterprise produces and with other segments of the
different geographical areas in which it operates. Such enterprise
information helps users of financial statements: (vi) Segment expense is the aggregate of:
(a) To better understand the performance of the (a) The expense resulting from the operating activities
enterprise; of a
(b) To better assess the risks and returns of the segment that is directly attributable to the segment, and
enterprise; and (b) The relevant portion of enterprise expense that can be
(c) To make more informed judgements
about the enterprise allocated on a reasonable basis to the segment,
as a whole.
c) Expenses relating to transactions with other segments of
Information about different types of products and services
of the enterprise.
an enterprise and its operations in different
geographical areas is (vii) Segment result is segment revenue less segment expense.
called Segment Information. Such information
is relevant for (viii) Segnnent assets are those operating assets that are employed
assessing the risks and returns of a diversified or multi-locational
enterprise but may not be determinable from the aggregated by a segment in its operating activities and that either are
data. directly attributable to the segment or carn be allocated to the
Therefore, reporting of segment information is
necessary.
considered segment on a reasonable basis.
Ex) Segment liabilities are those operating liabilities that result
Definitions:
(G)
from the operating activities of a segment and that either are
the
A business segment is a distinguishable
component of an airectly attributable to the segment or can be allocated to
enterprise that is engaged in providing segment on a reasonable basis.
an individual product policies
or service or a group of related
products or services and is Segment accounting policies are the accounting financial
subject to risks and returns that and presenting the
are different from those of adopted for preparing
other business segments. as those accounting
Statements of the enterprise as well
(i) A geographical segment is reporting
a distinguishable component of an Policies that relate specifically to segment
enterprise that is engaged in
providing products or services Segment Reporting Formats:
within a particular economic reporting,
environment and is subject to of formats followed while
risks and returns that are different
from those of components There are two types Reporting and Secondary egment
Segment
operating in other economic imary Segment
Primary reporting format
(ii) A reportable segment environments. primary segment
is a business segment or Eporting. Whether the geographical segments is
segment for which segment a geographica business segments or income and nature of risks
disclosed by this Standard. information is required to be be
ecided on the basis of
source of
the business has.
 Vipul's Auditing -Ii
136 (BAudit ofInsurance Companies 137
(ii) If the risks and returns of an enterprise are affected ortable segments, even if they
reportabl
predominantly by differences in the products and serviceest conition, until at least 75 per centdoofnot meet the 10 per cent
total enterprise revenue
produces, its primary format for reporting segment segment is included in reportable segments.
information should be business segments and secondary (V)A segment identified as a reportable segment in the
information should be reported geographically. immediately preceding period because it satisfied
wolevant 10 per cent condition the
(ii) Similarly, if the risks and returns of the enterprise are affected should continue to be a
predominantly. by the fact that it operates in different reDortable segment for the current period irrespective
countries or other geographical areas, its primary format for whether it meets the 10 per cent condition or no.
reporting segment information should be geographical Ceement Accounting Policies:
Segment
segments, with secondary information reported for groups of
related products and services. Segment information should be prepared in conformity with
(iv) Internal organisation and management structure of an the accounting policies adopted for preparing and presenting
enterprise and its system of internal financial reporting to the the financial statements of the ernterprise as a whole.
board of directors and the chief executive officer should (i) There is a presumption that the accounting policies that the
normally be the basis for identifying the predominant source directors and management of an enterprise have chosen to
of income and nature of risks faced by the enterprise. use in preparing the financial statements of the enterprise as a
whole are those that they believe are the most appropriate for
Reportable segments:
external reporting purposes.
whole and to the
(1) A business segment or geographical
segment should be ii) Though the same policies are applied as a
identified as a reportable segment if: not be as if the segments are separate
segments they should
calculation is done
(a) its revenue from sales to external customers and from stand-alone reporting entities. A detailed
accounting policy at the enterprise-
transactions with other segments is 10 per cent or more in applying a particular
of the total revenue, external and internal, of all be allocated to segments if there is a
wide level may
segments; or Teasonable basis for doing so.
jointly to two or more
(b) its segment result, whether profit or loss, is 10 per cent or u Assets and liabilities that relate segments if, and only if, their
more of: Segments should be allocated to those
also are allocated to
(i) the combined result of all segments in
profit, or related revenues and expenses
(ii) the combined result of all segments Segments. expense items
in loss,
whichever is greater in absolute amount or liability, revenue, and
(c) its segment assets are 10
The way in which asset, depends on factors like the nature
per cent or more of the total are allocated to segments conducted by the segment, and
assets of all segments. or those items, the activities
(II) A business segment or a geographical segment
segment which is not a the relative autonomy of that
reportable segment as per above condition, may DE
designated as a reportable segment at the ACCOUNTS:
discretion of the 6.12
6.12 AUDIT
AUDIT OF OF Accou (Amendment) Act, 2015
management. Insurance Laws date of the
(III) If total external revenue attributable
to reportable segments Section 11 of The on or after the
(Amendment) Act,
constitutes less than 75 per cent of states every insurer, Insurance Laws and
the total enterprise mmencement of the transacted by. him
revenue, additional segments business
should be identified as insurance
resp of
2015, in respect
In
 Insurandce Companies
138 (e8AuditAuditof
Vipul's Auditing 139
efore, the provisions of Companies
in respect of hisshareholders' funds, shall, at the expiration of appointment of auditor are applicable.
Act, 2013r
2013 relating to
each financial year, prepare with reterence to that year,ye:
balance sheet, a profit and loss account, a separate account n RDA recommends a panel of auditors as proposed
auditor of
receipts and payments, a revenue account in accordance with the company.
the regulations as may be specified. Erom this panel the auditor is appointed at the Annual
(2) This section also requires every insurer to keep separat General Meeting of the shareholders
accounts relating to funds of shareholders and policyholders IRDA formulates detailed norms for preparation of the panel.
(3) Section 12 of The Insurance Laws (Amendment) Act, 2015 One of the committees ofIRDA has recommended that each
states that The balance sheet, profit and loss account, revenue
insurer should have at least two joint auditors for each
account and profit and loss appropriation account int of every financial year and no one audit firm should continue as joint
insurer, in respect of all insurance business transacted by him,
auditor formore than five years.
shall, unless they are subject to audit under the Companies
Act, 2013, be audited annually by an auditor, and the auditor The appointment of statutory auditors of General Insurance
shall in the audit of all such accounts have the powers of, Corporation (GIC) and its subsidiaries and the divisions is
exercise the functions vested in, and discharge the duties and made by the Comptroller and Auditor General of India.
be subject to the liabilities and penalties imposed on, auditors
of companies by section 147 of the Companies Act, 2013. INSURANCE
6.14 INTERNAL cONTROLSIN
(4) A person qualified under Chartered COMPANIES
Accountant Act, 1949 to
act as an auditor can be appointed as an auditor.
The internal controls should bè mainly followed in case of
(5) Auditor's duties: Auditor has to check whether: following transactions:
Receipts and Payments A/c is in conformity with the Underwriting: It involves examination and evaluation of
risks and decidingg the
Books of Accounts. aPplications for insurance, the rating of
over underwriting
Receipts and Payments A/c has premium. The internal control system
been prepared in for acceptance of
accordance with provisions of relevant should ensure adherence to guidelines
statutes. risk and its
Receipts and Payments A/c give
nsurance, proper recording of insurance
True and Fair View o evaluation.
receipts and payments of the insurer for
the period under system over premium should
remium: The internal control
(2)
audit.
Thus, in addition to the Balance ensure that:
Sheet, and collected before
A/c and Revenue Account the ReceiptsProfit Payments
and LOs> premium is calculated
and Correct
Account also needs to be audited. acceptance of risk. appropriate manner.
accounted for in an
(b) premium is such risks
6.13 only in
respect of
APPOINTMENT OF AUDITOR:
Premium isthecollected
company. Commission
The Insurance Laws (Amendment) assumed by system over
Act, 2015 is silent as far a 3) Commission: The internal control
the procedure for appointment
n: as per rules and
companies is concerned. of auditors of insurance commission is paid
should ensure
en that
 Vipul's liting-l1(B Insurance Compan
140 ofInsurance
Audit of
141
regulations of the company and as per
agreements with Auditor should check whether
payment to agents who aCCOunts are maintained Separate Revenue
agents. It also has to take care of for each class of
general
brought business to the company. insurance business.
Reinstirrance
(4) Reinsurance: The internal control system over He has to verify interest or dividends
on investments due
reinsuran
should ensure calculations of correct amounts for hut not received. It can be verified
arising oout
ceded, proper valuation of assets and liabilities arising divided warrants or letters from those with reference to
companies.
reinsurance transactions and adherernce to legal provisian sions,
regulations and reinsurance agreements. Auditor should ensure that premium received in advance
not credited in current year's revenue account.
is
(5) Claims: The internal control system over Claims shoulH Audit of Expenses:
0)
ensure that only legally liable claims are paid by the
Commissions and Allowances paid to the agents can be
company. It should also check that cost of claims is properly
recorded and disclosed in financial statements. verified with reference to agreements with as well as
returns submitted by them of the policies sold by them.
Claims paid can be verified with reference to claims
6.15 GENERAL AUDIT PROCEDURE:
register, cash book, counterfoils of cheques issued etc.
(1) Preliminary Work:
Outstanding claims can be verified with reference to
The Auditors have to get acquainted with various claims register and related policies.
applicable laws, nature of business and accounting
policies adopted by the insurance company. Outstanding expenses like commission, allowances
should be shown on the liabilities side of the Balance
Depending on the volume of transactions, auditors have Sheet. Auditor has to verify the same.
to plan their audit programme. incurred in
Auditor has to check whether legal expenses
A/c.
They have to resort to test checking in such a case. They settlement of claims are Debited to Claims
have to decide the number of transactions to be checked verified with reference to
in test checking.
Payment on annuity should be
agreements and counterfoils of cheques.
They even have to rely on the internal control system. Audit of Reinsurance: In case
of reinsurance accepted
(2) Audit of Incomes: received on reinsurance and
ator has to check premium
The main source of income for an insurance company the amount of claims paid.
the Premium on policies. Auditor has to verify premi 0 Miscellaneous Items: securities
income with reference to counterfoils of receipts issue balances and the
should check the cash investments. He
on payment of premiums. Auditor loans and
company's regard are
Premium received from. branches be elating to the legal
requirements in this
and agents caitted 1Ould see to it that
verified with reference to returns
and accounts SuDi complied with. accounts should be
by them and counterfoils of the receipts. agency
branch and that they are
standing should see
He
checked carefully.
recoverable.
 Vipul's Auditing -lI(e Companies
Insurance 143
142
uditof
provid.. adv.
adequacy of depreciation ived in advance should be shown in separate A/c
received
He should check the Auditor. has to check whether these provisions are complied
company.
on assets of the
adequate provision is created ith.
with.
He should see that made by the agent after the balance sheet date
Collection
unexpired risks.
should be recorded in the premium account of the current

MAJOR ITEMS IN FINANCIA year only if it is related to the risk involved in the current
6.16 AUDIT OF
OF year.
STATEMENTS:
In case of coinsurarnce, only the company's share
of premium
(1) Premiums:
should be recorded.
Introduction of Premium:
pay-orde When premium is collected in instalments, auditor has to
Premium is accepted in cash, demand draft, cheque, check whether it has been collected as and when due.
The
and now even online through credit and debit cards.
company has to maintain a separate bank A/c for the
premium Instalments due before balance sheet date should be recorded
nd in the current year's income irrespective of whether
they are
collected on policies. Withdrawal from this bank A/c is
allowed to meet general day-to-day expenses. Differen received or not.
of like
companies follow different policies to transfer collection He has to verify whether proper custody of stationery
premium to the Regional Office or the Head Office. Company
policy documents, stamps, counterfoils etc. is maintained.
does not assume any risk in respect of any business on whidh
premium is payable unless and until premium is actually received2 Claims:
or guaranteed to be received by such person in such manner and Introduction of Claims:
within such time as may be prescribed. Liability for claims arises on (1) Direct Business (2) Reinsurance
accepted and (3) Co-insurance business. The cost
the claims
Revenue recognition of premium:
for
claims paid and the cost incurred
the posettlementamount of
poligy inciude
Premium is
Temum Is fixed
tixed as per the policy amount and and the surveyor's tees, travel
'some Settlement af i.e. legal expenses, surve
claims ie.
of claims
period and generally collected in instalments. Onlu in account is
, amount ofpenses, photograph charges etc. Therefore claims cost.
8neral insurance business, the whole settlement Ihe
ecrea beginning theebited with total of amount of claim and the
at the and adiusted during
maintained in respect or Claiis
Period o policy. This is followed mainlv in cace af marineOllowing registers are generally
insurance business. Premium received for
year is called as succeeding accounus Claims Intimation Register.
"Unearned Premium". This unearned prem
should be disclosed as "Reserve Claims Paid Register.
for Unearned Premium form, survey report,
Schedule 13, Current Liabilities.
Claims Dockets including claim report erc.
Jerification of Premium: photograph showing damage, police
Book.
The auditor has to check
the internal control system followed Claims Disbursement Bank
by the company in collection
and recording of premium Salvage Register.
Only premium relating
to the current period shou
recorded in Premium
A/c. Unearned nium
premium and Pren
 esurcnce Companies
144 Vipul's" Auditing -" (
tf 145
aims payments have been duly
Verification of Provision for Caims: ncerned autho horities and there are sanctioned by the
acknowledgments on
payment of
payznent claims to the policy
ot claims policy holders
Auditor should check that the estimated liability for clai. holders.
provided by the management is adequate. He should che Salvage recovered has been duly recorded in accordance
with
following matters: Pra
procedure adopted by the company.
That the provision has been made on the basis of clai
Partly settled claims should be vouched
properly by the
lodged or communicated by the policy holder to 2uditor.
company In case of final settlement of daim, the claimant has given an
&e
That date of loss incurred in the current year should only unqualified discharge note stating no further liabilities of the
provided in the accounts. company.
Provision has been made for only those claims for whic |la Commission:
company is legally liable. etroduction of Commission:
Provision made is not in excess of amount of policy. Large part of the business is procured by insurance companies
While determining the amount of provision, average clause isough sale of policies by the agents. The remuneration of an
agent is paid by the way of commission
which is calculated as a
applied in case of under-insurance by parties. him. Commission is payable
made percentage of premium collected by
n case of co-insurance agreements, company has through them and is debited
provisions only in respect of its own share of liability. b agents for the business procured
Business Account. Commission on
Commission on Direct
filing the case and appears in the records of H.0.
In case, unduly long time has elapsed after no litigation isEnSUrance accepted generally (Amendment) Act, 2015 states
there has been no further communication and 40 of The Insurance Laws
enquired. ction is not an agent of the
involved, the reasons for such provision should be
at no commission is paid to a person who
any clai 2Surance company.
No contingent liability is carried in respect of
intimated. Verification of Commission:
prepared at the time
estimated salvage. the vouchers
Auditor should check thatauthorized
Claims are provided for net of by concerned authonty.
and of paying commission are
The intimation of loss is received within reasonable time amount from TDS file
and TDS
TDS
reasons for undue delays should be enquired. H should also check
lodgedp certificates.
Due provisions has been made in respect of claims tE calculation of
commission.
from where Heshould also check the verification of
any office of company other than the one documents for
policy was taken.
uditor can check following
Verification of the claims paid: Commission:
check tha
For verifying amount of claims paid, auditor should been ORegister of Agents. premium
register.
ber columns in the
In case of co-insurance agreement, claims paid have to Commission
balance is debited OCommission Bill Copies.
booked only for company's share and
other insurance companies.
146 Vipul'sM Auditing - l (BBI uronce Companies
lnsuran
drof
147
O Agent-wise commission summary: shoul also check the system relating
He to:
o Bank Statements. of inforn
rmation from operating
O
o flow offices to
offices. controlling
o TDS File.
(4) Reinsurance: provisioning for outstanding claims.
o
Introduction of Reinsurance: 0
version of foreign currency transaction
con
and foreign
A reinsurance transaction is an agreement between a Cedino Currency balances.
Company' and a "Reinsurer whereby the former agrees to'cedeHe should also see that proper system is in place in
relation to
and the latter agrees to 'accept' a certain specified share of risk or reinsurance transactions decision making, financial
powers,
liability depending on the terms and conditions of the agreement placements
placements etc.
There are two types of reinsurance contracts:
erification of Reinsurance Inward:
Facultative Reinsurance: In this type of contract, each Reinsurance
Inward means Reinsurance Accepted.
transaction has to be negotiated individually.
AS per sub-regulation (4) of IRDA (General Insurance
Treaty Reinsurance: In this type of contract, agreement is5P
Reinsurance) Regulations, 2000 every insurer desirous of
entered into between two companies where reinsurances are
within the limits of the treaty. These limits can be monetary having reinsurance inward business should have a well-
geographical, section of business etc. In such a case it is defined underwriting policy.
scope
obligatory for the reinsurer to accept all risks within the The decision relating to reinsurance should be taken by
of the treaty. person with good knowledge and experience, keeping in
Verification of Reinsurance: view the financial risk involved in the transactions.
note on its
Reinsurance should be as per the norms and guidelines The insurer is required to file with the IRDA, a
prescribed by The Insurance Laws (Amendment) Act, 2015 underwriting policy and any changes in that.
and IRDA Regulations. Auditor should check whether reinsurance inward
prescribed by
Auditor should verify whether all contracts including underwriting is as per norms and guidelines
2015 and IRDA
facultative and treaty are in accordance with the reinsurance ne Insurance Laws (Amendnent) Act,
programme approved by the Board of Directors and have Regulations.
been submitted to the IRDA for the particular year. reinsurance inward
ne auditor should verify whether programme
approved
The auditor should verify whether commission on acceptances are in accordance with the
reinsurance accepted as well as ceded has been calculated as of the company.
closing returns
per the agreement and terms and conditions. whether proper claims.
he auditor should verify
and
The auditor should evaluate the system and practice adopte have been received in respect of premium
for recognizing the foreign currency transaction and a outstanding claim
The audi should examine whether the under
well in time,
whether it is in accordance with the revised AS-11. tor
igures have been properly obtained provisions have been
sufficient
The auditor should also examine whether proper disclosure is Systematic arrangements ana su
gements and
made regarding accounting policies.
ade for all outstanding clain
 Vipul'sAuditing - Companies
148 (e of Insurance
company
compay eels necessary
necessary itit may. maye 149
Closing balances of reinsurer's accounts should be reconcileatif
clegut
a
ifAuditor's
duty eis create
in this respect is to checkan additional
additional reserve
reserve
and the confirmation of balances should be obtained from 0.
prOvisionscomplied with properly or not. whether these legal
companies.
16) Coinsurance:
Verification of Reinsurance Outward:
Coinsurance isan agreement where the
Reinsurance Outward means Reinsurance Ceded. property of the insured
insured joint
ntly by two or more insurance
The auditor should verify that reinsuranceunaerwritingharing s es.
companies. There
of premium received as well aas claims Ihere will
returns received from operating paid between
the 1surance companies. If the company is the leaderi will send
claims paid, outstanding claims tally with the audited figures he premium
the statement to the other coinsurer which is called
of premium, claims paid, outstanding claims. Outgoing coinsurance. But if the company is not the
as
leader, it will
The auditor should verify whether the pattern ofreinsuranceeceive the inward premium statements from the leader.
outward is in accordance with current year's IRDAdit Audit Procedure:
guidelines.
The auditor has to verify that company has recorded in its
The auditor should verify whether reinsurance is ceded as per t onl
accounts only its own share of premium.
the agreements entered into with various companies.
The premium received should be checked by the auditor with
It should also be seen whether the commission on reinsurance
reference to counterfoils of receipts issued, agent's premium
ceded has been calculated as per terms of the agreement with
accounts, premium registers and premium statements to and
the reinsurers.
from coinsurer.
The auditor should see whether provisioning for outstanding In respect of claims paid also auditor has to verify that
claims recoverable on cessions have been confirmed by company has recorded only its own share.
reinsurers. created only
He should also check that provisionfor claims is
Confirmation certificates can be obtained from reinsurers for for that part for which company is legally liable.
the balances with them. adjustments are made for
He should also check that proper
(5) Reserve For Unexpired Risk:
incoming and outgoing coinsurance.
The insurer closes its books of accounts on a particular date (7) nvestments:
Investments:
But all risks under the policies do not expire on that date. Many
policies generally extend beyond this date into following yearntroduction of Investments: Act,
Laws (Amendment)
during which the risks continue. In other words, at the closSIng 4) Section 27(1) of The Insurance and at all times
date, there is unexpired liability under number of polices whi insurer shall invest
U15 states that everyequivalent to not less than the sum of
may occur during the remaining term of the policy beyona u Keep invested assets of lifeinsurance
year-end. his liabilities to holders claims and
a) the amount of
The Insurance Laws (Amendment) Act, 2015 requires that account of matured
policies in India on on policies of
certain provision/reserve has to be created for Unexpired RisK o to meet the liability SS
amount required payment in India LF
the General Insurance Company. In case of Fire aand the
fe insurance
maturing for
Miscellaneous insurance it should be 50% of the net premiumart
in case of Marine Insurance it should 100% of the net premnium.
 Companies
Audit of Insurance
Vipul's" Auditing -l (e
151
150
form as may be specified by the
fallen due. regulations made
(i) the amount of premiums which have this Act. under
such policies but have not been paid and the da
The certificate in this respect
of grace for payment of which have not expired is to be signed by the
Chairman, two directors and the
and Principal Officer of the
company and by an auditor.
(i) any amount due to the insurer for loans granted n
The expenses of management include all
and within the surrender values of policies of lif direct and
indirect charges including commission of all
insurance maturing for payment in India issued hu expenses are traveling expenses, employee kinds. These
him or by an insurer whose business he has cost, printing
acquired.
and stationery, audit fees, interest, depreciation etc.
that in case of an insurer carrying on
(B) Section 27(2) specifies
general insurance business, 6.17 AUDITOR'S REPORT:
(a) twenty per cent of the assets in Government Securities, Auditor's report has to de prepared in the form given in
(b) a further sum equal to not less than ten Regulation 3 of Scheduie C of IRDA (Preparation of Financial
per cent of the
assets in Government Securities or other approve Statements and Auditor's Report of Insurance Companies)
securities and Regulations, 2000. The form of Report is as follows:
(1) The
(c) the balance in any
other investment in accordance with Auditor has to report whether
the regulations of the Authority and subject to such all information and explanations necessary for the
limitations, conditions and restrictions as may be conduct of audit work is obtained.
specified by the Authority.
Proper Books of Acounts are maintained.
Audit Procedure:
Proper returns from branches, other offices and agents
Auditor should carry on physical verification of investments. have been received and whether they are adequate.
He should also check whether provisions of Section 27 and Balance Sheet, Profit and Loss A/c, Revenue Accounts
other restrictions relating to investments are complied with. and Receipts and Payments Account are in agreement
' He should see that investments are properly classified in tne with the books of accounts.
balance sheet and are valued as per IRDA guidelines. 2 The auditor has to express his opinionwhether
(8) Expenses of Management: View of the
The Balance Sheet gives True and Fair
end of the financial year.
Section 40B No insurer shall, in respect of insuran insurer's state of affairs at the
business transacted by him in India, and Fair View of the
spend as expense of The Profit and Loss A/c gives True the financial
management in any financial year company during
any amount exceeau 'rofit or Loss made by the
the amount as may be specified nade
by the regulations m year.
under this Act. True and Fair View of the
Section 40C neRevenue Account gives
-
Every insurer ce financial year.
business in India shall furnish transacting insura the Surplus or Deficit for the
to Authority,
details of expenses of management the
in such manner and
 Audit of Insuranc
Vipul'sAuditing Companies
152
-I (B8n 153
(Statutory Reserve, Contingency
Account gives True and..
The Receipts and Payments va Reserve) Reserve, Catastrophe
the Receipts and Payments for the financial
View of (c) Premium received for succeeding
accordance with the accounting year is called
Financial Statements are prepared in (overdue premium, as
Insurance Laws (Amendment) Act, outstanding premium) unearned premium,
requirements of The
2015, The IRDA Act, 1999 and the Companies Act, 20133. td) The cost the claims include amount of
cost. (settlement, outstanding, claims paid and
Investments have been valued in accordance with #h. actual)
provisions of IRDA Act and the Regulations. (e) In case of, average clause should
calculating claim amount. (under be applied while
a insurance, coinsurance,
The accounting policies selected by the insurer are reinsurance)
appropriate and they comply with applicable accountine
ting () Reinsurance means reinsurance accepted.
standards and accounting principles. (inward, outward)
(3) The auditor has to certify that: (g) In marine insurance resenve for unexpired risk is
% of net premium. (100, 50, 25)
He has reviewed the management reports and there are
no mistakes and inconsistencies with the financial (h) is an agreement where the property of the insured
is insured jointly by two or more insurance companies. (under
statements.
insurance, coinsurance, reinsurance)
The company has complied with the terms and Every general insurance company required to create a
()
conditions of the registration stipulated by the Authority. reserve. (Catastrophe, general, claim)
4) A certificate singed by the auditors, certifying that: 0) The auditor of an insurance company is to be appointed at the
They have verified the Cash balances and securities of the shareholders. (Annual General Meeting,
relating to the loans taken and the investments. Management Meeting, Interim Meeting)
(k) Surrender value becomes part of .
in Revenue
The extent, if any, to which they have verified the Account. (Premiums, Commission, Benefits paid)
investments and transactions relating to any trusts (0 is the term used in respect of pension of life
undertaken by the insurer as a trustee. insurance companies. (Annuity, Endowment, Life plan)
Policyholders' funds are not applied in contravention of [Ans.: (a) Solvency margin; (b) Catastrophe Reserve; (c) unearned
the provisions of The Insurance Laws (Amendment) Acy premium; (d) settlement; (e) under insurance; (1) inward; (g) 100;
2015. (hCoinsurance; (i) Catastrophe; (i) Annual General Meeting;
(k) Benefits paid: () Annuity)
are True or False:
6.18 EXERCISES: State whether following statements
at the branch of insuranc
OBJECTIVE QUESTIONS: (d) Major policy decisions may be taken
company.
(1) Choose the right answer to be made for each
and complete the sentence: 0Separate application for registration has
(a) refers to excess of assets over liabiliie Class of general insurance business.
(Solvencymargin, Profit, Loss) class or classes of general
IRDA has powers to suspend
(b) Every insurer carrying on hould insurance business.
create a general insurance business s
to meet future potential liabily (An insurance company should have
joint auditors.
 154 Vipul's Auditing -| (Be
Audit of Insurance
Componies
155
can be used for meeting day-to-dy hat should be the contents of audit report
(e) Premium cllected
(10) What of insurance company?
Expenses.
co (11)
what is the procedure to be adopted by an auditor
(In case of surance, only the company's share of premiunm premi in eneral insurance company? for verification of
shoutd be recorded.
(12)Exolain the audit procedure for premium received by an
(g) Claim intimated can be treated as contingent liability. company. (April 19) insurance
) The term surrender is used in case of general insurance. H How would the auditor vouch/verify items
appearing in the financial
0 Valuaticn balance sheet is to be prepared by life insurance statements of an insurance company:
cornpanies
(a) Premium.
Ans: (a) False; (b) True; (e) True; (d) True: (e) False; () True: (b) Claims.
g) False; (h) False; () True]
(3) Match the columns: (c) Commission.

Accounting Standard (d) Reinsurance.

Title
(e) Reserve for unexpired Risk.
(a) AS-3 ( Segment Reporting
(b) AS-9 (i) Accounting for Investments ( Coinsurance.
AS (g) Investments.
(c) 13 Gii) Cash Flow Statements
(d) AS-17 (h) Expenses of management.
(iv) Revenue Recognition
(14) Write short notes on:
[Ans.: (ai); (b-iv); (c-i); (d-J
THEORY OUESTIONS: (a) Audit of Accounts of Insurance Company.
(1) Explain some important provisions of The Insurance Laws (b) Audit report of insurance company.
(Asmendment) Act, 2015.
(2) VWhat are the amendments made by IRDA Act, 1999?
(3) Erplain the structure of Insurance companies in India.
(4) Vihat is the procedure for registration Insurance
companies?
(5) Explain the provisions of:
(a) AS-3
(b) AS-9
(c) AS-13
(d) AS-17
(6) How is an auditor appointed
in an Insurance company?
(7) How should be the internal
control system in an insurancs
Company?
(2) In what areas are
the internal controls
company? (Apríl 19) needed in an Insurane
(9) Vihat procedure
the auditor should follow
cornpany? in an insuran
 Vipul'sAuditing Recent
tDevelopmen in Types of Audits
156 1(BB 157

MODULE IV:
- 7.1 COST AUDIT:
Section 128 of the Companies Act, 2013 empowers
the Central
vernment
NEW AREAS OF AUDITING
vernment to order companies engaged in manufacturing
dction, processing and mining to maintain cost records in the
prod
arescribed manner showing details relating to utilization
of
material, labour and other items of cost.
Chapter7 Section 148 states that for the companies under Section 128, the
Central Govermment, may, by order, direct that an audit of cost
records of the company shall be conducted in such manner as may
be prescribed in the order.
Recent Developments in Cost audit is ordered to achieve the following objects:
(a) To fix up the selling price to its product.
Types of Audits (b) To offer price concession to the company.
(c) To safeguard interests of the customers.
to company
(d) To apply for protection to be granted the
(e) To determine the causes of loss
suffered by the company.
7.1 Cost Audit
7.2 Human Resource Audit Appointment:
the Board of Directors in
7.3 Management Audit The auditor should be appointed by
139 of the Companies
7.4 Operational Audit accordance with the provisions of Section
Act, 2013 with the previous approval
of the Central Government.
75 Forecast Audit obtained by the Board of
7.6 Social Audit However, a written certificate should be
stating that appointment, if
7.7 Tax Audit Directors from the proposed auditor Section 139.
with the provisions of
7.8 Forensic Audit made, shall be in accordance
7.9 Environment Audit Qualifications: an auditor who
7.10 Audit Committee should be normally conducted by Cost and
Ost audit accountant within the meaning of thepossessing
7.11 Exercises be a cost person
uld
works Accountants Act,
1959 or other
qualified to be appoirnted
person not
Prescribed qualifications. A Section cannot be appointed as
141
under
r of a company
a Cost Auditor.
which a
Powers and Duties: powers and duties,
same
ditor has the Section 143.
Cost audit
mpany auditor has under
 ecent Developments in Types of Audits
Vipul'sM Auditing -li (BB) 159
158
benefit system, career management, employee
relations,
Report: orformance measurement and evaluation process, termination,
Government.
Cost auditor should give his report to the Central key erformance indicators, and HR Information Systems (HRIS).
form and within such time as may be
The report should be in such Objectives:
prescribed. It is similar to statutory audit report.
The primary purpOse of HR audit is to know how the various
Cost Auditor has to report whether: units are functioning and how they have been able to meet the
G) He has obtained all information & explanation required for olicies and guidelines which were agreed upon. The other
the conduct of his audit work. objectives are:
(ii) The records give True and Fair view of cost of production, (1) To review every aspect of management of HR to determine
manufacturing and processing. the effectiveness of its working.
Apart from these details cost auditor has to give a paragraph (2) To get explanation and information in respect of failure
containing observation and conclusions. This paragraph will form
and success of HR.
part of cost audit report. It should contain:
(3) To evaluate implementation of policies.
(i) Cases where funds have been used in a negligeht or
inefficient manner.
(4) To evaluate the performance of personnel staff and
employees.
(i) Matters which appear to him to be wrorng or unjustifiable. management
(5) To seek priorities, values and goals of
(iii) Contracts or agreements relating to sale or purchase,
resulting in undue benefits to the client. philosophy.
Approaches to HR Audit:
Davis, there are five
7.2 HUMAN RESOURCE AUDIT: According to William Werther and Keith
They are:
Human Resource Audit is a comprehensive method of approaches for the purpose of HR Audit.
this approach auditors
objective and systematic verification of current practices, (1) Comparative Approach: Under
and the results of the
documentation, policies and procedures followed in the identify one model companycompared with the model
HR system of the organization. Though HR auditing is not organisation under audit are
mandatory like financial auditing, yet, organizations these days company. authority
are opting for regular HR audits in order to examine the existing (2) Outside Authority
Approach: In outside
compare own results. A
set to
HR system in line with the
organizations policies, strategies and approach a benchmark is outside consultant is used as
objectives, and legal requirements. Standard for audit set by
An efective HR audit helps in identifying benchmark.
the need tor statistical approach the
improvement and enhancement of Approach: Under in
the organization in maintaining
the HR function. It also guides Statistical information maintained by the company used as
compliance with ever-changing Statistical employee turnover
etc. is
rules and regulations. HR
auditor can be internal or external to
the organization. Generally, HR respect of absenteeism, pertormance
evaluating approach the
service of external HR auditors.
consulting firms render the the measures for Under compliance to determine
9Compliance Approach: actions
HR Audit generally covers
verification of documentation, job review of pastcompliance with the
legal
descriptions, personnel policies, auditors make a are in
legal activities
selection, training and development, policies, recruitment an whether those
compensation and employe
 Vipul's Auditing I (B8)
160
ent Developments in Types of Audits 161
the policies and
provisions and in accordance with and
Appraisal ot organizational structure:
company.
management which includes delegationIt evaluates
0 levels of
procedures of the
MBO approach specific targets are of authority and
(5) MBO Approach: Under work.
fixed. The performance is measured against
these targe
survey of actual performance Poor Management: Many times failure of the business is
The auditors conduct the
and compare with the goals set. because of poor management. Management audit can identify
and highlight those areas where there are deficiencies and can
Xz also suggest certain corrective action.
7.3 MANAGEMENT AUDIT:
(A) Confidence to lenders: It gives confidence to lenders that the
This is the most modern techniqué of audit. It involves
'

money they have lent is in the safe hands and will be used by
examination & evaluatjon of plans, policies, methods & strategies proper management.
of the organization
Appointment:
Management Audit is mainly concerned with appraising ald
Managenment Audit is not a statutory requirement. Therefore
evaluating the management for:
(i) Achievement of organizational goals & objectives.
there are no provisions for appointmernt of management auditor
in any law. He is appointed by the management. There are no
(i) Management of functions of planning organizing, prescribed qualifications also but management prefers Chartered
directing & controlling. Accountants in practice for this purpose.
(ii) Actions taken for achieving these objectives.
Report:
Therefore, it can be said that Management audit is.evaluating (i) There is no prescribed format for
management audit report. It
management's ability to manage the things. the management and scope ot
varies as per requirements of
Scope and Objectives: audit work.
(1) Appraisal of Internal Controls: Management audit evaluated comprehensive and to the point
(i) The report should be brief,
internal controls. Internal controls include accounting of important points to be
(ii) It should be framed in the order
controls as well as operational controls. Evaluation of controls
covered.
is considered to be important as their presence in the system charts, diagrams, figures in the
ensures proper performance and functioning in each (iv) Auditor can make use of
functional and operational area. report, if required. prepare a draft
report auditor has to
(2) Key Performance Indicators (KPI): Every
unit or division in Detore finalizing the with heads of various units or
the organization has certain indicators which indicate report and has to discuss it
performance of the unit, they are called Key Performance divisions.
Indicators (KPI). Management audit evaluates
(a) Existence of KPls. 7.4 OPERATIONAL AUDIT: operations ie. day-to-day
the audit of of
(b) Influence of KPls on the employees. Operational Audit is review and appraisal
(c) Comparison of actual business. It is the an independent
performance with KPls. vities of the It is
conducted by
sales,
(3) Appraisal of objectives and plans oduction, purchase,
Perations of the business. like production,
of the organization: accounting
determines whether basis expert. It covers operations focus much on regular
aisand objectives of the
organization are beirng fulfilled in
t etc. and does
not
practice. eing
aspects.
 Vipul's Auditing I (BB ReCent
ece DevelOpments in Types of Audits
163
162
s FORECAST AUDIT:
operational audit to check whether the 7.5
The main objective of
accordance with objectives, policiese
MEANING OF FORECASTING:
operations are in and
Madern business management has become a very complex
strategies of the organization.
activity
actit and so there 1s a need for adequate forecasting
Definition: Forecasting, in simple words, means predicting about the future.
Forecasting
as "A review of how an
Operational Audit can be defined
1s operating procedures are Without forecasting planning cannot be done at all.
organization's management and
to their effectiveness and efficiency in Forecasting is a method or a technique for estimating many
functioning with respect
meeting stated objectives." future aspects of a business. Long term success of any
organization is closely related to how well the management of the
Objectives:
organization is able to forecast and to develop appropriate
To examine the effectiveness and efficiency of operations of strategies to deal with likely future scenarios. According to Henry
the business in meeting organizational goals.
Fayol it is important to assess the future and also to make
i) To understand the responsibilities and risks faced by an provision for it.
organization.
There are some areas in which a business has to forecast for
(iii) To identify opportunities for improvement in operations.
survival and growth. These areas are:
iv) To evaluate the organization structure whether it is in
Economic conditions, trends and expected changes in
conformity with the management objectives and drawn on them.
the basis of matching authority and responsibility.
(ii) Developments in technology.
Advantages: (ii) Strategies of competitors.
(i) Influence Positive Change: It helps to understand how iv) Expected changes in social conditions.
future processes, policies, procedures, are producing (v) Changes in political environment.
maximum effectiveness and efficiency.
(i) Review Internal Controls: It is useful
to review the internal FORECAST AUDIT:
control system prevailing in the system followed in an
organization. It detects Forecast audit is an audit of forecasting
weaknesses in the system. of the forecasting
organisation. It allows in identifying weak areas
ii) Understand Risks: It helps
to understand the risks involved system.
in business. The risks may be is difficult to judge the quality
of
business interruption, employee In conduct of forecast audit it
omissions or errors, IT system focus should be on the
process
failure, product failure, satery the forecasts. Therefore the forecasting
and health issues, loss of By examining
key employees, fraud, loss followed by forecasting system.
suppliers, litigation etc. accuracy can be increased and
them,
(iv) Identify Improvement PrOcesses and improving
Opportunities: It not only reviews costs can be reduced.
system and understands
the risks but also identifies t the managers
should agree on the
for improvement. the area For effective forecast audit They should then
support the
process well in advance.
ting
process. an
have outsiders conduct
objectivity, it is better to be forecasting
O insure procedure. They could
As
udit of the forecasting
 Vipul's Auditing Developments
De
Recent
in Types of Audits
164 - | (B8/)
cetermal social responsibility: 165
experts from a different department in the same organization, It includes
they could be specialists from outside of the organization.
or
or 2 Overall community development the following:
development of roads, through
To facilitate audits, forecasters should keep good records
either parks, playgrounds, creation and
in a notebook or ina computer log. (b) Tree plantation for improvement hospitals, etc.
of environment.
Creating new job opportunities
7.6 SOCIAL AUDIT: (d)Setting up plants in backward areas.
Introduction: Concept of Social Accounting:
Social audit is a new concept and has gained significance
on cial accounting is a system of accounting, which indicates
account of the growing awareness of the responsibility Ow and in what way
business organization has discharged
of the its
business organizations towards the society. In modern sOcial responsibilities towards the society. For example,
times, in
addition to traditional audit, society expects various information can be provided by the entity
value added on the following
services from the auditors. Social audit is one matters:
such
wherein the auditor makes assessment of social contributionservice
made (a) remuneration of employees and fringe benefits.
by the business enterprise.
(b) retirement arrangements for employees.
Objectives of Social Audit/Why Soçial audit?
(c) health and safety measures.
In order to understand the need of social
audit, we need to (d) staff training programmes.
understand the concept of social responsibility
and concept of
social accounting. (e) quality control over products and pricing policies.
(0 contribution towards improvement of environment like
Concept of Social Responsibility: controlling water pollution, noise pollution, air pollution
Corporate entities have an important role to etc.
play in social well-
being and have high responsibility towards 8 energy conservation.
the society. Besides
earning profits, corporates are expected to fulfil Social audit is assessment of social performance of an
their social report
obligations. Social responsibilities can
be identified in two OTganization. Auditor is required to prepare social audit
directions as follows: indicating the social responsibilities discharged by the
term benefits to the
(1) Internal social responsibility: It includes
the following: ganization. Social audit can provide long awareness amongst
social
(a) promoting staff welfare unity as a whole by promoting are not ony
which includes providing them aware that they
indirect monetary benefits like Organizations and making
facilities, housing facilities,
provident fund, medical Profit making entities but alsoa strong
social force.
recreation facilities etc.
(b) keeping environment Objectives of Social Audit: organizatiorn.
of the work performance by an
surroundings healthy and non-hazardous.place and its make assessment of social
(c) providing good
quality products at fair prices.
to
9) to evaluate different social
projects from
viewpoint
ensuring
of their
most
benefits and thus
(d) paying statutory
dues on time. social co and social resources.
(e) providing
reasonable returns to investors Productive utilization of scarce
preparation ofsocial
accounts.
investments. on their o toa the management in
ssist
 Vipul's Auditing -" (BB Developments in Types of Audits
166 Recent
167
effectiveness of the 44AB arovides for compulsory tax audit for certain persons
(d) to inform the society abbut the
organization in discharging their social responsibilities. carryingon business or profession.
(e) to examine the correctness of 'value
added statements' whera PROVISIONS OF SECTION 44AB:
to the society is described.
the contributions of an enterprise Every person:
in
( to verify correctness of assets and liabilities shown social (a) Carrying on business shall, if his total sales, turnover or gross
balance sheet. receipts in business exceeds Rs:1 Crore in any previous year;
(g) to evaluate socio-economic contributions made by the society. or
Social Audit in India: Carrying on profession shall, if his gross receipts in
Audit of social accounts is not yet in practice in India. This is profession exceeds Rs. 50 Lakhs in any previous year; or
mainly due to: Carrying on business shall, if his profits and gains from
(a) absence of statutory provisions making social audit business are deemed to be profits and gains under Section
compulsory. 44AD or 44AE or 44AF or Section 44BB or Section 44BBB and
(b) no standard have been developed for preparation of who has claimed his income to be lower than the deemed
statement of social performance and socio-economic profits and gains of this section,
operating statement. (d) Carrying on business shall, if his profits and gains from
Section
In India, Tata Iron and Steel Co. published the report of their business are deemed to be profits and gains under
claimed such income to be lower than
social audit committee in 1980 indicating the social performance 44AD and he has
of his business and his income exceeds
of the company in the light of specific provisions contained in the profits and gains
chargeable to income tax in
Articles of Association regarding its social responsibility. maximum amount which is not
However socio-economic activity-wise operating statement any previous year.
year audited by an
showing costs and benefits of various social actions was not Get his accounts of such previous
date and furnish by that date the
prepared. accountant before the specified signed and
form duly
In short, in India, concept of social audit is not yet report of such audit in the prescribed particulars as
forth such
compulsorily implemented although steps towards social audit by such
verified accountant and setting
has been taken by the Government by introducing Section 143 of may be prescribed. who is required
in case a person
the Companies Act, 2013 which requires company auditor to give he Section also provides that audited, it shall be
his accounts
report on several additional matters of social importance. or under any other law to getprovisions of this section if such
with the profession audited
ncient compliance business or
7.7 TAX AUDIT: ngets the accounts of such furnishes by that date
date and
INTRODUCTION: under such law before pecified such other law and a
required under prescribed under this
port of the audit as
Tax audit refers to the audit carried on under the provisions or in the form
report by an accountant
Section 44AB of the Income Tax act, 1961. It was originally
introduced by the Finance Act, 1984, in the Income Tax act, 1961
er
section.
w.e.f. 1st April, 1985 through Section 44AB. Even if the Business: Income Tax Act, 1961, a
income 2(13) of the manufacture or any
below taxable limit, tax audit is compulsory if turnover tne brerding to Section commerce or
business or profession exceeds the prescribed limit. So Section business includ udes 'any trade,
 Vipul'sM Auditing
16S -
(80ACent Developments in Types ofAudits
AUDITOR: 169
adventure or concern in the nature of trade, commerce TAX
manufacture'. tion 44ABAB provides
for conduct of
Tax audit by an
Profession: Accontant'. Accountant means a Chartered
Accountant within
According to Section 2(36) of the Income Tax Act, 1961
a the meaning of artered Accountants Act,
1949. Following
profession includes 'vocation'. Profession can also be defined as persons can be appointed. as Tax auditor of a
company:
an occupation which involves rendering specialized
services on the basis of professional education, competence and
onal s A Chartered Accountantin practice.
dh) A firm of Chartered Accountants in
aining. Section 44A provides tor tollowinS protessions: Legal practice.
Medical, Engineering, Architecture, Company Secretary, c Statutory Auditor of the company.
Accountancy, Technical Consultancy, Interior Decoration, Film Thus any person, who is eligible for appointment as an auditor
Acting, Photography, Singing and Story writing. fa company u/s 13 of the Companies Act, 2013, is eligible for
Total Sales, Turnover or Gross Receipts: appointment as a tax auditor.
Section 4HAB or any other provisions of the Income Tax Even a Chartered Accountant, who is a tax consultant of the
Act.
1961 do not define the terms, Sales, assessee, can conduct the tax audit u/s 44AB.
Turnover and Gross Receipts.
From the guidance note of ICAI it can be interpreted that: However an Internal Auditor cannot be appointed as tax
(a) Sale denotes sale of movable commodity. auditor, though eligible.
(b) Turnover is aggregate amount for The appointed tax auditor should communicate to the previous
which sales are effected (last year's) tax auditor, in writing before accepting the
or services are rendered.
(c) Gross receipts include appointment. It is one of the requirements of Section 22 of
all receipts whether in cash or kind Chartered Accountants Act, 1949. This Section provides for
from carrying of business.
Professional Misconduct of Chartered Accountants.
(d) Transaction in shares is
turnover or will not depend The tax auditor should also obtain from the assessee a letter of
whether shares are held as stock in trade or
capital assets. Ppointment for conducting the audit.
Such transactions can be in the
form of speculative Time Limit for Tax Audit:
transactions, derivatives and delivery
based transactions. obtaining taax
OBJECTS OF TAX AUDIT: The last date of filing of income tax returns and
Income Tax Act, 1961, is
Tax audit is made compulsory audit report under section 44AB of the Board of
for the following objects: extended by Central
(a) To assist the U September every year. It may be
Assessing Officer in computing the total Direct Taxes, if necessary.
income of the assessee. TAXAUDIT REPORT:
(b) To enable proper
assessment of tax by the income Audit Report should be
department. requires that Tax
ection 44AB prescribed Rule 6G provides
form. Sub-rule of
1
ubmitted in the
(c)To ensure that income tax assessments are made simpic that tax audit report shall be:
and faster since the basic or profession and
data required for assessments re carrying on business
provided with the return of income In case of a person other law to get the
by filling Forms required by or under any
3CB and 3CD of
tax audit report. who is Form No. 3CA;
(d) To increase Ccounts audited, in
self-compliance by the tax payers an d to
educate them.
 170 Vipul's" Auditing -I1(Be Developments in Types
cent of Audits
C
First part ates whether in his opinion
In case of a person carrying on business or profession 171
huu the accounts
not being a person referred to in clause (a), in Form give True & Fair View:
himB audited by
3CB; No,
in In case of Balance Sheet of State
Further, Sub-rule 1 of Rule 6G provides that particulars
which the accounting year and Afairs as on
of Affairsas
on last date of
are required to be submitted under Section 44AB shall
No. 3CD.
be in For In case of Profit && Loss Account
assessee of
for the relevant accounting profit or loss of the
Tax Audit e-filing: year.
Second Part gives a statement that particulars
As per Notification No. 34 dated 1st May 2013, tehed under Section 44AB required to be
e-filing of Tay are annexed in Form
Audit report is now mandatory from the assessment No. 3CD. It
year 2013-14 also states that particulars given in Form No. 3CD
onwards. aretrue and
correct.
Forms for Tax Audit Report:
Form No. 3CD:
There are two forms in which Tax
Audit Report is to be The statement of particulars given in Form No. 3CD contains
submitted, Form 3CA and Form 3CB.
27 clauses. The tax auditor has to state whether particulars
Form No. 3CA: mentioned in it are true and correct. This form is a statement of
It is to be submitted by the particulars required to be furnished u/s 44AB. This Form is to be
auditor in case of business or
profession, who is required to
get the accounts audited by orannexed to Form No. 3CA or Form No. 3CB, as the case may be.
under any other law.
First part of this Form
states that statutory audit was 1.8 FORENSIC AUDIT:
conducted under the relevant
act and copy of that audit report is A forensic audit is the process of reviewing a person's or
annexed along with a copy of:
Company's financial statements to determine if they are accurate
Audited profit & loss account and lawful. It is mainly used when there is legal case related to
or income & expenditure
account for the yearended 31st financial matters of the organization. The matters may relate to
March.....
Audited balance sheet as at 31st Sluspected fraud, determination of tax liability, investigation of
Documents which are required
March... allegations of bribery etc.
to be annexed to profit & à quality control
loss account or income &
expenditure account and the ome companies perform the audit as company's already
the
balance sheet. easure. It is performed to strengthen faith of
help to improve
Second Part gives a statement 800a business practices. Such audits problems may arise
furnished under Section 44AB that particulars required to be customers. But the
are annexed in Form No. 3CD. It clients and
nolders, company itself starts committing frauds. Inoutside such
also states that particulars auditing
correct.
given in Form No. 3CD are true and En
case, forensi requested by a judge or an
audit may be suffered due to such fraudulent
COm knowledge
Form No. 3CB: ompany to determine losses
professionals who have
It is to be submitted Tep It is performed by accounting matters.
by the auditor in case well as
profession, who is not of business or perience in criminology as
required to get the accounts audited
under any other law. by o
 vipul's Auditing -l (BRN
nDevelopments in Types of Audits
172 173
which include issues such as environmental
Scope of Forensic Audit: audit legislation and
forensic audit is to find whether or not a fraud ha.
Objective of forensicanation ure
oressure from customers.
Definition:
important to
to supPOrt
support he
taken place. Proper documentation is nition:
theDefinonational
ne
International.Chamber of Commerce defines
focus on:
findings. In case of frauds audit should The
The Environment
loss. Audit as "A management tool comprising systematic,
Proving the
AUUnted, periodic and objective evaluation of how well
documente
Proving the responsibility for the loss. organisatio: management and equipment
environme are
Proving the method/motive. with the aim of helping to safeguard the environment
forming
Establishing guilty knowledge. facilitating management control of practices and assessing
Identifying other beneficiaries. by
mpliance with company policies, which would include
Application of Forensic Audit: regulatory requirements and standards applicable."
Forensic Audit may be applied in the following areas besides Benefits of Environment Audit:
fraud detection: Benefits of Environment vary depending on the objectives and
Conducting due-diligence (especially for segment wise SCOpe of the audit. These benefits include:
profitability analysis).
Business valuation.
a) Organisations understand how to meet their legal1
requirements;
Management auditing (b) Meeting specific statutory reporting requirements;
ASsessing loss before settling insurance claims. environmentally
0 Organisations can demonstrate they are
Use of Forensic Audit by Courts: responsible;
Forensic Audits are used as evidence by a prosecutor or lawyer )0rganisations can demonstrate their environmental policyis
representing an interested party. But finance is a very complex implemented;
area and forensic auditor tries to be very precise and to the point e) Understanding environmental interactions of
products,
while giving his report. Still the prosecutor or lawyer may call
upon expert witness to explain the significance of the audit in services & activities;
are managed
very simple manner. Knowing their environmental risks
appropriately;
implement an ISO 14001
7.9 ENVIRONMENT AUDIT! Onderstanding how to develop and
EMS; and
Environmental auditingÄs an environmental and saving
money.
management tool h Improving environmental performance
for measuring the effects of certain nproving environmental|
activities on the environment
against set criteria or standards. Organisations Environmental
Environmental Auditors: attributes, such
of kinds now
recognise the importance of environmental all
Environmet should have personal They should should
accept asethic ronmental Auditors tact.
performane
that their environmental performance
neir atters
matters and
will be scrutinised uby a en-mindedness,
ics, open-mindedness,
perceptiveness and
techniques. They
wide range of interested parties. willnderst
understand procedures and
An environmental principles,
erstand audit principe against and how
study an organisation's environmental eft nental auditor wi should they are auditing Leaders should
ronmental ould know the subject mamatter
documented manner effects in a systematic ana ions.Audit
Audit ieTeam
have
ented manner and will produce
report. There are many reasons an environmental aua
for undertaking
it
be
this
e
applies different organisations.
Sapplies
able
to
able to plan and
orgat
ana resource
effectively,
Preferably
have 80od
good
Environmental
an environmenta kills. Preie
leadership skills.
mmunication and nd
 Developments.in Types of Audits
Vipul'sM Auditing
174 -I (Ben Recommend appointment, remuneration
175

Auditors should complete training

and have attaineda Ppoint ent of the auditors of the company.
and terms of
good Auditor should haye
appropriate level of education. A oval of payment to statutory auditors for any other
adequate skills and experience. services rendered.
with management, annual financial statements
wing, with
Reviewing,
7.10 AUDIT COMMITTEE: auditor's betore its submissiot
report before submission
should and to board for
As per Clause 49 of Listing Agreement there aPproval.
It is a committee of Board of directors
separate Audit Committee. Reviewing, with management, quarterly financial statements
arising out audit of financial
which has to look after various issues to for approval.
statements of the company. before its submission board
a Reviewing, with management, the statement of funds utilized
Composition of Audit Committee:
for the purposes
other than those stated in the offer
Clause 49 prescribes following norms for composition of Audit
document/prospectus/notice.
Committee:
(1) The committee should have at least three directors as Review and monitor, the auditor's independernce,
process.
members. Two-thirds of the members should be independent performance and ettectiveness of audit
investments.
directors. Scrutiny of inter-corporate loans and systems.
(2) All members should be financially literate and at least one Evaluation of internal controls and risk management
member should have expertise in accounting and financial 10) Reviewing, with management, performance of statutory and
management. internal control system.
internal auditors and adequacy of
(3) The Chairman of the committee shall be an independent effectiveness of internal audit
director.
1) Reviewing the adequacy and
function.
(4) The Chairman should be present at the Annual General00 significant findings and
Discussing with internal auditors any
Meeting to answer the queries of the shareholders.
(5) The Company Secretary should act as Secretary of the theirtheirfollow-up. about nature and
scope ot
9DSCussion with statutory auditors
Committee. of concerm.
audit and post-audit discussion to know areas
(6) The finance director, head of internal audit and a mentioned in the terms
Carrying any other function as is
representative of statutory auditor may be invited to attend out
the meetings of the committee. of reference of the committee.
(7) There should be at least 4 meetings of the committee in a year
and time gap between two meetings should not be more than 210 EXERCISES:EXERCISES:
120 days. 0EJECTIVE QUESTIONS: sentence
the
ROLE/FUNCTIONS OF AUDIT COMMITTEE: Choose the right answer and complete welfare. (Extemal social
staff Intemal social
Role of the Audit Committee is as follows: (a) includes promoting responsibility,
social
(1) Oversight of the company's financial
reporting process and responsibility, Corporate part of
the disclosurè of its financial information to ensure responsibility) employees is a Social
tha arrangements for responsibility,
(6)
financial statements are correct, sufficient and credible. Retirement social
social
orporate
(Corporateresponsibility)
Accounting, Internal social
ACCOuntin
 Developments in Types of Audits
176 Vipul'sAuditing Management Audit is mainly
-l (ee g Ma
valuatingperformance of concened with
177

(c) Social audit is assessment of . performance an the management. appraising

and
of Operational aud may suggest
organization. (Financial, Soçial, Legal) opportunites
(d) is an inspection, survey and analysis of ene. in operations. for improvement
erg Statutory auditor cannot
flows for energy conservation. (Energy audit, Environm be apprinted
nert 0 as tax auditor.
audit, Social audit) Audit committeesshould have at
(e) verification
Audit is concerned with verification
Au Audit committee may have only
least 3 directors.
performance of environment management systems to con d m
2 meetings
Itis easy to judge the quality of the forecasts.in a year.
pollution and their efficiency to conserve environment. (Soa
Systems, Energy, Environment) Ans.: (a) True; (b) True; (c) True; (d) Tue; (e) False;
Ans True; (h) True; (i) False; ) True; (k) False: () True;
(9 Companies Act empowers to order conduct c () False]
QUESTIONS:
cost audit for certain companies. (State Govt., Central Go HEORY
President) hEplain the concept of Social Responsibility.
(g) In approach of HR audit, results of moreExplain the concept of Social Accounting.
company are compared with the company
under audtWhat are the objects of Social Audit?
(Comparative, MBO, Compliance)
4What is social audit? What are its objectives?
(h) Operational audit is the audit of
activities
business. (long term, day-to-day, important) tWhat is Cost audit? Discuss the contents of cost audit report.
) Provisions of Section Define HR Audit. Explain approaches of HR audit
applicable to tax audit. (44, 44AB, 44ABD)of Income tax Act are
7 What is Management audit? Discuss the scope of management
)Tax audit is applicable to professionals whose gross receipts audit. (April 19)
any previous year exceed Rs.
(25 Lakhs,
inWhat is Tax Audit? Explain in detail. (April 19)
50 Lakhs, 1 Crore)
(k)
Explain different forms that are needed in Tax audit report
auditor cannot be appointed as tax auditor even10)Discuss the provisions of tax audit w.r.t. its applicability.
though eligible. (Statutory, Cost, Internal)
() What is audit committee? Discuss its compostion.
act as Secretary of Audit committee. (Managing2)What are the
Director, Company Secretary, CEO) functions ofaudit committee?
[Ans.: (a) Internal social responsibility: ) Write short notes on:
(b) Social Accounting (a) Cost audit
(c) Social; (d) Energy audit (e) Environment;
(1) Central GOv.
(9) Compliance; (h) day-to-day; (i)
44AB; () 50 Lakhs; (k) Inteml
6) Social Audit.
() Company Secretary) (e) HR audit
2) State whether following ) Operational audit
statements are True or False:
(a) Cost audit is useful for fixing (e) Forecast
up selling price of the product. audit
(b) Through environment Environment Audit. (April 19)
audit organisations can demonstrate tna
they are environmentally responsible.
(9 Forensic Audit.
(c)A good environment Auditor should
experience. have adequate skills a Forecast Audit
(d) Cost auditor has the same
powers and duties that a compa
auditor has.
(e) HR audit is compulsory
for companies.
( () HR Audit covers compliance with legal
provisions.
178 Vipu'sMAuditing - l(B8n Audit
underCIS
INTRODUCTION: 179

Rapid hnological development throughout

enormous hanges in techniques the world world has
Chapter 8 ght
brought
ses. Computerize accounting of running
has become very common.
the
are cialized
specia. programs or software's that
maintain
co lete
accounting records This has facilitated
the
Audit under Computerized Auditinginin Computerised Environment. Though theneedbasic
A adamental.
for
ontals of auditing are same there are substantial
stantial changes
Information System (CIS) nthe method of evidence collection and evaluation.

Environment 82 SPECIAL ASPECTSs OF CIS AUDIT ENVIRONMENT:

Computerisation has changed the audit methods and
pproach. Therefore it is very important to consider following
things in Computerised lnformation System (CIS) audit

8.1 Introduction environment:

information can
8.2 Special aspects of CIS Audit Environment 1) High speed: In computerised environment
same time the necessary reports
8.3 Internal controls in Computerised System be collected very fast. At the
quickly. This saves the time of the
8.3.1 Problems in implementation of internal can also be made very
utilize for collection of more evidences
controls auditor which he can
8.4 Review of internal controls in Computerised System for his opinion.
2) Reduced clerical errors: Due
to computerisation human
8.5 Approach to audit in CIS environment substantially.
8.5.1 The Black-box approach clerical errors have reduced the
assistants: In manual environment
8.5.2 The White-box approach 5 Less number ofdepute different people for carrying on
8.6 Use of computer for internal and management audit auditor has to
computer program can
pertorm
purposes Verification process. But number assistants
This reduces the
8.7 Audit tools, test packs, computerized audit tany tasks at a time.
programmes required for verification. needs to have
system: Auditor computerised
8.7.1 Considerations for the use of CAATs complexity of accounting of
the
8.7.2 Control Procedure while applying CAAT technical expertise to under timeunderstand understand the system
some to
8.7.3 Test Packs accounting He may take individual
Computerised Audit Programs thoroughly. trace
8.7.4 facility to completion. In
5) Audit Trail: It refers to the source to
8.8 Exercises
udit system from journal, led
ansactions throug a documents may be documents
such
manual system, the source computerised system maintained in
is
trial balance etc. But in available as data
inphysical form may not be
in
 180 vipul' Auditing-|(een underCis
d ndE 181
electronic form. Therefore, audit trail is often missing in
ments. These controls
amendments.
are required
computerised systerm. nauthorized changes in the system to avoid
and programs.
(6) Lack of manual reasonableness: Proper analysis of
manual0 Retrieval and Back-up Controls: There s
should be methods
system is necessary to develop a computerised system. In this that will enable retrieval of data if if the system
process, many manual operations may be deleted or managed Back-up facility shoul also be there breaks down.
so that processine
to create a focused computer system. This may reduce the svsherm
that
continue even if part of the system goes down. processing can
manual reasonableness. t Controls: These controls ensure
5for processing is that the data received
(7) Poor system: If the computerised system is not developed
properly authorized, has been converted
with due care the results desired from the system may not be the form that computer accepts and the errors are detected.into
achieved.
(8) Internal controls: In computerised system, internal 6 Processing Controls: These controls ensure that all
controls transactions that are processed are authorized, unauthorized
may be in the form of passwords, authorization procedure,
file protection devics and application controls.
transactions are not added and authorized transactions are
(9) Security Issues: Computer frauds not omitted.
are very common now n Output Controls: They are concerned with verification and
days. Hacking by employces is also a common problem. So
the business needs to have security arrangements in distribution of the computer output. Its effectiveness depends
place to on the effectiveness of input and processing controls.
avoid significant damage. Even, a back-up
system is 13.1 Problems in CIS environment in implementation of
necessary tg save the loss of data.
Internal Controls: T
8.3 JNTERNAL CONTROLS Computers affect the impleníentation of internal controls in
IN cOMPUTERISEDnany
SYSTEM: ways. These effects are:
The chances of errors and frauds occurring in computerised 1 Separation of Duties: In manual system different persons are
system are more than in manual system. It is assigned different duties like initiating, recording of
also difficult to find
them out. Therefore, there have to
be well designed controls transactions, safeguarding of assets etc. But such separation
which are carefully monitored
in the system. These controls can
may not always happen in computerised system
be as follows: Delegation of Authority and responsibility: There hasas towell be
in manual
(1) Physical
Controls: All hardware and files should
be kept elegation of authority and responsibility system
under lock key and should have
&&
access to only authorizea as Computerised system. However, in computerised difficult to
staff. To protect the
should be kept away from
damage to hardware and files they
possible hazards like fire, floou
ne of authority and
establish as some resourcesae
establish
responsibility
are shared by
vees:
might be
multiple users.
growing
which may arise near canteen
or washroom.
3) ompetent and trustworthy employees: There is growing
(2) Access Controls: dema implement, operate and
Staff is provided with
user id and passwora for people who can develop, However such people
that restricts the unauthorised computerised system. functions as well as
Access Controls.
access. These are called as intain a competent
be to do all these
(3) System Development uld
trustw problem is employee
turnover in
procedures
Controls: There
for system and program must be standard thie
this sector.
ny.
Another major
maintains
and program testing, file documentation, syste m 4 Ade Manual system
conversion, acceptance an dequate documents and records: are required to 'rovide
authorization procedures adequate documents and reco.computerised is
and systems program computerised sys
sy* ?m
and
progra" audit
audit trails of. activities. If a
 underCS
udilt
183
Vipul's Auditing - (8B Such deficiencies have direct
182 impact on operation
system. There may even be Operation and
developed properly audit trails would be more effective than of
ut
the
computer systems are rauds made by the staff members.
risks due to errors
and
a manual system. But unfortunately all
not well developed.
(5) Adegquate Management supervision: In manual system, APPROACH TO AUDIT IN CIS ENVIRONMENT:
from management are in the form of observation and
controls he approach to audit in Computerised environment varies on
enquiries. But in computerised system they are in-built
ba oof knowledge and expertise of auditor. The approach can
hebasis
Therefore the managers must periodically assess the audithe
trail of employee activities and examine it for unauthorised
Black-box approach or
The
actions.
(6) Genuineness of data for comparison: In manual system, staff
(2) The White-box approach
prepares basic data for comparison purposes. But in LS.I The Black-box Approach:
computerised system software is used to prepare this data. If This approach is also known as auditing around the computer.
unauthorized modifications are made in the system the data hh this approach, the auditor concentrates on input & output and
entered may not be genuine. loes not consider how the data or transactions are processed. If
the input matches with the output, the auditor assumes that the
8.4 REVIEW OF INTERNAL cONTROLS IN processing of transactions is proper. The main advantage of this
COMPUTERISED SYSTEM: pproach is that the tracing of documents to output does not
It is very important for an auditor to review the internal require in-depth study of the computerised program. It is also less
controls to check whether they are in place and in operation. For epensive. However, the main disadvantage is that as the auditor
evaluating the reliability of the accounting and internal controls does not check the system completely he may not be able to claim
system, the auditor should consider whether these systems anything about underlying process.
(1) Ensure that authorized, correct and complete data is made L5.2
The White-box approach:
available for processing. computer.
(2) Provide for timely detection and correction of errors nis approach is also known as auditing through the verifies
but also
frauds.
anaThe auditor not only checks input & output de he checks checks
process. In other words, he
3) Ensure that in case of interruption in the working of CIS essing controls over this approach the auditor
this
environment, due to power, mechanical or processing Processing and the output. Inof computers to plan, direct,
to have sufficient knowledge
failures, the system restarts without losing the entered data to
Supervis and orTe
performed. The uditor
auditor also has to
and allows further entry of data after restart.
(4) Ensures that the output is accurate and
review the work s
sure that there are no unauthorized access to the
ana
computer and

(5) Prevent unauthorized changes in the

complete.
system and programs.
ee Com
computerized database.
(6) Provide for safe custody
of source code of application
8.6 INTERNAL AND
software and data files. USE OF COMPUTER FOR
(7) Provides data security against fire and MANAGEMENT AUDIT PUR.fectiveness
other calamities effectiveness of
the etfectiveness
or a
wrong processing and frauds. Internal audits designed
designéd to evaluate the about how
audits are information
The auditor should also assess the risk
arie ne involved in CISsine
CI iness's internal controls. It gathers
ints at whichde rro
points
rrors or
environment. The risk may arise due to deficiencies business
The
respect of development and maintenance, in CIS
operations, physical CI
in
etficieneunit
nefficiencies operates, identifies
are possible, and
the
checks system controls
gned to
 184 Vipul's"Auditing -l( (BBI underCIS
under C
wdit
internal contr
luation of internal controls technology 185
prevent or detect such occurrences. Then, the internal auditor teste
the application and performance of those controls to assess how hardware and software ad softwa with is used which involves
interactive
well they work. nunications in face-to-face devices for
meetings. The group
In order to be effective, auditors must use the computer as an des questions or statements to participants,
internal auditor
choices typically
auditing tool. He should audit automated systems and data, response cho projected on a
large
with a set of
understand the business purposes for the systems, and re produces graph of the results of keypad screen. The
a
ftw for the group to see. Responses responses, and
understand the environment in which the systems operate. Use of pryects ranknesssponses are typically
technology increases his individual productivity as well as olls to encourage frankness
anonymous
feat and openness. Immediate
effectiveness of the audit function. Following are some reasons back is a key
edback
eedb key feature of CSA systems
why auditor should use technology in audit function:
(i) Improves company decision-making using improved data. AUDIT TOOLSICOMPUTER ASSISTED
(ii) Increase the efficiency of an audit. 7 TECHNIQUES (CAATS):
AUDITING
(iii) Reduces routine tasks to provide more time for creative
AG there are no audit trails in computerised
and business analysis. system the auditor
needs an assurance that the programs are functioning
(iv) Provides improved transparency governance of. the correctly.
This checking
organization. is done with the help of Special Audit tools or
(v) Reduces fraud and abuse. brhniaues. These tools are known as Computer Assisted
(vi) Identifies savings in supplier, customer, human resource, Auditing Techniques (CAATS). There are mainly two types
computer, and enterprise management. CAATs.
8.6.1 Use of information technology in audit management: (1) Test Packs and
As audit tools are growing more powerful and sophisticated, (2) Computer Audit Programs
they are also becoming easier to learn and use. As tools become Such CAATs may be used for the following reasons:
more powerful, auditors may use features or services provided in (a) To check whether program controls are functioning
the software that command large amounts of system resources properly.
(memory, processing cycles, communication bandwidth, and (b) To overcome the losses of audit trails.
storage) and compete with other users of those resources. For C To improve efficiency of audit.
example, an auditor may request access to a file with a program (d) To reduce cost.
that will examine each record in the file and may lock other users 8.7.1
Considerations for the use of CAATS:
out until the process is complete. So the need for software before using the
specialists to support internal auditing is increasing even as the AUuditor should consider certain things
CAATs.
software is getting easier to use. technology:
of computers and
8.6.2 Understanding internal control evaluation: nowledge and expertisemust have proper knowledge of
Control Self-Assessment (CSA) is a popular methodology ne auditor and his team while using CAATSs. It
is
for technology
identifying and evaluating internal controls. Often
an internal puters and
execution and using
the results of
auditor becomes familiar with CSA and identifies and assesses for planning,
internal controls, address their strengths and
ired
CAATs. program should be
weaknesses, and (2) CAATs: CAAT or
discuss them with the management for improvements.
For the vailability
Availability of
easily and at reasonable
cost.
available to the auditor
 munderCIs
Vipul'sTM Auditing l (BBI) 187
-
aor knowledge
of computer if
186
should have
Aegrams.
P
T test data is entered in
The
he has to directly
test
(3) Suitability in client's system: The client perator. Test packs
the computer
by
sufficient infrastructure to use
for
the
the
CAAT.
auditor
It
to
should be
install and
ter
ter OPnor
he
anmputer
Dgram. as
invalid
either
may bring by regular
out reactions of
data or valid data.
alar
the
economical and practicable much The reaction valid
very mu useful to complete the audit
run the CAAT on client's system. is
1S
hata trail. The test
(4) Manual tests not possible: Sometimes it
is not possible to es the correctness of the program applied. pack
perform audit procedures manually as it involves complex should follow below mentioned
case the CAATs are
The uditor steps when he
processing and calculation. In this test pack:
very much suitable.
es Define the problem.
a

(5) Effectiveness and efficiency of extracting data: The () client.

CAAT should be effective and efficient to extract data from 2) Involve the documentation.
(8) Obtain computer
client's system. It includes selection of samples, applying
(4) Open audit working papers.
analytical procedures etc.
8.7.2 Control Procedure while applying CAAT: (6) Construct test data.
(6) Predetermine results.
Once the CAAT is installed on the client's system the auditor
has to ensure that it is meeting the objectives of audit. There are () Attend the computer run.
also chances of manipulations by the staff members of the client. (8) Check and summarise results.
Therefore the auditor should follow certain procedure to control If the test pack verification identifies errors, the auditor draws
application of CAAT. Heconclusion that appropriate action is taken on all errors and
program is functioning properly. To ensure that appropriate
(a) Participate in design and testing of CAAT.
(b) Verify whether it will work properly on client's system.
action is taken against all errors the auditor may follow
Compliance testing. If the results are satisfactory, the auditor may
(c) Run the audit software small test files before running it on
system.
the main data files. besatisfied that there are very less chances of error in the
Accordingly he can plan his audit program.
(d) Obtaining evidence that the audit software functioned as
planned by reviewing output and control information. .4 Computerised Audit Programs: used by the auditor,
(e) Ensure security measures to safeguard integrity and Computerised Audit Program is software
the client's accounting
confidentiality of the data. process data of audit significance from
file and extract defined
8.7.3 Test Packs: STem. Such programs can read generate special
Test Packs are a set of data in machine readable form. This data htormation. They can prepare analysis and
comparing different items
is supposed to be tested on the master file. Test pack techniques dat also. They can perform audit by totals also.
of
a, checking data reasonableness, and taking
are used in conducting audit procedures by entering data into Such for internal control
system
Such programs checking
client's computer system. The results obtained are then compared
with predetermined results. This helps in verifying whether thee
Ograms can be used forbalance sheet and profit testing. & loss
well as for verification of
account and substantive
testing
program and controls are operating correctly. i.e. Tor compliance testing powerful methods for
!

herefore, such Programs very

Test packs are used by the programmers for debugging programs aare ting. are also time
They are
rerification procedural testing. . electronic
programs. Auditor may borrow those or may prepare himselt a
saving work and procedura data
of data is done at
set of comprehensive transactions data. This data may
be fictitious as examination and analysis external auditor.
peed. and
but is designed to test various error conditions. The auditor needs hey can be used byinternal
188
Vipul's Auditing-i (BBI CIS
Auditunder

An auditor can get a special computer program designed from Difficulties may
(c) Difficul be experienced 1
a programmer but that may be costly for him. He may al computer time for testing. in obtaining adequate
purchase readymade package which involves less cost and (d) Involves high initial.capital
investment.
relatively permanent. However such programs take time for set Typesof Computerised Programs:
up and the auditor needs to have complete knowledge about the
There are different types of Computerised Progr
client's computer system. ram:
Features of Effective Computerised Audit Program:
Package
(1) Package Programs: These
are generalized
ograms that perform data processing.
prog computer
An effective Computerised Audit Program should have It includes reading
computer files, selecting information, doing
following characteristics: calculations,
creating data files and printing reports
(a) Simple: The program should be simple to use for auditor as per the
requirement of the auditor.
and his team members. (2) Purpose-Writen Frograms: Ihese programs are designed
(b) Understandable: The auditor and his team members to perform audit work in specific circumstances. They may
should understand the audit program easily. A person be designed by the auditor or by the client or by an outside
with less computer knowledge should also be able to programmer engaged by the auditor. In some cases, the
understand and operate the program. auditor may use the program available in client's system
(c)Adaptable: The program should be adaptable on with or without modifications.
computer system of various clients. (3) Utility Programs: They are used by an entity to perform
d) Vendor support: It is also very important to consider common data processing such as sorting, creating and
support from the vendor of the program. Such support printing files. They may not suitable for audit purposes.
includes designing of the program, installation, (4) Systems Management Programs: They are enhanced
maintenance as well as program fixing up the issues in productivity tools that are part operating system. They
case of problems. He may also provide training to audit also may not be useful for auditing purposes and their use
staff for the use of program. requires additional care.
(e) Report writing: The program should be capable of Pre-requisites of Auditing in CIS:
preparing various reports. If required it should also include points from Review
generate multiple reports in a single program run. Note: Answer to this question willSystem, Approach to audit in
0T internal controls in Computerised
Advantage of Computerised Audit Program: CIS environment and CAAIS)
(a) Fast and accurate checking of data.
(b) Cost effective. 8.8
(c) Very convenient when voluminous data has to be checked. EXERCISES:
0BJECTIVE QUESTIONS:
(d) Can be used until the file layouts are changed.
Advantage of Computerised Audit Program: ) Answer in ONE sentence:
auditing in
computerised
environment?

(a) Whyis here need for

(a) Technical skill and knowledge is required by auditor and Trail? form?
Audit
his team members. (o) What do you mean by can be in what
system, internal controls
(b) Modifications in program are required if the clients computerised
system changes.
In
(d) What does input controls
ensure

(e)What is CSA usedfor?CAATS?

.What do you mean by
 underCIS
Vipul'sM Auditing-lI (BBI) dtMatch the Following: 191
190
A
(g) What are test packs? Purpose-written programs Preventsloss of
Audit Programs?
(h) What Computerised Computerised Audit Program
data

(2) Fill in the blanks: () Softwareused bythe auditor

that restricts the Physical controls (c) Tracing of transactions
(a) Staff are provided with mobiles)
internet,
unauthorised access.(user id & password, Audit Trail (d) Auditin specific circumstances
unauthorized
(b) controls are required to avoid Back-up system (e) Lock & key
programs. (physical, system
changes in the system and () Audit in CIS
development, access)
(b-); (C-V); (d-i); (e -i)
(c) approach is also known as auditing around the Ans.:(aV);
QUESTIONS:
Yellow-box)
computer. (White-box, Black box, THEORY
through aspects in Computerised Audit Environment?
approach is also known as Auditing the What are the special
(d) Computerise System?
in Computerised
computer.(White-box, Black box, Yellow-box) PWhat the Internal Controls
Wnat are tne
(Computerised System of of auditing in CIS?
(e) CSA stands for
Auditing, Control Self- g) What the pre-requisites in CIS environment in implementation of
Accounting. Computerised System of 14) What are the Problems
19)
Assessment) Internal Controls? (April computerised system?
programs are generalized computer programs controls be verified in
(5) How should internal environment?
(Purpose-written, Package, to audit in CIS
that perform data processing. (6) What are the approaches internal and management audit?
useful for
Utility)
system development; (c) Black 7) How is computer Aided Auditing Techniques (CAAT).
How
[Ans.: (a) user id & password: (b) (1) Package]
Computer
9) Explain Computerised Audit Program? Mention features and
White box; (e) Control Self-Assessment:
box; (d) is a
are TRUE or FALSE: 9 What
advantages.(April 19)
(3) State whether following statements of
of audit change basic objectives (10) Write short notes:
(a) Changes in techniques
audit (a) CAATs.
knowledge to perform audit
i

(b) Auditor need to have technical (b) Test Packs.

computerised environment. (C) Computerised Audit Program.
on the effectiveness
(c) Effectiveness of output controls depends (d) Input Control.
of input and processing controls.
simple in computerised system.
(d) Delegation of authority is very
infrastructure to use the CAATS
(e) The client should have suitable
processing time.
() Computerised Audit Programs increase
useful only for external audit
(9) Computerised Audit Programs are
(h) CIS has created a problem of data security.-
(d False); (e - Truel
[Ans.:(a - False); (b - True); (c - True);
-False): (g- False); (h- False)]
 essonalEthics
192 Vipul' Avditing - (88) 193
INTRODUCTION:
MODULE Chartered Accountant is required
V Chartered Accountants to function
as per the
ions of Act, 1949. He
PROFESSIONAL ETHICS manner consistent with is expected to
the good reputation
in
ion
ession and refrain from any conduct which of the
AND might bring
it to the profession. A professional accountant should carry
professional services in accordance
MISCONDUCT with the relevant
ofessional standards.
The over-riding motto has been 'pride of service in preference
conal gains'. A chartered áccountant is expected
Chapter 9
dignity and prestige or the protession. Chartered
to maintain
Accountants
t has laid down several conditions under which he must
nction. This is mainly to ensure high level of professionalism
Professional Ethics ad sincere attitude of the members
The most distinguishing mark of a profession is acceptance of
ponsibility by the members towards the society. A Chartered
9.1 Introduction Acrountant must recognize the fact that he plays a very significant
mdle in the society. In the course of his duties auditor must
9.1. Main Objectives of Code of Ethics
9.2 Ethics and Professional Misconduct emember that the standards of the accounting profession are
9.3 Schedules eavily determined by the public interest. The atitude and
9.4 Professional Misconduct tehaviour of Chartered Accountants in providing professional
9.5 Case Study TiCes have an impact on economic well-being of the community
9.6 Exercises ndcountry
position
Chartered Accountants can remain in advantageous
level of quality services to
Dy continuously providing high confidence is firmly
public
Public which demonstrates that themade known to the users of
Hence it is essential that it is
nded. and attitude of the
he
services, that the services provided
of ethics so as to
Accountants are regulated by code
eered highest level of professional attitude.
Objectives of Code of Ethics to maintain highest
Main
The ethics are
evel ofmain objectives of code of highest level of performance
el
and
of rofessionalism, to attain requirements. These
d in in general to meet the public interest
0jectives to be met:
require four basic needs credibility in information and
c
Credibility: Society expects
ntormation systems.
 essionalEthic
194
Vipul's Auditing-l (B8
97 of the Act 195
ection 22 read with schedules
(2) Professionalism: There is a need for individuals who
can be Justrative definition of Professiona contains an
the field Misconduct'.
clearly identified by clients as professionals in of mnstitute the Code of Professional Conduct These
accountancy. ACcountants. applicable to
hartered
(3) Quality of services: There is a need for assurance that all
services provided by Chartered Accountants are carried out 3SCHEDULES:
to the highest levels of performance.
Acts or omissions which comprise professional
(4) Confidence: Users of the services should be able to feel misconduct
onauct
confident that there exists a framework of professional ethics ithin the meaning of Section 22 of Chartered Accountants Act
Schedules i.e. First Schedule tants
that governs the services provided. are defined in two and Second
Schedule.
9.2 ETHIS AND PROFESSIONAL MISCONDUCT: First Schedule is divided intofour parts.
The Chartered Accountants Act, 1949 came into force on (A) Part 1 of the First Schedule deals with misconduct of a member
July, 1949. In 1959 certain amendments were made in the Act. in practice who has compromised with his position as an
After that in 2006, extensive changes have been made in the Act independent person.
through The Chartered Accountants (Amendment) Act, 2006. (B) Part II deals with misconduct ofmembers in service
Further few insertions were made to the principle Act through
The Chartered Accountants (Amendment) Act, 2011. The Act (C Part III deals with misconduct ofmembers generally and
defines the Ethics and Professional Misconduct for the Chartered (D) Part IV deals with other misconduct of members generally.
Accountants. Second Schedule is divided into three parts.
Meaning: (A) Part I deals with misconduct in relation to a member in
"Professional Ethics" refers to the behaviour of a professional practice and
man towards other members of professional body and also (B) Part Il deals with misconduct of members generally
towards members of the public. All professions such as those of of members generally.
law, medicines, accountancy etc. have developed code of conduct
(C) Part II deals with other misconduct
for the guidance of their fellow members. It's expected that the
members should follow them in the interest of their profession 4PROFESSIONAL MIScONDUCT
toProfessional
and also to gain public trust and confidence. above, yarious clauses relating
Professional Misconduct has been defined
mentioned
are given in 2 schedules. These
clauses are as follows:
"for the purpose of this act, professional
u/s 22 of the Act as conduct
First
misconduct shall be Schedule: stated in any of
deemed to include any act or omission specified or omissions
schedules, but nothing in this section shall in any of the Ifa
the
ember is found guilty of acts
council shall pass appropriate
be construed to limit or parts of this schedule, the member ought, in
arbitrage in any way the power conferred orders name of the
or duty cast on the except in case in which the for a period
council under section 21 to inquire
into the conduct of any View of removed from the register
member of the institute under any circumstances." exCeerd the
cour
COuncil, to be
exceeding five years or permanently.
 rofessionalEthics
Vipul'sM Auditing I (BBI) 197
196 ding to this clause, a practicing
rding chartered
person as a partner accountant can
PART I
ake other only if he fulfils
ollowing criteria: any of the
Professional Misconduct in Relatión to Chartered Accountants
in Practice: He is a chartered accountant in practice.
A Chartered Accountant in practice is deemed to be guilty of (b) He resides outside India, but in spite of his residence
professional misconduct if he: abroad is entitled to be registered as a
member.
Clause (1): "Allows any person to practice. in his name as a AHis
(c) His qualifications are recognized
by the central
Chartered Accountant in practice and is in partnership with or employed rovernment or the council of the Institute for
the purpose
by himself" of permitting such partnership.
The main objective of this clause is to ensure that the work of (d) He shares the fees and profits of the profession both in and
the accountant is carried out only by a Chartered Accountant who
outside India.
may his partner or his employee. Thus this clause prevents
unqualified persons from practicing in the name of qualified A Chartered Accountant is not permitted to enter into
chartered accountants. partnership with any person other than a Chartered Accountant
Clause (2): "Pays or allows or agree to pay or allow, directly or inpractice and this prohibition applies not only to the profession
indirectly, any share, commission or brokerage in the fees or profits of his ofaccounting but to any kind of business. However, partnership
professional business, to any person other than a member of the institute between members of the institute and members of foreign
or a partner or retired partner or the legal representative of a deceased professional bodies are permissible provided members of such
partner." bodies are enable or the membership of the institute, and
According to this clause, no commission, no brokerage or fees provided further that they share in the fees or profits of the
can be paid to third parties nor the profits of his profession business of the partnership both within and without India.
can be
shared with the persons other than CA. This rule a person not
is directed Clause (5):. "Secures, either through the services of
against arrangements or understandings, whereby for a which are not open to a Chartered
gunaliyied to be his partner or by means
consideration, professional work will be introduced Accountant, any professional business."
to a member
by a third party. to procure professional
Clause (3): "Accepts or agree to accept any part of
the profits of the
his clause prohibits a member through such means and
professional work of a lawyer, auctioneer, usiness through third parties or of this clause is to
broker or other agent who is purpose
not a member of the institute." s as are not opened to him. The the chartered
impose check on ugly competition among
Just a member cannot share his fees dignity of
with a non-member, he is accountants in practice, thereby lowering the
also not permitted to receive and share obtained by a member by
lawyer, engineers, brokers etc. Such a the fees of others such as
that a Chartered Accountant who is often
restriction is necessary so
required to engage or to
n.
ly
Professional work should be
and integrity.
building confidence in his ability adtvertisement, personal
recommend for engagement by
members of the other professions,
his clients, the services
of the
a
CommUi
(6): Solicits clients by
circular,
other means.
such as lawyers, engineers, etc, nication or interview orby any professional work
may not share the fees received canvassing for circulars,
This clause of
by other professional persons.
by a bans all forms practice, including issue ofinterviews.
Clause (4): Enters into partnership with chartered accountant in through
a person other thana CA im
practice. advertisementsor personal communication or indirect methods of
any
embers should not
adopt gain publicity
adver
CVenh practice with view to
ture theirprofessional
 Ethics
essional
198 VipulM Auditing -1I (BBI) 1
profes nal work. Where the existence of sudh a
panel is
and thereby solicit clients or professional work. Such a restraint is within know owledge of a member, he is free
to write t the
essential so that members may maintain their independence of concerne organization with a request to place
is rame c
judgment and may be able to command the respect of their panel However, is not proper for the Crarered
prospective clients.
the
Accountantant to mnake rovirng enquiries by applying to any su
It should be through his skill, intelligence and competence that anization for having his name induded in any such a
a Chartered Accountant should attract and retain clients. Securing
panel. Its permissib to quote íees on enqiries being
work through advertisement, circulars or by solicitation would ereived from such bodies which maintain such parei but is
adversely affect the esteem and image of the profession. It should not proper for the members to send printed cr cyicstyled
be noted that its not advertisement which is the key to success but
copies of the scales of fees in reply to such enquiries.
it's the quality of service offered by the member that can help him
progress in his professional career. Publication of Name or Firm Name by Chartered
Some forms of soliciting work which the council has prohibited Accountants in the Telephone or other Directories
are discussed below: published by Telephone Authorities or Private Bodies: The
(a) Advertisement and not in the press: Members should not council has held that it would be not a proper for a cihartered
advertise in manner which could be interpreted as soliciting accountant to have entries made in a Telephore Directory
of additional
or offering to undertake professional work. They are also not either by making a special request or by means
payment. The coundil has also considered the quesion of
permitted to circulate letters to a small field of possible
chartered accountars ard
clients. The exception to the above rule are: permitting entries in respect of
specified group in telephone/trade
i) A member may advertise changes in partnerships or their firms under a and non-govermument
dissolution of a firm, or of any changes in address of directories brought by the govermment
entries subjact to the
practice and telephone numbers. Such announcement agencies.It had decided to permit such
should be limited to a bare a statement of facts and following restrictions: of
the section/category
consideration given to the appropriateness of the area of a) The entry should appear in
distribution of the newspaper or magazine and number "Chartered Accountants."
the town/ity in
of insertions.
member/firm should belong to published.
A member is also permitted to issue classified
(ii) he respect of which the directory
is being
advertisement in journal/newsletter of the Institute with letters. Entry in bolded
should be in normal type of box is not
an intention to give information for sharing The letters or in a
Work on assignment basis or for seeking
professiona pe or abnormal type of
partnership or permissible. alphabetical and
salaried employed of an accountancy should be
nature, provided it
only contains the accountant name, (d) The order of the entries
address or telephone
number, fax number or e-mail address. logical. manner giving the
appear in a should not
(b) Application for empanelment entry should
(e) The entr not
for allotment of audit and ie publicity/advertisement. Entry to it as
other professional work: The government pression of prominence
governments companies/Corporations, departments, which gives
courts, co-operative be given in manner
societies and banks and other similar not be
institutions prepare Compared to other entries. the entry should
panels of chartered accountant for the any, for
allotment of (6 The payment, if
unreasonable.
 essionalEthics
200 Vipul's Auditing -1 (BB
r inauguration ot
openingor
201
opeu e office of the
(g) The entries should not be restricted and should be offic premises and change members,
change in
restricted and should be open to all the chartered the ded that
at such
such a greeting in telephone
elephone numbers,
cards or invitations etc.
accountants/firms of chartered accountant in the the sentto the clients, relatives or close friends of are only
particular city/town in respect whereof the directories concerned. the members
which are published. Co
(h) Subject to the above conditions, the members can also Solicit citing Professional Work by Making Roving
not permissible for a member to address lettersInquiries:
include their names in the trade directories which are Ittoispersons are likely to require services
circulars
circulars
published and/or otherwise available electronic media
e.g. internet, telephone services like 'Ask me Services
Accountant since it would
Accountant wouldha sof Chartered
be amount to issue
of
advertisement.
(d) Responding to Tenders, Advertisements and Circulars: The
work from professional colleagues: The issue of an
council, is of the opinion that members should not:
(i) Respond to advertisement inviting applications for
0 Seeking
advertisement of a circular by a Chartered Accountant,
appointment of auditors; seeking work from professional colleagues on any basis
(ii) Respond to tenders or circulars inviting quotations for whatsoever except as provided in (a) (2) above would be in
a
professional services restricted to Chartered Accountants violation of this clause.
either by statute or in terms of tender or circular; and Giving public interviews: While giving any interview or
(ii) Respond to an inquiry asking for quotation of
fess in otherwise furnishing details about themselves or their firms
circumstances indicating that such inquiry has been in public interviews or to the press or any forum, the
made to more than one member and as such the same is members should ensure that it should not result in publicity.
interviews or
in the nature of circular or tender. Due care should be taken to ensure that such
of their firms are not given in a
However such restrictions are relaxed in other areas of details about the members
professional attainments.
work where Chartered Accountants compete with non- manner highlighting their
advertisement under
Chartered Accountants. 03) Members and / or firms who publish
prohibited from inserting
(e) Issuing Hand Bills: A member is
prohibited from B0x numbers: Members / firms are professional work
distributing hand bills ostensibly for the guidance, of the advertisements for soliciting clients or
persons other than his clients in matters such as changes in under box number in the newspapers.
or services, or
attainments
tax laws. ause (7): "Advertises his professional
(E Publication of Books or Articles: A expressions other than Charterea
member is not permitted Sany designation or thedocuments, visiting cards letter heaas or
to indicate in a book or an article, AccOuntant on his professional
association with any firm of Chartered
published by him, his
Accountants.
tant
boards
professional n0e
rsitu established
University established by lao inn
by law
unless it be a degree of aGovernment or title indicating
a
Central
(g) Issue of Greeting Cards or
Invitations: The council does not
approve of the issue of greeting cards
or
personal invitations sIp
or
India recognized by the
of the Institute of Chartered Accountants
the Central
or of any otner
Government or may
by member indicating their professional recognized by
Tero o
designation, status, that has been
and qualification etc. However, the be
De recognized by the council. Accountant in
practice to
council is of the view that Chartered
the designations "Chartered Accountant" This clause prohibits a manner. It also
name in any
of the firm may be used in greeting as well as the PublicieT
publicise his professional attainment
designations or
expression
marriage and religious ceremonies cards, invitations for any
Testrainsa from using
and any invitations for member
 mofesional Ethics
202 Vipul' Auditing-Il (BBI) 203
Audit
iitor may not accept the
AnIncoming assignment offered
other than that of a Chartered Accountant in a documents through the following cases: to
which the professional attainments of the member would come in
Non-compliance of the
to provisions of Sections
the notice of the public. 139
For example:
he Companies Act as mentioned in clause (9); and 140 of
(1) A Chartered Accountant should not indicate
Under-cutting of fees;
in his Non-payment of undisputed auditfees by client other
professional documents that he is an Income tax
consultant or i Case of sick units tor carrying out the statutory
than in
Management Consultant etc. audit under
(2) A member should not use the the Companies Act, 1956 or various other status.
designations like Member of
Parliament or Municipal councillor in addition to Issuance of a qualified report.
Accountant.
Chartered
In the first three cases, an auditor who accepts the audit would
(3) Member may appear beguilty of professional misconduct. In the last case a new
on television or fillms and agree to
broadcast in the Radio or gives lecture at accountant may accept the audit if he is satisfied that the atitude
give their names and describe themselves
forums and may
of the retiring auditor was not proper and justfied. If, on the other
as Chartered
Accountants. Special qualifications or hand, he feels that the retiring auditor has qualified the report for
specialized knowledge
directly relevant to the subject matter of gOod and valid reasons, it would be a good practice not to accept
programme may also
be given. But no reference should theaudit. It should be noted that the image of the profession will
be made, in the case of
practicing member to the name and address be badly affected if there is a general belief amongst the public
firm. What he may say or write must or services of his
easily
not be promotional of that the auditor found 'inconvenient' by the client can be
his or his firm but must be an objective
the topic under consideration. professional view of and readily replaced by the new auditor.
as auditor of a company
(4) Members writing articles Clause (9): "Accepts an appointment
or letters to the press on subject the requirements of Section
connected with the professional work can ut Jirst ascertaining from it whether 2013, in respect of such
give their names Companies Act,
and the use the description 'Chartered 10, 140, 141 & 142 of the
Accountant. OPpointment have been duly complied with".
Clause 8: Accepts position as auditor previously should ascertain first whether
Chartered Accountant or Restricted
communicating with him in writing.
held by another
State Auditor without first s clause states that an auditor
PPOintment is in order or 140,
he should accept
not and only then, Companies Act
of the
139, 141 & 142
In fact, this clause serves as a safeguard
for the new auditors. It
pointment. Section provision for the appointment
of company
enables them to know well e the required appointment of an auditor.
in advance the circumstances, which auditor.In order that the validity of theshareholders or the retiring
have led to his appointment,
and retirement of the existing is nallenged or objected to by made obligatory on the
auditor.
In many cases, clients change auditor at a later te, it has been company that the
change being:
their accountants. Reasons for incoming auditor to ascertain from theappointment has been
of
(a) Change in the place appropriate procedure in the matter
of business. profit or
(b) Dissatisfaction in respect properly followed. percentage basis of
of the quality of the work performed accepts fees on a
by the accountant. Clause 10: Charges or
U Charges results:
findings or calculation of professional
which
ohicho
are contingeni upon the
c) Disputes in respect
of payment of fees etc. the basis of results of an
According to t clause,
To this profits or the
es should not be elated to the.
fees
 ProfessionalEthics
204 Vipuls Auditing
-ll (BBI)
advertise for his other 205
assignment except in cases permitted under any regulations able to ad business and
under this act. The basis should be related to time, skills
mado
and
air advantage his professional practice.
inl thereby secure an
responsibilities involved in the assignment. The Council has formulated
Members are prohibited from charging or accepting fing the activities with whichRegulation
Specifying 190A and 191
a member in
remuneration based on a percentage of the profits or anv ociate himself with or without the permission practice can
on the anA, Chartered Acountant in practice
of the Council.
happening of a particular contingency such as, the
outcome of an appeal in revenue proceedings. If successful not to engage in any
the fees of the other business or occupation:
member is directly proportionate to the benefits A Chartered Accountant in practice
derived by the shall
not engage in any
client, its quite possible. that the member
may try to gain husiness or occupation other than the profession of
maximum advantage of his service through accountancy
unethical means. This wrent with the permission granted in
will adversely affect his integrity accordance with a
and independence. resolution of the Council".
Also professional services should
not be offered or rendered 191. A Chartered Accountant in practice may accept Part-time
under an arrangement whereby no fee
specified finding or result will be charged unless a employment:
is obtained or where the
otherwise contingent upon the findings fee is "Notwithstanding anything contained in Regulation 190A but
However, fees should not be or results of such services. subject to the control of the Council, a chartered accountant in
regarded as being, contingent if fixed
by a court or other public authority. practice may act as a liquidator, trustee, executor, administrator,
The council or the Institute has arbitrator, receiver, adviser or representative for costing, finanial
which exempts member from however framed Regulation 192 or taxation matter, or may take up an appointment that may be
the operation of this clause made by the Central Government or a State Government or a
certain professional services. in
The main provisions of COurt of law or any other legal authority or may art as a Sexretary
192 are as follows: Regulation
No chartered Accountant in n his professional capacity, provided his employment is not on
charge, accept or offer to accept,practice shall charge or offer to salary-cum-full-time-basis".
work, fees which are based on in respect of any professional Clause (12): "Allouus a person not being a
member of the lrestitute r
a
are contingent upon the findings percentage of profits, of which on his behalf er o* kis arm, any
or results of such work. nember not being his partner to signreport or firanrial stateer:ts
Clause (11): "Engages in any business 2lance sheet, profit and loss acount,
or occupation other than the chartered arvuntant in practi
profession ofchartered accountants
engage:
unless permitted by the Council cording to this clause, a his partner to sign înaneial
so to cannot allow anyone except
Provided that nothing arements on his behalf or on behalf of his tirm. a eport ox, a
chartered accountant from contained herein shall disentitle a while signing
he or any of his partners
being a director of a company,
are interested in such unless so
fina
if a Chartered Accountant
A nci statement or any
is rapinmd hr discla
other document while appvvndng his
auditor". company as an name
name, he ould disclose his IWhen* then is n sch
This clause prohibits a chartered signature on the report or document, name of the
in any trade or business accountant to engage statuto member mar sign in the
other than himself ory requiremenent the
It helps in maintaining that of a chartered accountant. firm. pnfesaimat
the whirh a
reason for the introduction dignity of the profession. Another documents on mar
accountant, if permitted
of such prohibition is
to enter into all kinds that a chartered
Power to sign
on
n routine
or authentication is not
requirexd to e evPRnd
of business, would
206 Vipul'sTM Auditing -l (BBI) ofessionalEthics
207
delegated in the following instances and such delegation will not member in the ove circumstances
attract provisions of this clause: Asconduct regardles would
duct regardless of the fact that he was be guilty of
(i) Issue of audit queries during the course of audit. in whole-time or
art-time employment or that he was carrying on practice of
part-tim
(ii) Asking for information or issue of questionnaire. ancy along with his employment.
(iii) Letter forwarding draft observations/financial statements. PART-II1:
(iv) Initialling and stamping of vouchers and of schedules essional Misconduct in Relation to Members of the
Professional
prepared for the purpose of audit. Institute Generally:
(v) Acknowledging and carrying on routine correspondence
A member of the Institute, whether in practice or not, shall be
with clients. deemed to be guilty of professional misconduct.
(vi) Issue of memorandum of cash verification and
other Clause (1): If he, not being a Fellow styles himself as a Fellow.
physical verification or recording the results thereof in the
books ofthe clients, dause (2): If he does not supply the information called for, or
for, by the Council
(vii) Issuing acknowledgments for records produced. does not comply with the requirements asked
(viii) Raising of bills and issuing acknowledgement for
or any of its Committees.
money professional work from another
receipts. Clause 3): while inviting responding to tenders or enquiries
Chartered Accountant or while
(ix) Attending to routing matters in tax information knowing it to
practice, subject to
provisions of Section 288 of Income Tax Act. oradvertising through a write up, gives
(x) Any other matter incidental to the office administration and be false.
PART IV:
routine work involved in practice of accountancy. Members of the Institute
It is also clarified that where the authority to Other Misconduct in Relation to
sign documents Generally: not, shall be
given above is delegated by a chartered accountant or by a firm of in practice or
Institute, whether
chartered accountants the fact that the documents have not been A member of the misconduct, if he:
signed by a chartered accountant is not a defence to him or to the deemed to be guilty of other criminal court for
an
held guilty by any civil or term not
firm in an enquiry relating to professional misconduct. Clause (1) is imprisonment for a
with
PART I1: offenc which is punishable
exceeding six months; disrepute to the
Professional Misconduct in Relation to Members of the Council brings
of the whether or not
Institute in Service:
A member of the institute (other than a member
in practice)
se (2) in the opinion result of his action
profession or the Institute as a
work.
shall be deemed to be guilty of professional misconduct, if he: to his professional
(1) Pays or allows paying any person
ated
The Second Schedule: the
member
opinion that a Second
any share in the (Discipline) is of misconduct in the
emoluments of his employment. When the Director matter before
(2) Accepts or agrees to accept any part of fees professional or othershall pla
place the
or gain from a is guilty of any Schedules, he
lawyer, a chartered accountant or broker engaged by such Schedule or in.both the
employer by way of commission or gratification. Disciplinary Committee
 eOnalEtN
209
208 Vipul's Auditing-|(BBI a5 a arent or a subsidian access
papers. to his audit
Part l: Professional Misconduct in Relation to Chartered working
Accountant in Practice: main auditorsof an enterprise
A Chartered Accountant in practice shall be deemed to
The do not have right
to the audit working papers of the branch auditors. of access
be
guilty of professional misconduct, if he: ditor
An aud can rely on the work of
ancther auditor,
without
Clause (1): "Disclose information acquired in the course of his having any right of access to the audit working
papers of the
professional engagement to any person other than his client, without the other auditor
consent of his client or otherwise than as required by any
lawfor the time (D An auditor may, at this discretion, make portions
being in force". of or
oxtracts from his working papers available
to the dlient.
Auditor may come across lot of confidential information
regarding client's business during the course of his audit
dause (2): "If he certiftes or submits in his rme or in the rame of
He should not disclose such confidential information work. s firm a report of a examination offinarcial staizmenis unless the
to the nuination; of such statements aná the relaied records hns ben made
competitors or any other third person unless there is
any legal H him or by a partner or ar1 emplcye in his firm or by amother chartered
requirement. Such information is provided to the
member so as to
facilitate him in his performance of
duties effectively and hence to ountant in practices"
divulge such information would be a breach According to this clause, a chartered accountant in practice
of professional
confidence which may give rise to the cannot sign reports Or inanaal statements or accounts examined
most serious consequences,
even to an action by the client for
the loss suffered by him through by outsiders. He can, however, certifhy the statements examined by
such a breach. However if disclosure another chartered accountant in practice. This exception is
is required as a part of
performance of duties or where there is necessary to enable two or more firms of chartered accountants to
legal requirement, the
above mentioned provisions will not to accept a
apply. Conduct joint audit. This enables two or more members
Where the consent of the client has been member to carry out the
should ensure that it has been obtained obtained, the member pint assignment or enables a
with the assistance ot other
give such consent, for ex, in the case
from competent person to alnination of financial statements
of a sole proprietary concern, chartered accountant in practice
or the name of his firm e
the consent may be given by the to used im
proprietor. In the case of a
partnership firm, every partner has
the authority to bind the firm
Cause (3): "Permits his name earnings comtingent uoi fufure
by his acts; the consent may be Lonection with an estimate of belicf that ihe reuches for
given by any partner. In the case lead to the
a company the Board of
Directors can give such consent
etc.
of sactions in manner which may
accuracy of the forecast
Access to Audit Working Papers: le chartered accountant in practice to
In the course of audit, auditor clause prohibits a
showing forecasted
earmings.
may contain significant prepares working papers
which
nis ne accuracy of the statement preparation of
information about client's H
render assistance in the This clause
accounts, finance, internal
controls, weakness business, However, he can statements.
other vital observation etc. in the system, any or similar
casted cash flows, budgets Accountant from assoc
Hence the question preparation of
whether the working papers
of the auditor can be
arises as to does not pre a Chartered participate in the
to third parties? The main made accessible name can provided he
points to be noted with foreca He reriew them,
follows: in this regard are as profit or financial torecasts and can information, the basis
sources of arriving at
(1) An auditor is
not required to dicates clearly in his report theassumptions made in
auditors of the same enterpriseprovide the client or the other early
orecasts and also the major
or its related
enterprise such
 roessionaEthics
(BBl) 211
Vipul'sM Auditing -li
210
eroneous tatement) could influence the economic
decisions of
the forecasts and so long as he does not vouch
for the accuracy of
aken on the basis of the financial information."
the forecasts. to report a material
financial statements of any Clause 6: Fails misstatement known to him to
Clause (4): "Expresses his opinion on in a financial starement witlh witich he is concerned in a
business or any enterprise in which he, his firm or a
partner in his firm
also in his rofessional capacity".
has a substantial interest, unless he discloses the interest complementary to the above clause 5. In
report". This clause is in fact
AitHon to disclosure of any omission of material fact from
This clause imposes restriction on the chartered accountant
to ddition
statement, the auditor should also report a material
express his opinion on financial statement of any business in ncial therein.
which he is directly or indirectly interested. If he expresses nisstatement contained
part of a member to point
opinion on such statements he must disclose about his interest in This clause refers to failure on the
a financial
a material misstatement appearing in
his report.
t in his report of the same. The concept of
Auditor should perform his work honestly and sincerely and ciatement and he has knowledge
clause 5.
should be independent in performance his duties. If auditor has materiality is applicable as in negligent in
any direct or indirect interest in the organization of which he is exercise due diligence, Is grossly
the auditor, it's quite possible that he may get influenced with
Clause (7): "Does not
professional duties
.
the conduct of his accountant is expected to
such interest which may ultimately lead to compromising of his clause a chartered
According to this expected from a man of
independent status. Auditor should not allow any bias to override so much as is
his objectivity and hence this clause requires the auditor to show his skill and expertise negligence on his part means
The gross
disclose his interest clearly. Council further requires the member his calibre and status. gross negligence is
a matter or
carelessness. What constitutes
to ensure that do not place themselves in positions which would
the individual case.
either compromise or affect their independence. actual circumstances of information to warrant
the
"Fails to obtain suficient to negare
Clause (5): "Fails to disclose a material fact knorwn to him which is Clause 8: exception are
sufjficient materal
not disclosed in a financial statement, but disclosures of which is Cpression ofan opinion or his
an
necessary to make the financial statement not misleading". the expression ofan opinion. chartered accountant to express
obtain
Auditor should form an opinion and report on the basis of the prohibits a is able to
audit evidence obtained by him. He should form an opinion and his clause financial statement unless he also requires the
report on various aspects like: Pnon on the regard. The
Suficient evidence in this opinion if the
clause
qualifications in his
opinion on
(a) Whether accounting policies and accounting standards auditor to express a negativemakes giving a positive meaningless.
report are so material that it financial statement,
have been properly followed.
(b) Whether proper disclosures of all material facts have been
made in the financial statements.
are the
the true and fair nature of determine the
information
extent of accordingly
should
The auditor should and held
(c) Whether financial statements reflect true and fair view of express an opinion
information. He will be
opinion
Tequired by him to
that expresses an
profitability and state of affairs of the enterprise. ensure that he has obtained reliability of
misconduct if hejustify the
Auditor will be held guilty of professional misconduct if he guilty of professior evidence to
fails to disclose a material fact in financial statements, known to sufficient information
ithout obtaining
infodlning opinion if
him. The word materiality has been defined in SAP-13 as follow. nat information. any
seen any
that forming any not seen
"Information is material, if its misstatements (i.e. omission or should avoid tor theditor auditor has
Also auditor ex, if
available fficient, for
insufficient, Ior
is
 Professiona/Ethics
212 V"V Vipul'sM Auditing -!1 (B8/)
noted that failure to 213
shoul he
evidence of the existences perform statutory
and/or valuation of the investment it duties cann
excused just by giving a qualification/reservation
be Auc nnot
which constitutes the only asset of a company, he should
not say be CAuditor
eport. is required to indicate in audit
that: the reasons
rmance of the given duty as per the for non-
"Subject to the verification of the existence and value generally accepted
of the procedures.
nrocedures. audit
investments the balance sheet shows a true and fair view etc."
On the other hand he should say that: For example: 1f the auditor was required to verify
nce
bala since such verification was necessary,
the cash
"As we have been unable to verify the existence and value material and
of feasible, then if the auditor failed to verify the same,
the investments of the company, we are unable to state mere
whether dication of such failure in audit report will not be sufficient.
the balance sheet shows a true and fair view etc."
Auditor will have to specity the reasons for such failure in
As regards qualifications in audit report, Council the
has issued audit report.
certain guidelines which must be observed by the
members. Clause 10: "Fails to keep moneys of his client in separate banking
Important points to be noted are as follows:
(a) Auditor should clearly account or to use such moneys Jorpurposesjor vlhich they are intended".
indicate his qualifications in his audit
report (irrespective of the fact that the same According to this clause, an auditor should not misuse the
has been money deposited to him by his cients for some specific purpose.
included by directors in notes to accounts).
(b) Auditors should quantify, He should deposit such amount in a separate bank account and
wherever possible the effect of the
qualifications on the financial statements in should use it only as per the instructions of the client. If he
a clear and misuses it, it will amount to breach of trust.
unambiguous manner if the same is material.
(c) Auditor Following important points should be noted:
should'not only quantify the effect of individual to be provided
qualification but should also quantify the overall (a) Advance received from client against services
effect of all covered by this clause.
qualifications in his audit report. by Chartered Accountant is not
incurred like payments of
(d) If it is not possible to quantify
the effect of the qualifications ) Moneys received for expenses to be then such amounts
accurately, the auditor may do so on the basis statutory dues etc. within a short time,account.
of estimates separate bank
made by the management after carrying out
such audit tests need not be deposited in a which is not to be
as are possible, and clearly indicate the fact received for some specific purpose
based on management estimates.
that the figures are Money be deposited in
a separate bank
Spent in near future should
Clause 9: Fails to invite attention to any material account. as
generally accepted procedure ofaudit applicable departure from Accountant in capacity
Chartered
to circumstances. oneys received by
etc., then such
amounts must be
Auditor is required to carry out
critical and systematic ustee, executor, liquidator bank account.
examination and verification of books
of accounts and other immediately put in a separate Relation to Members ofthe
business documents so as to enable Professional Misconduct in
him to form an opinion on
financial statements of the Institute Generally: or not shall be
organization. There are certain in practice
generally accepted audit procedures whether
the auditor in the course of his audit.
which must be followed by A member of the Institute
professions
misconduct if he:
Act or
emed to be guilty of provisions of this
Any material departure from such of the
indicated very clearly by the auditor audit procedures should be Clause (1): Contravenes any the Counci ncil.
issued by
in his audit report. However Regulations or guidelines
 Pofessiona
215
Vipul'M Auditing -l Clause (a:"Includes any information, statement
(BBI)
214
m be submitted to the Institute, Council oror return
form to be
retu or
This clause is very important. It requires every member of the Committees, Director (Discipline), Board any of its
Institute to act within till framework of the Chartered Accountants of Discipline,
Act and the Regulations. Any violation either of the Act or the isciplinary Committee, Quality Review Board or the
Appellate
Regulations by a member would amount to misconduct. Authority any particulars knowing it to be false."
The Regulations under which cases of contravention have If a Chartered
ccountant includes in any information,
generally come to the notice of the Council are the following: ment, return or form to be submitted to the Council any
statement,
Regulation43 :Engagement of Articled Clerks iculars knowing it to be false, he will be held guilty of
particul
misconduct.
Regulation47 :Premium from Articled Clerks
Regulation 48 Stipend to Articled Clerks Clause (4): "Defalcates or embezzles money received in his
professional capacity"
Regulation 46 Registration of Articled Clerks
Defalcation and embezzlement of money received in
Regulation 65 :Articled Clerk not to engage in any other professional capacity is considered to be a fraud and the member
occupation misconduct.
isdeemed to be guilty of professional
Regulation 56 Termination or assignment of Articles Part Il: Other Misconduct in Relation to Members of the
Regulation67 Complaint against the employer (from Institute Generally:
practice or not, shall be
Articled Clerk) A member of the Institute, whether in
is held guilty by any
deemed to guilty of other misconduct, he is punishable with
Regulation 68 to 80 if
Audit Clerks
an offence which
Regulation 125 Disciplinary action against member in ivil or criminal court for
exceeding six months.
connection with conduct of election. Lmprisonment for a term
Misconduct of Chartered
Regulation 190 Register of offices and firms regulation Enquiry into Charges of
190A Chartered Accountants not to engage Accountants:
empowered to inquire into the
in any other business or occupation. The Council of the ICAI is circumstances. Section 21 of
Regulation 191 :Part-time employment's a Chartered conduct of the members in the above procedure tor
Accountants Act prescribes the
Accountant may accept eChartered misconduct of the Chartered
Regulation 192 ry relating to the professional
Restriction on fees Accountants.
Clause (2): "Being an employee of any
discloses confidential information
company, firm or person Receipt of complaint by the Council: appropriate form and duly
acquired in the course of his complaint should be in
employment except as and when
required by any law for the time being he
in force except as verified. fees.
permitted by the employer." the specified
An employee may access (ii) It should be accompanied by of acts and
confidential information of the the details
company. He should use this complaint shall include oral evidences
duties as an employee and should
information only to perform
his
he as the
documentary and
Omissions as well
not disclose it to anyone. The further
clause is applicable irrespective Supporting the allegations.required form, orif any
time or part-time employment whether the person is in whole- complaint is not in be asked
or was carrying.on (iv) complainant may
accountancy along with his
employment.
practice or the
particulars are
required, the
 Ethics
ofessional
216 Auditing -11 (BBI)
Vipul' 217
The
(ii)
TH pondent may represent
to comply with the particulars within a specified himself in person
time through legal practitioner or or
through any other
period.
(v) The lnstitute may also initiate
inquiry on its own on
: The Disciplinary Committee may report
member.
the results of its
receipt of any information relating to misconduct of inquiry to the Council of the ICAI.
a
member of the Institute. A copy of the'report of the Disciplinary Committee
may
(11) Processing of complaint: be sent to the respondent and the respondent may make
(i) On receipt of complaint, a written representation to the Council.
the secretary of the ICAI may
send a copy of the complaint to the alleged member mConsideration of the inquiry report by the Council:
firm within 60 days of the receipt of the or
complaint. m The Council of ICAI may consider the report received
(ii) Within 14 days from the from the Disciplinary Committee and the written
receipt of the copy of the
complaint or within the extended tinme, representation of the respondent.
the concerned
member may file a duly verified
written statement to (2) If considered necessary, the Council may order for
defend himself.
(ii) Within the specified time further inquiry to be made by the Disciplinary
period, the secretary of ICAI Committee.
may forvard such a statement to
the complainant, for (3) If the Disciplinary Committee finds the respondent not
him to filea rejoinder, which is duly
verified. guilty of professional or other misconduct, the
(iv) After receiving the
copy of the rejoinder from proceedings may be filed or the complaint
dismissed. If
complainant, which is forwarded the
not
ICAI, the respondent may file
by the secretary of the Disciplinary Committee finds a respondent
his comments on the contrary view. On
rejoinder as a written statement guilty, the Council may not take a if
which is duly verified, Disciplinary Committee,
within the specified time period. considering the report of the professional
guilty of
(v) The secretary may the Council finds the member Schedule of the
require, further misconduct mentioned in the First
documents from the complainant particulars or give the respondent
respondent, which may be furnished or from the Chartered Accountants Act, it may
by them. an opportunity of being heara.
(vi) If the Council of
the ICAI, after considering the pass an order either,
statements of both the parties written (4) Subsequently, the Council may
and other documents filed removing the name of the
by them, is of the opinion that a reprimanding the member or for a period
prima facie case exists, it of the members
may refer the matter to the
Disciplinary Committee. member. from the Register
thinks tit.
(vii)lf the Council, after not exceeding 5 years, as it remove the name trom
considering the statements, opinion to
documents etc., is of the opinion t the Council is of the exceeding 5 years or
facie case against the that there is no prima members for a period Court
respondent, the same may the register of to the High
informed to both the parties. be may forward the case respondent
permanently, it where the
the area
having the jurisdiction in
(ITD) Inquiry:

() The secretary
may place carries his business. Disciplinary Committee,
Committee all relevant facts, before the Disciplinary report of the professional
considering the
relating to the case, brought n the
Council finds misconduct
member guilty of
in the first
to his notice.
ne
SConduct or other
Chartered
not specified Council
Accountants Act, the
Schedule of the
 Ethics
ressional
218 Vipul'sM Auditing-11(BB siondi 219
power
s as are vested with the City Civil
may refer the matter to the competent High Court with ne
neP
CivilProcedure, for the matters
Court under the
its recommendations. deof relating to:
ot summons to a person.
(7) The High Court shall hear the case forwarded by the issue
Council and after considering the recommendations enforcing attendance of a person for inquiry.
made by the Council, pass any of the following orders: Examining a person on oath.
dismiss the case or file the proceedings. Receiving evidence on affidavit.
reprimand the member. Discovering and production of documents.
remove the name of the member from the register of
members, either permanently or for a specified CASE STUDIES:
period as it thinks fit, or 5
Determine hether, in the following cases, if there is any
may direct the council to make further inquiry in the
orofessional misconduct by the member.
matter. Accountant, accepted
an
(V) Right to Appeal:: Mr. Aryan, a practicing Chartered
a project report for a chemical
(1) The Chartered Accountants Act, allows a member to assignment of preparing
prefer an engineer and agreed to pay
appeal to the High court, against the order passed by the factory jointly with a chemical
fees received by him.
council of ICAI finding him guilty of professional misconduct him 40% of the professional
2 of First Schedule (part-1) of the
specified in the First Schedule of the Chartered Accountant Ans.: As per the Clause Chartered Accountant in
1949, a
Act. He may prefer an appeal within 30 days or such Chartered Accountants Act,
sharing his professional fees with
extended time allowed by the High Court, from the date on practice is prohibited from
member of the institute.
which the order is communicated to him. any person other than the professional
held guilty of
(2) The High court is empowered to admit the
appeal and revise Accordingly Mr. Karan will be professional fees with the
his
the order passed by the council, if it deems fit. The High misconduct because if he shares be guilty of
Court can do so only after calling for the written statements, engineer. However he will not specific and
chemical responsibility is
his
documents and other records. professional misconduct if
(3) Before modifying or setting aside separate.
the order passed by the his professional fees is arrangement with a
lawyer
council, an opportunity of being heard may be entered into an each other.
given to the (b) Mr. Aryan their clients to
council. refer 25% of the
ereby they agreed to would share
(4) If the High court imposes or enhances the penalty to the was decided they
According it clients.
member, an opportunity of being heard is
given to the gross fees received from such of
professional misconduct
member. will be guilty Schedule (Part-1) of
the
(5) The High court has the power to Ans.: Mr. Aryan Clause 3 of First Accountantin in
revise the order passed by under Clause 2 and Chartered
1949. A professional fees with
the council of ICAI; either on its own motion or Act,
otherwise. Chartered Accountants sharing his non-members of
(VDPowers of the Council and the Disciplinary Committee: ohibited from from
practice is receiving fees
For conducting any inquiry under the Chartered
Accountants nor l-members or from
Act, the Council of ICAI and the Disciplinary
Committee have the the Institute.
 220 Vipul' Auditing-1 (Bel esionalEthics
221
(c) Mr. Lakshya, a Chartered Accountant, sent an
application to
Mr. Aryan, a Chartered AccOuntant accepted
the Chairmen of a Co-operative Society offering himself for statutory auditor of a company without the position asa
first communicating
appointment as an auditor. in writing with the Complainan's Firm
which was
Ans.: Clause 6 of First Schedule (part-1) of the Chartered previous auditor. the
Accountants Act, 1949 bans all forms of Ans.: Clause 8 of First Schedule (part-1)
Ans.
canvassing for of the
professional work by a Chartered Accountant in
practice, Accountants Act, 1949 prohibits a practicing Chartered
including issue of circulars, advertisements AccOuntant from accepting any new Chartered
or personal assignment without
communication or through interviews.
intimating the retiring auaitor. New auditor is
Accordingly Mr. Lakshya will required to
be held guilty of intimate the retiring auditor and should have
professional misconduct under this clause. sufficient
(d) Mr. Aryan, a practicing
evidence of such intimation.
Chartered Accountant wrote a Therefore in the given case, Mr. Aryan is guilty of
to a company in standard format letter
highlighting his expertise in professional misconduct under this clause.
income tax and sales tax matters.
Ans.: Guilty of professional
misconduct under clause 6 h Mr. Aryan, a Chartered Accountant sent a letter by ordinary
(same as case study 3) post to the previous auditor after the acceptance of the audit
(e) Mr. Aryan, a assignment. Moreover, no evidence was produced to show
Chartered Acountant in practice,
an advertisement released responds to that the said letter was either sent to or was received by the
by a private company
newspaper inviting applications in a previous auditor.
for appointment as auditors.
Ans.: According to Clause 6,
members should not respond Ans.: New auditor should intimate the retiring and should
to advertisement inviting
applications for appointment have sufficient evidence of such intimation (communication
auditors. of through "Registered Acknowledgement due" or by hand
be
Therefore Mr. Aryan
will be guilty of professional delivery against a written acknowledgement would
misconduct under this clause. sufficient evidence of such communication).
( Mr. Aryan displays a signboard of professional
outside his office describing ACCordingly Mr. Aryan will be guilty
himself as a "Chartered
Accountant and Management misconduct under clause 8.
Consultant". placed an advertisement for
Ans.: Clause 7 of First Directors of Thunder Strom Ltd. of retiring auditors. Mr.
Schedule (part-1)
of the Chartered PPOintment of new auditors in place
Accountants Act, 1949 and was appointed as
Accountant from using
prohibits a practicing
Chartered A2aPplied in writing for the post He did not intimate
designation or expression audi directors.
"Chartered Accountant" other than r of the company by the of audit assignment
on his professional the retiring auditor before a acceptance
visiting cards letter heads
or documents, rovisions
provisions Sectio 140
of Section
of a University established sign boards unless it be a degree and also failed to ascertain whether uditors has
appointment of auditors
the Central Government. by law in India or recognized by of Companies Act regarding
Acordingly Mr. Aryan been complied with. contraventions of
will be held guilty made serious Chartered
misconduct under this of professional Ans.: Mr. Aryan
Ar has (Part-1) of the
clause. Schedule professional
Aco uses
arious clauses of First
ccountants Act, 1949. He will
be held
guilty of

misconduct under:
 essionolEthics

222 Vipul's Auditing I! (BBI)

a Chartered
Accountant, 223
-
M
record of his professional receipts.
does not maintain
Clause 6: (it prohibits Chartered Accountants in practice any
from responding to advertisement inviting applications for AT : He
will be held guilty of
professional
appointment of auditors). under part II of the Chartered Accountants Act, 1949.
misconduct
Clause 8: (prohibits a practicing Chartered Accountant
notification of the council of ICAI, As per
the practicing Chartered
from accepting any new assignment without intimating ntant is required to maintain proper books of accounts
the in respect
retiring auditor) of his professional practice.
Clause 9: (prohibits acceptance of appointment as
of a company without first ascertaining from it
auditor
whether the EXERCISES:
requirements of Section 140 of the Companies
Act, 1956, in JECTIVE QUESTIONS:
respect of such appointment have been
G) Mr.
duly complied with). Choose the right answer and complete the sentence:
Aryan, a practicing Chartered
Accountant, was (a) A is required to function as per
appointed to value goodwill of a the
provisions of
purpose of its acquisition. It was running business for the Chartered Accountants Act, 1949. (Chartered Accountant,
fees of Mr. Aryan would
decided that professional Cost & Management Accountant, Company Secretary)
be 15% of the goodwill (b) refers to the behaviour of a professional man
ascertained by him. value
towards other members of professional body and also towards
Ans.: Clause 10 of First Schedule members of the public. (Professional Misconduct, Professional
Accountants Act, 1949 prohibits (part-1) of the Chartered Ethics, Honesty)
Accountant from charging a Practicing Chartered
or acceptingg fees on a percentage (c) Professional Misconduct is defined under Section.
basis of profit or which are of the Chartered Accountant Act, 1949. (32, 42, 22)
results. This is to ensure contingent upon the findings
that members do not sacrifice or ()Part lI of First Schedule deals with professional misconduct in
independence in order to their relation to members in (service, practice,
derive maximum benefit
given assignment. If the from the general)
professional fee is
findings of the Chartered not based upon (eThe main auditor don't have right to access the audit working
Accountant
able to exercise his professional then he would be better
papers of auditors. (joint, branch, statutory)
judgement.
Since Mr. Aryan member of the Institute shall be deemed "to be in Practice"
if
has contravened the
will be held guilty of professional said provisions, he A himself in the practice of (costing, accountancy,
k) Mr. Aryan, a Chartered misconduct. taxation)
submitted by his articles Accountant, in an application Aperson who wants to be member of the Institute should be of
permission to pursue clerk to the council the age of. years. (18,21,25)
another of ICAI for
working hours of course confirms
that the normal
ns. Chartered Accountant;: (b) Professional Ethics; () 22;
his office are from
and the hours during 10.30 a.m. to 5.30
p.m. service; (e) branch: () accountancy: (9)2
classes are from which the article True or False
is required to attend following statements are
attends the classes
6 p.m. to 9.30
p.m. However
the article clerk
whether
A chartered accountant is expected to
maintain the dignity and
from 10 am to
one year. 3 pm on all prestige of the profession.
weekdays for misconduct of members in
Ans.: Since the
Fart l
of First Schedule deals with
to ICAI contains application seeking permission service.
false his fees With a non
is guilty of professionalinformation, the Chartered submittea Accountant cannot share
misconduct. Accountant nartered
member.
 224 Vipul'sM Auditing (BBI)LessionolEthics
225

(d) Chartered Accountant can get the clients by advertising.

A (d) issue of circular
activity.
(e) AChartered Accountant cannot send invitation or greeting(e) any business
cards. Hint: (a) Clause 8 & 9; (6) Clause 10& 12;(c) Clause 2 & 3;
(1) A Chartered Accountant can disclose the client's financial (d) Clause 6;(e) Clause 11]
information media. aolly state the meaning of Professional Misconduct' as per
(g) A person not holding certificate to practice is allowed to Cection 22 of Chartered Accountants Act 1949 with parts and
practice. contents of the schedules there under. Also state any eight clauses
(h) A Chartered accountant can advertise in newspapers to solicit which constitute professional misconduct.
professional assignments. Misconduct"
OWhat do you mean by "Professional Schedule of and Chartered "Ethics"?
Ans.: (a) True; (b) False; (c) True; (d) False; (e) False: () False; Enumerate any five instances of Part I I
the
(g) False; (h) False. Accountants Act, 1949.
THEORY QUESTIONS: procedure for enquiry into charges of Misconduct of
1) Explain theAccountants.
(1) Explain the term "Professional Misconduct". Discuss various Chartered
instances of professional misconduct indicated in Part of the12) Write a short notes on:
I

Chartered Accountants Act, 1949. members generally.

(a) Professional misconduct of
(2) Explain the terms "Professional Ethics" and "Misconduct". in practice.
(b) Members deemed to be
(3) Explain five instances of Professional misconduct of an auditor.
(4) What are the clauses of Professional Misconduct in relation to (c) Disciplinary Procedure.
Chartered Accountant in Practice? (April 19)
(5) Explain the role of professional accountant in society. (Hint: Write
introduction and main objectives of code of ethics) (April 19)
(6) What are fundamental principles of code of ethics?
(7) Discuss the effects of the conduct of Chartered Accountant in the
following cases:
(a) He forms an opinion on financial statements without obtaining
sufficient evidence in this respect.
(b) He solicits professional work.
(c) He charges fees, which are contingent upon the results.
(d) He accepts new audit assignment without intimating the retiring
auditor.
(e) He accepts the audit work in contravention of the provisions of
section 140 of Companies Act 1956.
(9 He puts up a signboard outside his ofice showing his
designation as "Chartered Accountant and Company Law
Adviser"
(8) Explain the professional ethics that are to be followed by an auditor
with respect to the following:
(a) accepting of any new audit
(b) charging of fees to the client
(c) sharing of fees
 Questions
wjiective

226 227
Vipul'sM Auditing-ll (BBI) (9) approach is also
known as
around the computer. auditing
(white box, black box, yellow
box, red box)
Objective Questions 10) The main auditor does not
have the right
to access
the audit working papers of_
auditor.
(joint, branch, statutory, cost)
April- 2019 TAns.: (1) Divisible Profit, (2) Twenty, (3) Civil,
(4) Board of
(1) (A) Directors, (5) Reporting, (6) Cal, (7) Benefits paid, (8) 44AB,
Choose the correct option: (Any Eight) (8)
(1) (9) Black box, (10) Branch]
is the amount of net profit available for
distribution of dividend. (B) State True or False: (Any Seven) (7)
(Net profit before tax, Net profit after tax, Divisible (1) Dividend can be distributed from the share capitalof
profit, Dividable profit) the company.
(2) An auditor can auditor maximum (2) Auditor of a company can be appointed by CAG.
companies as per Companies Act, 2013. (3) Auditor is liable only if there is a loss to the party.
(ten, twenty, thirty, forty) (4) Auditor is supposed to report to the board of
(3) Misfeasance directors.
isa liability in the
companies act., (5) Internal auditor cannot perform concurrent audit.
classes of
(criminal, civil, contractual, government) (6) IRDA has the power to suspend class or
(4) First auditor of a company shall be appointed by the general insurance business. provisions.
legal
(7) HRaudit covers compliance with
security
(shareholders, promoters, boardof directors, (8) CIShas createda problem of data his fees with a
registrar of companies) accountant cannot share
(9) A chartered
(5) is the most important objective of non member. for at least 5
auditing Books of account shall be preserved
(10)
(Reporting Fraud detection, Verification, years. (4) False, (5) False,
Preparatíon of final accounts) False, (3) False,
lAns.: (1) False, (2) (9) True, (10) False
(6) Money let for one day is called as money at True,
(6) True, (7) True, (8)

(short notice, call, intraday, liquidity)

(7) Surrender value becomes a part of in
revenue account.
premiums, commission, benefitspaid, tax paid)
(8) Provisions of section of income tax act
aPply to ax audit.
(44, 44AB, 44ABD, 44AC)
228 Vipul's Auditing -
Il (BB) University Question Paper 229
(9) approach is also known as auditing
University Question Paper around the computer.
(white box, black box, yellow box, red box)

April - 2019
(10) The main auditor does not have the right to access
the audit working papers of . auditor.
(joint, branch, statutory, cost)
N.B. (1) All questions are compulsory.
(B) State True or False: (Any Seven) (7)
(8) (1) Dividend can be distributed from the share capital of
(1) (A) Choose the correct option: (Any Eight)
net profit available the company.
(1) is the amount of for
(2) Auditor of a company can be appointed by CAG.
distribution of dividend.
(3) Auditor is liable only if there is a loss to the party.
(Net profit before tax, Net profit after tax, Divisible
profit, Dividable profit) (4) Auditor is supposed to report to the board of

(2) An auditor can auditor maximum directors.

(5) Internal auditor cannot perform concurrent audit.
companies as per Companies Act, 2013.
(6) IRDA has the power to suspend class or classes of
(ten, twenty, thirty, forty)
a liability in the general insurance business.
(3) Misfeasance i
(7) HR audit covers compliance with legal provisions.
companies act.
(8) CIS has created a problem of data security.
(criminal, civil, contractual, government)
9) A chartered accountant cannot share his fees with a
(4) First auditor of a company shall be appointed by the
non member.
(10) Books of account shall be preserved for at least 5
(shareholders, promoters, boárd of directors,
years.
registrar of companies)
of auditing
(5) is the most important objectiveVerification (2) (a) What are the provisions of the companies act regarding8
(Reporting Fraud detection, (8)
maintenance of books of accounts.
Preparation of final accounts) (b) What are the duties of a company auditor? (7)
(6) Money let for one day is called as money
at
OR ut L
(short notice, çall, intraday, liquidity) (c) Discuss types of liabilities of professional accountant. (8)
in
(7) Surrender value becomes a part
of
(d) What is an audit report? Mention and elaborate types o
revenue account. audit report. (7)
(premiums, commission, benefits paid, tax paid)
(8) Provisions of section of income tax act 13) (a) What is LFAR? Mention the contents and importance of
apply to tax audit. LFAR. (8)
(44, 44AB, 44ABD, 44AC) (b) How do you audit Premium of an insurance comf iny?(7)
 Vipul's Auditing - 1 (BB)
230

OR
control
(c) How would an auditor evaluate the internal
(8)
system of the bank?
(c) What areas are the internal controls
needed in an
(7)
insurance company?

scope and
(4) (a) What is a management audit? Mention its
(8)
objectives.
features
(b) What is computerized audit program? Mention
(7)
and advantages.
OR
(8)
(c) What is a tax audit? Explain in detail.
(d) What are the problemns in CIS environment in
(7)
implementation of internal control.

5) (a)
(5) What are the clauses of professional misconduct in
(8)
relation to chartered accountant in practice.
(b) Explain the role of professional accountant in society
(7)
with reference to the code of ethics.
OR
(15)
(c) Write short notes on: (Any Three)
A Segment reporting
(i Remuneration of an auditor.
(iii) Environment audit.
(iv) True and fair.
(v) Non-performing assets.