Auditpedia 5.0 by CA Ravi Agarwal

CA RAVI AGARWAL’S
AUDITPEDIA 5.0
India's rst Comprehensive

HANDWRITTEN
CONCEPT BOOK
FOR CA FINAL
AUDiT
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PAPER 3 -ADVANCED AUDITING AND PROFESSIONAL ETHICS SCORE 70+ IN AUDIT
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AUDITPEDIA 5.0 FOR CA FINAL
Audit Planning, Strategy & Execution
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Reason for
changes to
Planning
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RiSK ASSESSMENT &
iNTERNAL CONTROL
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02 Risk Assessment and Internal Control

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Audit Risk Components
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SPECIAL ASPECTS OF AUDITING
IN AN AUTOMATED ENVIRONMENT
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SPECIAL ASPECTS OF AUDITING IN AN AUTOMATED

03 ENVIRONMENT
Category of Business Applications & Category
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Ø Packaged Software (off the shelf application) used by micro & small business. Eg. Tally &
Quickbooks
Ø Small ERPs in small to medium business. Eg Tally ERP, SAP Business One, Focus ERP
Ø ERP- Med to large Cos à Eg. SAP ECC, Oracle Enterprise Business Suite
Layers of Automated Environment

Ø Applications (discussed above)
Ø Databases: Oracle 19C, MS-SQL Server
Ø Operating systems: Windows, Linux
Ø Hardware & storage devices: Server, disks
Ø Network devices: Switches, routers
Ø Network: LAN, WAN
Real Time Environment

Transactions initiated, processed & recorded immediately as they happen without delay
Real Time Environment: IT Components

Applications Middleware Networks Hardware
For eg: ERP For eg: Webservers For eg: Wide Area For eg: Servers,
Applications SAP, like Apache, Oracle, Networks, Local Data centers,
Oracle E Business Fusion, IIS Area Networks Backup & storage
suite, Core Banking devices
Applications
Understanding & Documenting Automated Environment

Understanding of Automated Environment as per SA 315. The auditor's understanding should
include:
· Applications used by Co
· Details of IT Infrastructure components for each application
· The org structure & governance
· The policies, processes & procedures followed.
· IT Risks & controls
Document the understanding as per SA 230
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Consideration of Automated Environment at each phase of audit cycle

·during risk assessment, the auditor should consider risk arising from the use of IT systems at the
company;
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·when obtaining an understanding of the business process and performing walkthroughs the use of
IT systems and applications should be considered;
·while assessing entity level controls (ELCs) the aspects related to IT governance need to be
understood and reviewed;
·pervasive controls including segregation of duties (SOD), general IT controls (GIT) and applications
should be considered and reviewed;
·during testing phase, the results of general IT controls would impact the nature, timing and extent
of testing;
·when testing of reports and information produced by the entity (IPE) generated through IT
systems and applications;
·at completion stage, evaluation of control deficiencies may require using data analytics and CAATs.
In a controls-based audit, audit approach can be classified into 3 broad phases comprising of planning,
execution, and completion. In this approach, considerations of automated environment will be relevant at
every phase as given below:
I.Risk Assessment Process

•Identify significant accounts and disclosures.
•Qualitative and Quantitative considerations.
•Relevant Financial Statement Assertions (FSA).
•Identify likely sources of misstatement.
•Consider risk arising from use of IT systems.
II.Understand and Evaluate
•Document understanding of business processes using Flowcharts / Narratives.
•Prepare Risk and Control Matrices (RCM).
•Understand design of controls by performing walkthrough of end-to-end process.
•Process wide considerations for Entity Level Controls, Segregation of Duties.
•IT General Controls, Application Controls.
III.Test for Operating Effectiveness
•Assess Nature, Timing and Extent (NTE) of controls testing.
•Assess reliability of source data; completeness of population.
•Testing of key reports and spreadsheets.
•Sample testing.
•Consider competence and independence of staff /team performing controls testing.
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IV.Reporting
•Evaluate Control Deficiencies.
•Significant deficiencies, Material weaknesses.
•Remediation of control weaknesses.
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•Internal Controls Memo (ICM) or Management Letter.
•Auditor's report.
Enterprise Risk Mgt (ERM)

Risks which business have to face & manage?
Businesses today operate in adynamic environment. The volatility, unpredictability and pace of changes
that exist in the business environment today is far
greater than in the past
.
Some of thereasons for this dynamic environment includeglobalisation, use of technology, new regulatory
requirements, etc. Because of this dynamic environment the associated risks to business have also
increased and companies have a need to
continuously manage risks.
Examples of risks include:

•Market Risks;
•Regulatory & Compliance Risks;
•Technology & Security Risks;
•Financial Reporting Risks;
•Operational Risks;
•Credit Risk;
•Business Partner Risk;
•Product or Project Risk;
•Environmental Risks.
Risk Assessment Process (RAP)

One of critical component of ERM is RAP. It involves consideration for:
ØRisk identification
ØAssessment criteria including qualitative & quantitative factors
ØDefn of key performance & risk indicators
ØRisk appetite
ØRisk scores, scales & maps
ØAssess risks
ØUse of data & metrics
ØPrioritise risk
ØBenchmarking
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Typical risk assessment process would be given below:
Define business Identify events that Assess likelihood & Respond & Assess residual
objectives & goals affect achievement impact mitigate risk risk
of business objectives
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Types of Controls:
฀General Controls: Policies & proceduresrelate to many applications& support effective functioning
of application controls. They apply to mainframe, miniframe, and end user environment. The GIT
controls that maintain integrity of info & security of data commonly include controls over
following:
ØData center & network operations
ØSystem of software acquisition, change & maintenance
ØProgram change
ØAccess security
ØApplication system acquisition, development & maintenance
฀Application Controls: They include both automated or manual controls that operate at business
process level. Application controls can bepreventive as well as detectivein nature and designed to
ensure integrity of accounting records. Automated Application controls are embedded into IT
applications viz., ERPs and help in ensuringcompleteness, accuracy and integrityof data in those
systems.
Examples of automated applications include :

Ø edit checks and validation of input data,
Ø sequence number check,
Ø limit check,
Ø format check,
Ø range check,
Ø reasonableness check,
Ø mandatory data fields,
Ø existence check etc.
Entity Level Risks & Controls (ELCs)

Characteristics of ELCs
•Entity Level controls are known as pervasive controls since they operate across all organisation
levels.
•ELCs are part of company's overall internal control framework and relate to internal control
components other than control activities.
•Entity level controls are subjective by nature and hence require application of more professional
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judgement in their evaluation and testing.

Types:
1.Direct ELCs: operate at a level higher than business activityor transaction level such as a business
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process or sub-process level, account balance level, at a sufficient level of precision, to prevent,
detect or correct a misstatement in a timely manner.
Eg. Business performance reviews, Internal Audit
2.Indirect ELCs: do not relate to any specific business process , transaction or account balance and
hence, cannot prevent or detect misstatements. However, they
contribute indirectly to the effective
operation of direct ELC and other control activities.
Eg. Co code of conduct and ethics policies, HR Policies, Employee job roles & responsibilities
Whistle Blower Policy

How auditor obtains understanding & evaluates whistle blower policy of Co?
Ø Does Co. have a whistle blower policy?
Ø Is this policy documented & approved?
Ø Has whistle-blower policy been communicated to all employees?
Ø Are employees aware of this policy & understand its purpose & their obligations?
Ø Has Co. taken measures viz. training, to make employees understand contents & purpose of
policy?
Ø Does Co. monitor effectiveness of policy time to time?
Ø How does Co. deal with deviations & non-compliance?
Computer Assisted Audit Techniques (CAATs)

Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics. The data analytics methods used in an audit are known as
Computer Assisted Auditing Techniques or CAATs.
When auditing in an automated environment, auditors can apply concepts of data analytics for
several aspects of an audit including following:
Ÿ preliminary analytics;
Ÿ risk assessment;
Ÿ control testing;
Ÿ non-standard journal analysis;
Ÿ evaluation of deficiencies;
Ÿ fraud risk assessment.
Standards, Guidelines & Procedures- Using Relevant Frameworks & Best Practices
ŸStandards
· on Auditing issued by ICAI, are required to be followed for an audit of financial statements.
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Section 143 of Companies Act 2013 requires statutory auditors to provide an Independent Opinion
on the Design and Operating Effectiveness of Internal Financial Controls Over Financial
Reporting (IFC-FR) of the company as at Balance Sheet date. For this purpose, the Guidance
Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI, provides
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the framework, guidelines and procedures for an audit of financial statements.
Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404
of this act requires public listed companies to implement, assess and ensure effectiveness of
internal controls over financial reporting and auditors independent opinion on the design and
operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to
the requirements of IFC-FR for Indian companies.
ISO 27001:2013 is the Information Security Management System (ISMS) standard issued by the
International Organization for Standardization (ISO). This standard provides the framework,
guidelines and procedures for implementing information security and related controls in a
company. For eg, this std covers password security, application security, physical security, backup
and recovery.
ITIL (Information Technology Infrastructure Library) and ISO 20000 provide a set of best practice
processes and procedures for IT service management in a company. For example, change
management, incident management, problem management, IT operations, IT asset management
are some of the areas that could be relevant to audit.
The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in
the storage, retrieval, transmission or handling of credit card/debit card are required to
implement the security controls in accordance with this standard.
The American Institute of Certified Public Accountants has published a framework under the
Statements on Standards for Attest Engagements (SSAE) No.16 for reporting on controls at
service organisation that include
❖ SOC 1 for reporting on controls at a service organization relevant to user entities' ICFR.
❖ SOC 2 and SOC 3 for reporting on controls at a service organization relevant to security,
availability, processing integrity, confidentiality or privacy i.e., controls other than ICFR.
❖ While SOC 1 and SOC 2 are restricted use reports, SOC 3 is general use report.
The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular framework for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks
COMPANY AUDIT
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04 COMPANY AUDIT
Section with Respect to Company Audit:

139.Appointment of auditors.
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140.Removal, resignation of auditor and giving of special notice.

141.Eligibility, qualifications and disqualifications of auditors.
142.Remuneration of auditors.
143.Powers and duties of auditors and auditing standards.
144.Auditor not to render certain services.
145.Auditors to sign audit reports, etc.
146.Auditors to attend general meeting.
147.Punishment for contravention.
148.Central Government to specify audit of items of cost in respect of certain companies
Sec 139: Appointment of Auditors
First Auditor Subsequent Auditor

Goverment Company defined Other Than a Govt Co Goverment Company
Other Than a Govt defined u/s 2 (45)
u/s 2 (45) [Sec 139(1)]
Co [Sec 139(6)] [Section 139(7)] [Section139(7)]
Appointment by BOD Appointment by CAG within Appoinment by Appintment by CAG Within

Within 30 Days From 60 Days from the DOR Members in AGM 180 Days from
DOR In Case of Failure: In case of Failure - BOD Commencement of Year
Members in EGM within 30 Days
within 90 Days In case of Failure - Members
in EGM within 60 Days Hold the office from 1st Hold the Office till the
AGMtotofullfillment
6th AGM ofSubject conclusion of AGM
Hold the Office till the Hold the Office till the Certain Conditions
conclusion of First AGM conclusion of First AGM
Following Points to be Noted:

฀Before Such Appointment, Written consent of auditor & certificate that appointment is as
per prescribed conditions to be obtained from the Auditor.
฀Certificate should also indicate that auditor satisfies criteria u/s 141
฀Co. inform auditor of appointment & file notice of appointment with Registrar within 15 of the
meeting in which he is appointed.
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Filling of Casual Vacancy [Sec 139(8)]
i)In case ofnon – Government Company -by BOD within30 days
If due to resignation by auditor then Board Approval & shareholder's approval at GM within 3
months of recommendation of Boardand Auditor shall hold office
upto next AGM
ii)In case ofGovt Co- by CAGwithin 30 days.In case of Failure - BOD within next 30 days
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Note:
In case of Resignation the Auditor shall file within a period of 30 Days Form ADT – 3 with the
company, registrar and CAG(In case of Government Companies)
Penalty if Failure : Lesser of 50000 or Remuneration (If Continuing – 500 / Day Maximum – 2 L.)
Retiring auditor maybe reappointed at AGM if,

a)Not disqualified for reappointment
b)Not given notice in writing of unwillingness of reappointment
c)SR hasn't been passed to appoint some other auditor or expressly provide that he shall not be
reappointed
Where at any AGM, no auditor appointed or re-appointed, existing auditor shall continue to be
auditor of company.
Sec 141: Eligibility, Qualification & Disqualification of an Auditor

Qualification:
Ÿ Person shall be eligible to be Auditor only if he's a CA
Ÿ Firm (including LLP) where majority partners practicing in India appointed by Firm name. Partners
who are CA can only act & sign on behalf of firm
Disqualifications of Auditor [Sec 141(3) read with Rule 10 of Cos.(Audit & Auditor) Rules 2014]
a)Body Corporate (BC) other than LLP
b)Officer or employee of Co.
(Officer includes Director, Manager, KMP, Shadow Directors)
c)Person who is partner or employment of officer or employee of Company
(Section 141(3)© of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company. Section 141(4) provides that an auditor who after his appointment, disqualified u/s
Section 141(3), he shall be deemed to have vacated his office as an auditor.)
d)Person who is relative/partner (PRP)-
i.)Is holding security or interest in Co/Associate/Suby/Holding/Subsy of such holding
Ÿ Relative may hold security in the Co.of Face value 1 Lakh
Ÿ If relative (not auditor or partner) acquires interest > 1 lakh, then corrective action to
maintain limit within60 Days of acquisition
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Relative: Members of HUF + Husband wife + Father (including step- father), Mother (including step-
mother), Son (including stepson), Son's wife, Daughter, Daughter's husband, Brother (including step-
brother), Sister (including step- sister)
ii)PRP indebted to Co/Associate/Suby/Holding/Subsy of such holding > 5L

rd
iii)PRP given guarantee or security for indebtedness of 3 person to
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Co/Associate/Suby/Holding/Subsy of such holding > 1L

e)Person or firm has business relation with Co/Associate/Suby/Holding/Subsy of such holding or
associate Co.
(Business relation excludes services permitted under CA Act 1949 by auditor & commercial
transactions by Company at Arm's length price)
f)Person whose relative is Director or employed by Co. as Director or KMP
g)Full time employed OR person or partner of firm auditing > 20 companies excluding
OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with no default in filing F.S. or
Annual Return)
Notes:
ØNo. of partners on the date of acceptance of audit assignment shall be taken into account
ØCA in full time employment elsewhere shall not be taken into account
h)Convicted for Fraud & period of 10 years not elapsed from date of conviction
i)Renders service under Sec 144 to Co. or its holding.
Sec 144: Services not to be rendered by Auditor

(I)accounting and bookkeeping services;
(ii)internal audit;
(iii)design and implementation of any financial information system;
(iv)actuarial services;
(v)investment advisory services;
(vi)investment banking services;
(vii)rendering of outsourced financial services;
(viii)management services; and
(ix)any other kind of services as may be prescribed.
Sec- 139(8) Where auditor incurs any of disqualifications after appointment, he shall vacate
office and such vacation shall be deemed to be casual vacancy.
Rotation of Auditors: Sec 139(2)

Applicability:
Ÿ Listed Companies. (Exclude OPC & Small Cos)
[Defn of small co. - other than public Co. (Paid up cap less than or equal 50L & Turnover less
than or equal 2Cr)]
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Ÿ Public Companies: PSC more than or equals 10 Cr
Ÿ Pvt ltd: PSC more than or equals 50 Cr
Ÿ Companies with borrowings from Financial institutions, banks or public deposits more than or
equals 50 Cr
Companies. for which Rotation provision are applicable, shall not appoint or re-appoint-
(a)an individual as auditor for more than one term of five consecutive years ; and
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(b)an audit firm as auditor formore than two terms of five consecutive years
.
Cooling period - 5 years

i.individual auditor - not be eligible for re-appointment as auditor in same Co. for 5 years from
completion of his term;
ii.audit firm - shall not be eligible for re-appointment as auditor in the same Co. for 2 term of 5
years from completion of such term.
Notes on Rotation:
Ÿ It shall not prejudice the Right of Company to remove auditor or right of auditor to resign
from such office of Co.
Ÿ Members of a company may resolve to provide that-
(a)in audit firm appointed by it, auditing partner and his team shall be rotated at
such intervals as may be resolved by members; or
(b)audit shall be conducted by more than one auditor.
Manner of Rotation
Ÿ Audit committee(AC) shall recommend to BOD the name of auditor
Ÿ If no AC, then Board forward its own recommendations for appointment at AGM to members
Ÿ If a partner, who is in charge of audit firm and also certifies F.S. of the Company, retires from
said firm and joins another firm of CAs, such other firm shall also be ineligible to be appointed
for a period of 5 yrs.
Ÿ a break in term for a continuous period of 5 yrs shall be considered as fulfilling requirement
of rotation
Audit Committee – Sec 177

Applicability:
Ÿ Listed companies
Ÿ Public Companies -
ØPaidup Share Capital (PSC)>= 10 Cr or
ØTurnover (T/o) >= 100 Cr or
ØL/D/D(Loans/Debenture/Deposits) > 50 Cr
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Manner & procedure for selection & appointment of Auditor
Ÿ AC or Board shall consider Qualification & Experience along with if any, pending proceedings
relating to professional conduct
Ÿ AC shall recommend name to BOD
Ÿ If board agrees, it Will forward to AGM
Ÿ If board disagrees, it will refer back to AC along with reasons
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Ÿ If AC doesn't reconsider, board will record reasons of disagreement & forward its
own recommendation to AGM
Ÿ Auditor will hold office till conclusion of 6th AGM
Auditor's Remuneration - Sec 142

Board may fix remuneration of 1 st auditor.
In other case, it will be fixed in the AGM
Remuneration includes fees, expense reimbursed & facility extended to him
Removal of Auditors before expiry of term -Sec 140(1)

(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2
and shall be accompanied with fees as provided for this purpose under the Companies
(Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within 30 days of the resolution.
(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing thespecial resolution.
It is important to note that before taking any action for removal before expiry of terms, auditor
shall be given reasonable opportunity of being heard.
Tribunal by suomoto on an application made to it by CG within 15 Days, may order the company to
change its auditors, if CG is satisfied that either directly or indirectly, the auditor acted in
fraudulent manner in relation to the company or its directors. (The auditor shall be liable under
447)
Appointment of Auditor other than retiring Auditor who was removed (Sec 140)
v Special notice shall bereqd for resolution at AGM for appointing auditor
lPerson other than retiring auditor or
lProviding expressly that retiring auditor will not be reappointed (except where
rotation timeline completed)
v On receipt of notice of such a resolution, Company shall forward to retiring auditor
v On receipt of notice if retiring auditor makes representation to Co. in writing &
request notification to members, then Co. shall
ª In notice of meeting to members state fact that representation has been made &
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ªSend copy of representation to every member to whom notice is sent

ªIf copy of representation couldn't be sent à then Auditor may require it to be read out at
meeting + copy to be filed with ROC
ªIf tribunal satisfied on application by Co. or any aggrieved person à then representation need
not be sent or read out at the meeting
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Ceiling on Number of Auditor:
Maximum appointment 20 Companies – other than following
OPC
Small Company
Dormant Company
Private companies PSC < 100 Cr ( Not defaulter in Filling FS & Annual Report)
In case of Firm: Maximum limit X No. of partners
For tax audit Assignments the limit is 60
Powers & Duties of Auditor:

Right of access to books etc.
Sec 143(1) of Act provides auditor, at all times, have right of access to books of account and vouchers of
Co, whether kept at regd office or any other place and is entitled to require from officers such info &
explanation as he consider necessary for performance of duties as auditor.
Auditor of holding co. will have right to access records of all its subsys & associates related to
Consolidation.
Eg. While conducting audit of limited co. for year ended 31st Mar,2020, auditor wanted to refer to
Minute Books. BOD refused to show Minute Books to auditor.
Section 143 of Companies Act, 2013 grants powers to auditor that every auditor has right of access,
at all times, to books and account including all statutory records such as minute books, fixed assets
register, etc. of Co. for conducting audit. In order to verify actions of Co. and to vouch and verify
some of transactions of Co , it is necessary for auditor to refer to decisions of shareholders and/or
directors.
Therefore, essential for auditor to refer to Minute Books
. In absence of Minute Books, auditor may
not be able to vouch/verify certain transactions of Co.
Conclusion: In case directors have refused to produce Minute Books, auditor may consider extending
audit procedure and also consider modifying/ qualifying his report in appropriate manner.
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Sec 146 – Right & duty to attend AGM
ª All notices & other communication of GMs to be forwarded to auditor
ªAuditor shall attend (unless exempted) by himself or authorised representative (qualified to be
auditor)
ªShall have right to be heard at such meet on any part of business which concerns him as auditor
Right of Lien:
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Auditor may exercise right of lien in cases of cos BUT it is mostly impracticable for legal and
practicable constraints. His working papers being his own property, question of lien does not arise.
Sec 143(1) Duty to enquire on Certain Matters

a)Loans & advances made on security have been properly secured & whether terms prejudicial to
interest of Co. or its members
b)Transactions merely represented by book entries prejudicial to intt of Co.
c)Where Co. not being Investment/ Banking Co. whether its assets consisting of shares, debentures
& other securities sold at price < purchase price
d)Whether Loans & Advances shown as Deposits
e)Whether personal expenses charged to Revenue a/c
f)Where shares of Co. have been allotted For cash, whether cash received & if no cash recd,
position as per books & balance sheet, correct, regular & non misleading
Notes:
ªAuditor not reqd to report on above matters unless spl. comments to make
ªAuditor should report only when ans. to any of matters is in adverse
Sec 143(3) Duty to Report

Auditor's report shall state:
(a)whether he hassought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
(b)whether, in his opinion,proper books of accountas reqd by law have been kept by the Co. so far
as appears from his examination of those books and proper returns adequate for the purposes
of his audit have been received from branches not visited by him;
(c)whether the report on accounts of branch office of the Co. audited u/s 143(8) by a person
other than the company's auditors has been sent to him and the manner he has dealt with
it in preparing report;
(d)whether the company's balance sheet and profit and loss accountdealt with in the report are in
agreement with the books of account and returns;
(e)whether, in his opinion, the financial statements comply with the accounting standards ;
(f)the observations or commentsof the auditors on financial transactions or matters which have
anyadverse effect on the functioning of the company;
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(g)whether any director is disqualified from being appointed as a director u/s 164(2)
(h)any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith;
(i)whether the company has adequate internal financial controls with reference to financial
statements in place and the operating effectiveness of such controls;
(j)such other matters as may be prescribed.
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Rule 11 of Cos. (Audit and Auditors) Rules, 2014 other matters to be included in auditor's report
namely:-
a)whether Co. has disclosed impact, of pending litigations on its financial position in its financial
statement;
b)whether Co. has made provision, as required under any law or accounting standards, for material
foreseeable losses, if any,on long term contracts including derivative contracts;
c)whether there has been delay in transferring amt, to Investor Education and Protection Fund by Co.
d)Omitted
e)i) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds advanced, loaned or invested by Co. in any person or entity including foreign entity with
understanding that Intermediary will lend or invest in another entity or provide guarantee or
security on behalf of Co. (Ultimate Beneficiary)
ii)Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds received by Co. from any person or entity including foreign entity(Funding Parties) with
understanding that Co. will lend or invest in another entity or provide guarantee or security on
behalf of Funding Party (Ultimate Beneficiary)
iii)Auditor has found no material misstatement in above representations
f)Whether Dividend declared & paid as per Sec 123
g)In respect of FY commencing after 1.4.22 - Co. used a/c software to maintain books of a/c
having audit trail & same operated throughout year & audit trail hasn't been tampered &
preserved by Co. for retention.
Note: Auditors of public cos. Required to report remuneration to directors within limits u/s 197
under the Section Report on Other Legal and Regulatory Requirements.
Sec143(3) Duty to state reason for qualification or negative report Sec 143(9) Auditor's duty to
comply with As
Sec 145 Duty to sign Audit Report

Ü Qualifications, observations or comments on financial transactions which have adverse effect
on functioning of Co.
ÜRead before in GM & open for inspection by members of Co.
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Report on Frauds [Sec 143(12)]
sIf auditor has reason to believe offence of fraud involving amount of 1 Cr or above committed in
Co. by its officers or employees
sAuditor shall report to CG within such time & manner as prescribed
Manner of reporting to CG
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sReport to Board or Audit Committee within 2 days seeking their reply within 45 days
sOn receipt of reply, forward his Report, Reply or observation of board or AC, With his comments
within 15 days of receipt of reply
sIf no reply received, then shall forward only his report
sSend to Secretary, MCA in sealed cover by Regd post with acknowledgment due (RPAD) or by
Speed post followed by e-mail
sReport format - ADT 4
l On letter head of auditor with post address, e-mail, mobile no., & signed by auditor with Seal +
Membership no.
If fraud < 1 Cr - report to AC or Board within 2 days specifying following:
a)Nature of fraud
b)Amount involved
c)Parties involved
Disclosure on Board Report: Nature of fraud, amount, parties involved (if remedial action not taken) or
remedial action taken (fraud < 1 Cr)
143(13) safeguards auditor from fraud reported out of Good Faith.

The provisions of reporting on Fraud also apply to Cost & Secretarial Auditor. Penalty for non-
compliance: Listed Co: 5L Any other Co: 1L
The auditor is also required to report under clause (xi) of para 3 of CARO, 2020 on whether any
fraud by company or any fraud on Company has been noticed or reported during year. If yes, nature
and amount involved is to be indicated.
Audit of Branch Office Accounts

s Sec 128(1) à Every Co. shall keep at Regd office books of a/c & FS that give true & fair view
& as per accrual basis + double entry system of accounting
s If kept at any other place inform ROC within 7 days
sIf Co. has branch office, it can keep books of Branch at that office & proper summarised returns
sent to Regd office periodically
sSec 143(8) à Powers & duties of Co. Auditor in relation to branch & branch auditor
sBranch a/c can be audited by Co. auditor or any other qualified person
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sBranch auditor (if different) shall share his report with Co. Auditor
sSA 600 shall apply in such case
sRight of principal auditor to visit component & examine books & records, if necessary
sObtain SAAE that other auditor's work adequate for him
sOrdinary procedures:
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Ø Advise other auditor of use of his work
Ø Coordinate at planning stage
Ø Inform about areas requiring spl considerations
Ø Procedures for identifying inter-component transactions that require disclosure
Ø Time-table for audit completion
Ø Advise about significant a/c, auditing & reporting requirements
Ø Obtain representation as to compliance with them
sMight discuss audit procedures applied or obtain written summary of other auditor's procedures
sIn form of Questionnaire/checklist
sNTE of procedures will depend on circumstances of engagement & knowledge about competence of
other auditor
sKnowledge can be enhanced through review of previous audit work
Cost Audit (Sec 148)

Sec 148 of Companies Act 2013 read with Companies (Cost Records & Audit) Rules 2014
Rule 3 – Applicability of maintenance of Cost Records => t/o of products & services >= 35 cr –
Rule 4 Cost Audit applicability
i)Regulated sectors: T/o overall >= 50 Cr & individual product/service >= 25 Cr
ii)Non regulated sectors: t/o overall >= 100 Cr & individual product/service >= 35 Cr
Non-Applicability
ØRevenue from exports in forex > 75% of total revenue or
ØOperating from SEZ
ØEngaged in generation of electricity for captive consumption through captive generating plant Rule5
- every Co. covered by Rule 3 maintain cost records in Form CRA-1
Who can be a Cost Auditor? Cost Accountant appointed by Board + Cos' auditor can't be cost auditor
CARO Clause: As per Clause (vi) to Para 3 of CARO 2020
, auditor has to report whether maintenance
of cost records has been specified by the CG under section 148(1) of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.
Rule 6 - Appoint auditor within 180 days of commencement of FY

Ø File notice of appointment with CG in form CRA-2 with fees within 30 days of BM or 180 days
of commencement of FY, earlier
Ø Cost auditor shall continue till expiry of 180 days from closure of FYor till submission ofAudit report
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ØAudit report to be submitted in form CRA-3 within 180 days of closure of FY & forward to BOD
ØCo. within 30 days of receipt of copy of report furnish to CG in Form CRA-4 in XBRL format +
explanation to every qualification or reservation
ØIn case of any default of these rules è Penalty u/s 147 for Co., officers & Cost auditor
Sec 147: Penalty

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ÜDefault u/s 139-146 [Company & Officer]

ØCo: 25k – 5 Lakh
ØOfficer: 10k – 1 Lakh
ÜDefault u/s 139, 144 & 145 [Auditor]

s Auditor: 25k – 5L or 4 times remuneration ฀
Ø If wilful default & intention to deceive then punishable with
v Fine 50k – 25 Lakh or 8 times remuneration ฀ + imprisonment up to 1 year
v Liable to refund remuneration
v Pay for damages to Co./stat bodies/authorities/members/creditors of Co. for their losses
s If auditor is firm + proved that partner(s) involved in fraud à liability of concerned partners &
firm (joint & several)
Ø For criminal liability in respect of liability other than fine à partners who are involved in fraud
only liable
Final Accounts Preparation & Presentation

Sec 129 à Requirements to be satisfied by F/s
Ÿ True & fair view
Ÿ Comply with a/c standards notified u/s 133 & as per Schedule III Notes:
Ÿ CG has exempted Cos. in defence production from AS of Segment Reporting
Ÿ Provision of DTA/DTL not apply for Public Financial institution which is NBFC in business of
Infrastructure finance leasing >= 75 % of revenue from business with Govt Cos.
Ÿ Board to lay before every AGM F/S for the FY
Sec-130: Re-opening of Accounts on Court's or Tribunal's orders

Ÿ Co. shall not reopen or recast f/s unless application by CG/Income Tax
Authorities/SEBI/Regulatory body &
Ÿ An order by tribunal to effect that –
Ÿ Earlier a/c prepared in fraudlent manner or
Ÿ Affairs of Co. mismanaged, casting doubt on reliability of F/S
Ÿ Such order for reopening can't be made beyond 8 years immediately preceding current FY
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Section 131: Voluntary Revision of F/S or Board's report
If it appears to directors of Co. that F/S or Board Report, don't comply with Sec 129/134, they may
prepare revised f/s or Board Report of any 3 preceding FY after obtaining Tribunal's approval & copy of
Tribunal's order filed with ROC
National Financial Reporting Authority (NFRA)
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NFRA shall:
a)Shall make recommendation to CG on formulation & laying down of a/c & auditing policies &
standards
b)Monitor & enforce the compliance with a/c & auditing stds
c)Oversee quality of service of professions ensuring compliance with standards & suggest measures
for improving quality of service
d)Perform such other functions as may be prescribed
Applicability to Companies:
a)Listed Companies
b)Unlisted public companies
Ø Paid up capital >= 500 Cr or
Ø T/o >= 1000 Cr or
Ø Loans/Deposits/Debentures >= 500 Cr as on st31 March of preceding FY
c)Insurance, banking companies, cos. engaged in generating electricity,
d)Any BC or Co. or person referred to NFRA by CG in public interest
e)A BC incorporated or regd o/s India which is subsy/associate of Companies referred in (a) to (d),
if Income/NW > Consol Income/NW of such Co.
Above companies will be governed by NFRA rules for 3 years after it ceases to fulfil above conditions
*Co. not governed by NFRA rules will inform NFRA about Auditor's appointment within 15 days form
NFRA-1Every auditor referred to in Rule 3 shall file return with the NFRA on or before 30th Nov.
every year in Form NFRA-2
Punishment for Non compliance

Co./officer/auditor ฀Sec 450 of Cos Act 2013 (upto 10k + 1000/day) In case of professional/other
misconduct:
A.Impose penalty of:
1 L extend to 5 times fees recd (Individuals) 5 L extend to 10 times fees recd (firms)
B.Debar member or firm from:
ØBeing appointed as auditor or Internal auditor
ØPerforming valuation u/s 247 For min 6 months to max 10 years
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To check True & Fair, auditor has to see:

i.that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
ii.no material asset is omitted;
iii.the charge, if any, on assets are disclosed;
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iv.material liabilities should not be omitted;

v.statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III
vi.balance sheet has been prepared in accordance with Part I of Schedule III;
vii.accounting policies have been followed consistently; and
viii.all unusual, exceptional or non-recurring items have been disclosed separately.
Audit of Dividend
Ÿ Dividend out of profits after providing for depreciation under Schedule II
Ÿ Transfer to reserves optional : Co. may transfer such percentage of profits it considers
appropriate to reserves irrespective of size of declared dividend
Ÿ Out of Past profits: If current profits inadequate, it may declare out of past profits
Ÿ Dividend only from free reserves
Ÿ Dividend includes Interim dividend which can be out of profits of that FY
Ÿ If loss during FY upto last qtr à Rate of dividend <= average of preceding 3 FY
Ÿ It should bedeposited within 5 daysin separate a/c in scheduled bank from date of declaration
Ÿ It must bepaid within 30 days from date of declaration
Ÿ If not paid within 30 days, interest @18% p.a. applicable + defaulting director (upto 2 yrs +
1000/day)
Ÿ No offence on part of Co. if:
Ønon-payment due to operation of any law
Øshareholder given directions & those directions can't be complied & this told to Shareholder
Ødispute regarding right to receive dividend
Ødividend adjusted lawfully against sum due from shareholder
Øany other reason, not due to fault of Co.
Ÿ If authorised by articles may pay in proportion of paid up amount of share
Ÿ Board may deduct amount receivable by Co. on account of calls while paying dividend
Ÿ If dividends are declared after the bal. sheet date but before F.S. are approved for issue, check
that dividends have not been recognised as a liability as per AS 4 and Ind AS 10- Events after
the Reporting Period, but disclosure of the same has been made in the notes.
Unpaid Dividend Account (Sec 124)
Ø Dividend unpaid/unclaimed for 30 days
Ø Transfer to this A/C within 7 days of expiry of 30 days
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Ø If default, interest @ 12% p.a.
Ø Statement showing names, address & amount on website of Co. within 90 days of transfer
Ø If it remains unpaid for 7 years à transfer to Investor Education & Protection Fund
(IEPF)
Penalty for non-comp
Co: 1L + 500/Day - Max 10 L Officer: 25k + 100/day à 2L
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The Investor Education & Protection Fund shall be utilised for the following purposes in accordance
with such rules as may be prescribed-
(a) refund in respect ofunclaimed dividends, matured deposits, matured debentures

, the application
money due for refund and interest thereon;
(b) promotion of investors' education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who suffered losses due to wrong
actions by any person, in accordance with orders made by Court which had ordered
disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and
245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.
Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares (Sec 126)
Payment of dividend and allotment of bonus and right shares to transferee to be held in abeyance till
title to shares is decided. Where any instrument of transfer of shares has been delivered to Co. for
registration and transfer of such shares has not been regd., it shall transfer dividend in relation to such
shares to spl. account referred to in section 124 i.e. Unpaid Dividend Account unless Co. is authorised by
regd. holder of such shares in writing to pay such dividend to transferee specified in such instrument of
transfer. Further, Co. shall also keep in abeyance in relation to such shares, any offer of right shares and
any issue of fully paid up bonus shares.
Power to close register of members or debenture-holders or other security holders (Sec 91)
Co. may close register of members or debenture-holders or other security holders for any period not
exceeding aggregate 45 days in each year, but not exceeding30 days at any one time
, subject to giving
of previous notice of at least 7 daysor such lesser period as may be specified by SEBI for listed cos. or
cos. which intend to get securities listed.
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Notes:
Ø residual value of asset shall not be more than 5% of original cost of asset
Ø Useful life of asset shall not ordinarily be different from useful life specified in Part 'C' to
Schedule II
Ø If asset is used for double shift, depreciation will increase by 50% for that period and in case
of triple shift depreciation shall be calculated on the basis of 100% for that period.
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Non-provision of tax in the accounts

The Council of ICAI has taken note of the fact that there is a practice prevalent whereby companies do
not make provision for tax even when such a liability is anticipated. It has expressed view that on an
overall consideration of relevant provisions of law, non-provision for tax (where a liability is anticipated)
would amount to contravention of provisions of Sec 128 and 129 of the Companies Act, 2013
.
Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring out
the manner in which the accounts don't disclose a “true and fair” view of state of affairs of Co.
and the profit or loss of the company.
An example of manner in which report on balance sheet and Statement of Profit and Loss may be
qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated aggregate
amount of taxation not so provided for is ` ............ including ` ............. for the Year ended on
To
the extent of such non-provision for the year, profits of Company for FY under report have been
overstated and to extent of such aggregate non provision, reserves of company appearing in said
balance sheet have been over-stated and current liabilities and provisions appearing in said balance
sheet have been understated”.
Limited Liability Partnership (LLP) Audit

Ø Applicability of Audit: If T/o <= 40 L or Contribution <= 25 L à No Audit
Ø Annual return in Form 11 with ROC within 60 days of F.Y.
Ø Statement of Account & solvency in Form 8 within 30 days from end of 6 months of F.Y.
Appointment of Auditor: The auditor may be appointed by designated partners (DPs) of LLP –
1. At any time for 1st FY but before the end of first financial year,
2. At least30 days prior to the end of each financial year (other than the first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
Note: The partners may appoint the auditors if DPs have failed to appoint them.
LLP's are required to maintain books of accounts which shall contain:
1. Particulars of all sums of money received and expended by the LLP and the matters in respect of
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which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goodspurchased, inventories, work-in-progress, finished goods and COGS,
4. Any other particulars which the partners may decide.
Advantages / Purpose / Need of Audit:
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1. Auditing the accounts of LLP helps in detecting errors & frauds & verification of financial
statements.
2. Disputes, if any between any partners in the matter of accounts can be settled
3. Banks & financial institutionslend money to the firms only on the basis of audited accounts.
4. Periodical visits & suggestions by the auditor will be helpful in improving the management of
the LLP.
5. For settling accounts between partners at the time of admission, death, retirement, insolvency,
insanity, etc., audited accounts are accepted by those concerned who have dealings with the LLP.
Auditor's Duty Regarding Audit of LLP

1.The auditor should get definite instructions in writing as to the work to be performed by him.
2.The auditor should mention:

a)Whether the records of the firm appear to be correct & reliable
.
b)Whether he was able to obtain all information & explanation necessary for his work.
c)Whether any restriction was imposed upon him
.
3.The auditor should read the LLP agreement & note the following provisions:
a)Nature of the business of the LLP.
b)Amount of capital contributed by each partner.
c)Interest – in respect of additional capital contributed.
d)Duration of partnership.
e)Drawings allowed to the partners.
f)Salaries, commission etc., payable to partners.
g)Borrowing powers of the LLP.
h)Rights & duties of partners.
i)Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
j)Any loans advanced by the partners.
k)Profit sharing ratio.
4.If partners maintainminute book he shall refer it for any resolution passed regarding the accounts.
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Miscellaneous Topic:
AS 1 - Disclosure of Accounting Policies -In case of a Co, members should qualify their audit
reports in case:
(a)a/c policies required to be disclosed under Schedule III or any other provisions of Companies Act,
2013, have not been disclosed, or
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(b)accounts have not been prepared on accrual basis, or

(c)fundamental a/c assumption of going concern not followed and fact not disclosed in F.S., or
proper disclosures regarding changes in accounting policies have not been made
COMPANIES AUDITOR'S REPORT
ORDER, 2020 (CARO 2020)
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COMPANIES AUDITOR'S REPORT

05 ORDER, 2020 (CARO 2020)
Applicability:
Applies to every company including a foreign company Except following:
ŸA banking company
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ŸAn insurance company

Ÿsection 8 Company
ŸOne Person Company and small company
ŸA private limited company, not being a subsidiary / holding of a public company,
ŸHaving a paid up capital + reserves and surplus <= 1Cr @ B/S date
ŸTotal borrowings <= 1 Cr from bank or FI at any time during the year
ŸTotal revenue as disclosed in Scheduled III <= 10 Cr during the year
*CARO not applicable to Consolidated financial statements
Para 3: Clauses (i) to (xxi)

(i)Proper records of PPE/Intangibles
(a) (A) whether Co. is maintaining proper records showing full particulars, including quantitative
details and situation of Property, Plant and Equipment;
(B) whether company is maintaining proper records showing full particulars of intangible assets;
(b)whether these PPE have been physically verified by management at reasonable intervals;
whether any material discrepancies were noticed on such verification and if so, whether same
have been properly dealt in books of a/c;
(c)whether title deeds of all immovable properties (other than properties where company is lessee
and lease agreements are duly executed in favour of lessee) disclosed in F.S. are held in name
of company, if not, provide details thereof in format below:-
Description of Gross Held in Whether Period held- Reason for

property carrying name of promoter indicate range not being
value director or their where held in name
relative or appropriate of Co.
employee
(d)whether company has revalued its PPE (including Right of Use assets) or intangible assets or
both during the year and, if so, whether revaluation is based on valuation by Registered Valuer;
specify amount of change, if change is 10% or more in aggregate of net carrying value of each
class of PPE or intangible assets;
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(e)whether any proceedings initiated or pending against company for holding any benami property
under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so, whether
Co. has appropriately disclosed details in its F.S.;
(ii)[Inventory à Physical verification + Working capital loans]

(a) whether physical verification of inventory has been conducted at reasonable intervals by mgt
and whether, in opinion of auditor, coverage and procedure of verification by mgt is appropriate;
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whether any discrepancies of 10% or more in aggregate for each class of inventory were noticed
and if so, whether they have been properly dealt with in books of a/c;
(b) whether during any point of time of year, company has been sanctioned working capital limits
in excess of 5 cr, in aggregate, from banks or financial institutions on basis of security of
current assets; whether quarterly returns or statements filed by company with such banks or
financial institutions are in agreement with books of a/c of Company, if not, give details;
(iii) Loans, Investments, Guarantee & Securities (LIGS)
whether during year Co. has made investments in, provided any guarantee or security or granted any
loans or advances in nature of loans, secured or unsecured, companies, firms, LLPs or any other
parties, if so,-
(a)whether during year Co. has provided loans or provided advances in nature of loans, or stood
guarantee, or provided security to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-
(A)aggregate amt during year, and balance o/s at BS date w.r.t. such loans or advances and
guarantees or security (LAGS) to subsidiaries, joint ventures and associates;
(B)Agg. amt during year, and balance outstanding at BS date w.r.t such LAGS to parties other than
subsidiaries, joint ventures and associates;
(b)whether investments made, guarantees provided, security given and T&Cs of grant of all loans
and advances in nature of loans and guarantees provided are not prejudicial to the company's
interest;
(c)in respect of loans and advances in nature of loans, whether schedule of repayment of principal
and payment of interest has been stipulated and whether repayments or receipts are regular;
(d)if amount is overdue, state total amount overdue for more than 90 days, and whether
reasonable steps have been taken by company for recovery of principal and interest;
(e)whether any loan or advance in the nature of loan granted which has fallen due during the year, has
been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh
loans and percentage of aggregate to total loans or advances in the nature of loans granted during
year [not applicable to companies whose principal business is to give loans];
(f)whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
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related parties as defined in clause (76) of section 2 of the Companies Act, 2013;
Sec 185 & 186

(iv)in respect of loans, investments, guarantees, and security (LIGS), whether provisions of sections 185
and 186 of the Companies Act have been complied with, if not, provide the details thereof;
Deposits
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(v)in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether
directives issued by RBI and provisions of Sec 73 to 76 or any other relevant provisions of Companies
Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of
such contraventions be stated; if an order has been passed by Company Law Board or NCLT or RBI or
any court or any other tribunal, whether the same has been complied with or not;
Cost records
(vi)whether maintenance of cost records has been specified by CG under section 148(1) of Companies Act
and whether such accounts and records have been so made and maintained;
Statutory dues
(vii)(a) whether company is regular in depositing undisputed statutory dues including GST, PF, ESI,
income-tax, sales-tax, service tax, customs duty, excise duty, VAT, cess and any other statutory dues
to appropriate authorities and if not, extent of arrears of o/s statutory dues as on last day of the
financial year concerned for a period of more than 6 months from date they became payable, shall be
indicated;
(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any
dispute, then amounts involved and forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a dispute);
Income Disclosure
(viii)whether any transactions not recorded in the books of account have been surrendered or disclosed as
income during year in the tax assessments under Income Tax Act, 1961, if so, whether the previously
unrecorded income has been properly recorded in the books of account during the year;
Repayment of loans
(ix)(a) whether Co. has defaulted in repayment of loans or other borrowings or in payment of interest
thereon to any lender, if yes, the period and the amount of default to be reported as per the format
below:-
Nature ofborrowing, Name oflender Amt not paidon Whetherprincip No. of daysdelay Remarks,if any
including debt due date al or interest or unpaid
securities
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*lender wise details in case of default to Bank, financial institutions & Govt
(b) whether company is a declared wilful defaulter by any bank or financial institution or other lender;
(c) whether term loans were applied for purpose for which loans were obtained; if not, amount of loan so
diverted and purpose for which it is used may be reported;
(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, nature and
amount to be indicated;
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(e) whether Co. has taken any funds from any entity or person on account of or to meet obligations of
its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and
the amount in each case;
(f) whether company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also report if company has
defaulted in repayment of such loans raised;
IPO/ FPO Reporting:

(x) (a) whether moneys raised by way of initial public offer or further public offer(including debt
instruments) during the year were applied for purposes for which those are raised, if not, the details
together with delays or default and subsequent rectification, if any, as may be applicable, be reported;
Preferential Allotment/Private placement

(b) whether Co. has made any preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) during year and if so, whether the requirements
of section 42 and section 62 of the Companies Act, 2013 have been complied with and funds raised
have been used for purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance;
Fraud
(xi) (a) whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, nature and amount involved is to be indicated;
(b) whether any report under 143(12) of Companies Act has been filed by the auditors in Form ADT-
4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by
company;
Nidhi Company
(xii) (a) whether Nidhi Company has complied with the Net Owned Funds to Deposits in ratio
of 1:20 to meet out liability;
(b) whether the Nidhi Company is maintaining 10% unencumbered term deposits to meet out
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the liability;
(c) whether there has been any default in payment of interest on deposits or repayment thereof
for any period and if so, the details thereof;
Related Parties
(xiii) whether all transactions with related parties are in compliance with sections 177 and 188 of
Companies Act where applicable and the details have been disclosed in the financial statements, etc.,
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as required by the applicable accounting standards;
Internal Audit
(xiv) (a) whether the company has internal audit system commensurate with the size and
nature of its business;
(b) whether reports of Internal Auditors for the period under audit were considered by the
statutory auditor;
Non cash transactions

(xv) whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether provisions of Sec 192 of Companies Act have been complied
with;
RBI
(xvi) (a) whether company is required to be registered under section 45-IA of Reserve Bank of India
Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;
(b) whether company has conducted any Non-Banking Financial or Housing Finance activities
without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve
Bank of India Act, 1934;
(c) whether company is a Core Investment Company (CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the
company is exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes,indicate the number of CICs
which are part of Group;
Cash Losses
(xvii) whether company has incurred cash losses in financial year and in immediately preceding
financial year, if so, state the amount of cash losses;
Resignation by Statutory Auditors

(xviii) whether there has been any resignation of statutory auditors during year, if so, whether auditor
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has taken into consideration the issues, objections or concerns raised by the outgoing auditors;
Going Concern
(xix) on basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements, auditor's
knowledge of Board of Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on date of the audit report that company is capable of meeting its
liabilities existing at date of balance sheet as and when they fall due within a period of 1 year from BS
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Date;
CSR Reporting
(xx) (a) whether, in respect of other than ongoing projects, company has transferred unspent
amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the
expiry of financial year in compliance with second proviso to section 135(5) of the said Act;
(b) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to
any ongoing project, has been transferred to special account in compliance with section 135(6) of the
said Act;
Qualifications in CFS
(xxi) whether there have been any qualifications or adverse remarks by respective auditors in the
Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated
financial statements, if yes, indicate details of companies and paragraph numbers of CARO report
containing qualifications or adverse remarks.
Schedule III (Division II i.e. Ind AS)

Current Asset
Asset shall be classified as current when it satisfies any of following criteria:
(a) expected to be realized, or consumed in, company's normal operating cycle;
(b)held primarily for purpose of trading;
(c)expected to realize within 12 months after reporting period; or
(d)cash or cash equivalent unless restricted from being exchanged or used to settle a liability
for at least 12 months after reporting period.
All other assets shall be classified as non-current.
Operating Cycle
An operating cycle is time b/w acquisition of assets and their realization in cash or cash equivalents.
Where normal operating cycle can't be identified, it is assumed to have a duration of 12 months.
Current Liability
Liability shall be classified as current when it satisfies any of following criteria:
(a) expected to be settled in Co's normal operating cycle;
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(b) held primarily for purpose of trading;
(c) it is due to be settled within 12 months after reporting period; or
(d) Co. doesn't have an unconditional right to defer settlement of liability for at least 12 months after
reporting date. Terms of a liability that could, at option of counterparty, result in its settlement by
issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.
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Balance Sheet Non-Current Assets

l. Property. Plant and Equipment :
(i)Classification shall be given as:
(a)Land
(b)Buildings
(c)Plant and Equipment
(d)Furniture and Fixtures
(e)Vehicles
(f)Office equipment
(g)Bearer Plants
(h)Others (specify nature)
(ii)Assets under lease shall be separately specified under each class of assets
(iii)A reconciliation of gross and net carrying amts of each class of assets at beginning and end of
reporting period showing additions, disposals, acquisitions through business combinations, amt of
change due to revaluation (if cha nge is 10% or more of Net Value of each class of PPE) and other
adjustments and related depreciation and impairment losses or reversals shall be disclosed separately.
Investment Property: Reconciliation similar to PPE.

Goodwill:
A reco. of gross and net carrying amt of goodwill at beginning and end of reporting period showing
additions, impairments, disposals and other adjustments.
Other Intangible assets
(i)Classification shall be given as:
(a)Brands or trademarks
(b)Computer software
(c)Mastheads and publishing titles
(d)Mining rights
(e)Copyright, patents, other intellectual property rights, services and operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
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(ii)Reco. similar to PPE.
Biological Assets other than bearer plants:

A reco. of carrying amts of each class of assets at beginning and. end of reporting period showing
additions, disposals, acquisitions through business combinations and other adjustments shall be disclosed
separately.
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Investment
(i)Investments shall be classified as:
(a)Investments in Equity Instruments;
(b)Investments in Preference Shares;
(c)Investments in Government or trust securities;
(d)Investments in debentures or bonds;
(e)Investments in Mutual Funds;
(f)Investments in partnership firms; or
(g)Other investments (specify nature)
Under each classification, details shall be given of names of bodies corporate that are-
(i)subsidiaries,
(ii)associates,
(iii)joint ventures, or
(iv)structured entities,
in whom investments made and nature and extent of investment made in each body corporate
(partly- paid investments shown separately). lnvestment in partnership firms alongwith names
of firms, their partners, total capital and shares of each partner disclosed separately.
(ii)The following shall also be disclosed:
(a)Aggregate amt of quoted investment and market value thereof:
(b)Aggregate amt of unquoted investment: and
(c)Aggregate amt of impairment in value of investment.
Trade Receivables:
(i)Trade receivables shall be sub-classified as;
(a)Trade Receivables considered good - Secured;
(b)Trade Receivables considered good - Unsecured;
(c)Trade Receivables which have significant increase in Credit Risk; and
(d)Trade Receivables - credit impaired
(ii)Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
(iii)Debts due by directors or other officers of co. or any of them either severally or jointly with any other
person or by firms or pvt companies respectively in which any director is a partner or a director or a
member should be separately stated.
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Trade Receivables Ageing Schedule
Outstanding for following periods from due date of payment#

Particulars < 6 months 6m-1 year 1-2 years 2-3 years > 3 years Total
i) Undisputed Trade
receivables – considered good
ii) Undisputed Trade
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Receivables
– which have significant
increase in credit risk
iii) Undisputed Trade

Receivables– credit impaired
(iv) Disputed Trade
Receivables– considered good
(v) Disputed Trade Receivables
– which have significant
increase in credit risk
(vi) Disputed Trade Receivables
– credit impaired
# similar info. shall be given where no due date of payment is specified in that case
disclosure shall be from date of the transaction
Loans:
(i)Loans shall be classified as-
(a)omitted
(b)Loans to related parties (giving details thereof); &
(c)Other loans (specify nature).
(ii)Loans Receivables shall be sub-classified as:
(a)Loans Receivables considered good - Secured;
(b)Loans Receivables considered good - Unsecured;
(c)Loans Receivables which have significant increase in Credit Risk; and
(d)Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a)Secured, considered good;
(b)Unsecured, considered good; and
(c)Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant
heads separately.
(iv) Loans due by directors or other officers ….(same as Trade Receivables)
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Other Financial Assets
(i)Security Deposits
(ii)Bank deposits with more than 12 months maturity
(iii)others(to be specified);
Other non-current asset: Other non-current assets shall be classified as-
(i)Capital Advances; and
(ii)Advances other than capital advances;
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(1)Advances other than capital advances shall be classified as:
(a)Security Deposits;
(b)Advances to related parties (giving details thereof; and
(c)Other advances (specify nature).
(2)Advances to directors or other officers of Co. or any of them either severally or jointly with any
other persons or advances to firms or private companies respectively in which any director is a
partner or a director or a member should be separately stated, ln case advances are of nature of
financial asset as per relevant Ind AS, these are to be disclosed under other financial assets
separately.
(iii)Others (specify nature).
Current Assets
Inventories:
(i)Inventories shall be classified as-
(a)Raw materials;
(b)Work in-progress;
(c)Finished goods;
(d)Stock-in-trade (in respect of goods acquired for trading);
(e)stores and spares;
(f)Loose tools; and
(g)Others (specify nature).
(ii)Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii)Mode of valuation shall be stated.
Investment;
Similar to non-current
Trade Receivables Similar to non-current
Cash and cash equivalents:
Cash and cash equivalents shall be classified as:-
a.Balances with Banks (of the nature of cash and cash equivalents);
b.Cheques, drafts on hand;
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c.Cash on hand; and
d.Others (specify nature).
Loans:
Similar to non-current
Other current assets (specify nature): This is an all-inclusive heading, which incorporates current
assets that do not fit into any other asset categories. Other current assets shall be classified as-
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(i)Advances other than capital advances

(1)Advances other than capital advances shall be classified as:
(a)Security Deposits;
(b)Advances to related parties (giving details thereof);
(c)Other advances (specify nature)
(2)Advances to directors or other officers of Co. or any of them either severally or jointly with
any other persons or advances to firms or pvt cos. respectively in which any director is a partner or
a director or a member should be separately stated.
(a)Earmarked balances with banks (for example for unpaid dividend) shall be separately
stated.
(b)Balances with banks to the extent held as margin money or security against
borrowings, guarantees, other commitments shall be disclosed separately.
(c)Repatriation restrictions in respect of cash and bank balances shall be separately stated.
Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii)Commitments shall be classified as-
(a) estimated amt of contracts remaining to be executed on capital account and not
provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
Equity
Equity Share Capital: For each class of equity share capital:
(a)no. and amt of shares authorised;
(b)no. of shares issued, subscribed and fully paid, and subscribed but not fully paid;
(c)par value per Share;
(d)reconciliation of no. of shares outstanding at beginning and end of period;
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(e)rights, preferences and restrictions attaching to each class of shares including restrictions
on distribution of dividends and repayment of capital;
(f)shares in respect of each class in the company held by its holding or ultimate holding co.
including shares held by subsidiaries or associates of holding or ultimate holding co. in
aggregate;
(g)shares in company held by each shareholder holding more than 5% shares specifying no. of
shares held;
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(h)shares reserved for issue under options and contracts or commitments for sale of shares
or disinvestment, including terms and amounts;
(i)for period of 5 years immediately preceding the date at which Balance Sheet is prepared
•aggregate no. and class of shares allotted as fully paid up pursuant to contract without received
in cash;
•aggregate no. and class of shares allotted as fully paid up by way of bonus shares; and
•aggregate no. and class of shares bought back;
(j)terms of any securities convertible into equity shares issued along with earliest date
of conversion in descending order starting from farthest such date;
(k)calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l)forfeited shares (amount originally paid up)
(m)Disclosure of Promoter Shareholding
Shares held by promoter at end of Year % change during year

S No. Promoter Name No of shares* % of total shares
* details to be given for each class of share

Other Equity:
(i)Other Reserves' shall be classified in the notes as-
(a)Capital Redemption Reserve;
(b)Debenture Redemption Reserve;
(c)Share Options Outstanding Account; and
(d)others- (specify the nature and purpose of each reserve and the amount in respect
thereof); (Additions and deductions since last balance sheet to be shown under each of
the specified heads)
(ii)Retained Earnings represents surplus i.e. balance of relevant column in Statement of
Changes in Equity;
(iii)A reserve specifically represented by earmarked investments shall disclose the fact that it is
so represented;
(iv)Debit balance of Statement of P&L à shown as a negative figure under the head 'retained
earnings'. Similarly, balance of 'Other Equity', after adjusting negative balance of retained
earnings, if any, shall be shown under the head 'Other Equity' even if the resulting figure is
in the negative; and
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(v)Under the sub-head 'Other Equity', disclosure shall be made for the nature and amount of
each item.
Non-Current Liabilities
Borrowings:
(i)borrowings shall be classified as-
(a)Bonds or debentures
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(b)Term loans
(I)from banks
(II)from other Parties
(c) Deferred payment liabilities
(d)Deposits.
(e)Loans from related parties
(f)omitted
(g)Liability component of compound financial instruments
(h)Other loans (specify nature);
(ii)borrowings shall further be sub-classified as secured and unsecured. Nature of security shall
be specified separately in each case.
(iii)where loans have been guaranteed by directors or others, aggregate amount of such loans
under each head shall be disclosed;
(iv)bonds or debentures (along with rate of intt, and particulars of redemption or conversion) shall be
stated in descending order of maturity or conversion, starting from farthest redemption or
conversion date where bonds/debentures are redeemable by instalments, the date of maturity for
this purpose must be reckoned as date on which first instalment becomes due;
(v)particulars of any redeemed bonds or debentures which company has power to reissue shall be
disclosed;
(vi)terms of repayment of term loans and other loans shall be stated; and
(vii)period and amt of default as on balance sheet date in repayment of borrowings and intt shall be
specified.
Provisions: The amounts shall be classified as-

(a)Provision for employee benefits; and
(b)Others (specify nature).
Other non-current liabilities;
(a)Advances; and
(b)Others (specify nature).
Current Liabilities Borrowings:

(i)Borrowings shall be classified as-
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(a)Loans repayable on demand
(I)from banks
(II)from other parties
(b)Loans from related parties
(c)Deposits
(d)Other loans (specify nature);
(ii)borrowings further sub-classified as secured and unsecured. Nature of security shall be
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specified separately in each case;
(iii)where loans have been guaranteed by directors or others, agg. amt of loans under each head
shall be disclosed;
(iv)period and amt of default as on B.S. date in repayment of borrowings and intt,
specified separately in each case.
(v)Current maturities of long term debt shall be disclosed separately
Other Financial Liabilities: OFL shall be classified as-

(a)omitted
(b)omitted
(c)Interest accrued;
(d)Unpaid dividends;
(e)Application money received for allotment of securities to the extent refundable and intt
accrued thereon;
(f)Unpaid matured deposits and interest accrued thereon;
(g)Unpaid matured debentures and interest accrued thereon; and
(h)Others (specify nature).
'Long term debt is a borrowing having a period of more than twelve months at time of
origination Other current liabilities:
The amounts shall be classified as-
(a)revenue received in advance;
(b)other advances (specify nature); and
(c)others (specify nature);
Provisions: The amounts shall be classified as-

(i)provision for employee benefits; and
(ii) others (specify nature)
Trade Payables
The following details relating to Micro, Small and Medium Enterprises(MSME) shall be
disclosed in notes:
(a)principal amt and interest due thereon (to be shown separately) remaining unpaid to any
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supplier at end of each accounting year;
(b)amt of interest paid by buyer in terms of sec 16 of MSME Development Act, 2006,
along with payment made to supplier beyond appointed day during each accounting year;
(c)amt of interest due and payable for period of delay in making payment (which have been
paid but beyond the appointed day during year) but without adding interest specified
under MSME Development Act, 2006;
(d)amt of interest accrued and remaining unpaid at end of each accounting year; and
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(e)amt of further interest remaining due and payable even in succeeding years, until such date
when interest dues above are actually paid to small enterprise, for purpose of disallowance of a
deductible expenditure under sec 23 of MSME Development Act, 2006.
Trade Payables Ageing Schedule
Particulars Outstanding for following periods from Total

due date of payment
I) MSME < 1 year 1-2 years 2-3 years >3 years
ii) Others
iii) Disputed dues- MSME
iv) Disputed dues- others
The presentation of liabilities associated with group of assets classified as held for sale and
non- current assets classified as held for sale shall be in accordance with the relevant Ind
AS.
Dividends
The amount of dividends proposed to be distributed to equity and preference shareholders for
the period and related amount per share shall be disclosed separately. Arrears of fixed
cumulative dividends on preference shares shall also be disclosed separately.
Utilisation of Amounts Raised

Where issue of securities made for specific purpose, whole or part of amt hasn't been used for
specific purpose at balance sheet date, indicate by way of note how such unutilized amts have
been used or invested.
Where the company has not used borrowings from banks and financial institutions for specific
purpose for which it was taken at balance sheet date, company shall disclose details of where
they have been used.
CA Ravi Agarwal's
Adtional Regulatory Info

i) Title deeds of Immovable Properties not held in name of the Company
The company shall provide details of all immovable properties other than on lease whose
title deeds are not held in name of Co. in a format and where such immovable property is
jointly held with others, details are required to be given to the extent of Co's share.
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(ii)The Co. shall disclose as to whether the fair value of investment property is based on valuation by
a regd valuer as defined under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.
(iii)Where Co. has revalued its PPE (including Right-of-Use Assets), disclose as to
whether revaluation is based on valuation by a regd valuer.
(iv)Where Co. has revalued its intangible assets, disclose as to whether revaluation is based on
valuation by a regd valuer.
(v)The following disclosures shall be made where Loans or Advances in nature of loans are granted
to promoters, directors, KMPs and related parties (as defined under Companies Act, 2013),
either severally or jointly with any other person, that are:
(a)repayable on demand; or
(b)without specifying any terms or period of repayment,
Type of borrower Amt of loan Percentage of total loans

Promoters
Directors
KMPs
Related Parties
(vi) Capital Work in Progress Aging
CWIP Schedule < 1 year 1-2 years 2-3 years >3 years * Total
Projects in Progress
Projects temporarily suspended
For CWIP, whose completion is overdue or exceeded its cost compared to original plan,
following CWIP completion schedule shall be given:
To be completed in: Total

Project 1 < 1 year 1-2 years 2-3 years >3 years
Project 2
(Details of projects where activity has been suspended to be given separately)
CA Ravi Agarwal's
(vii)Similar schedules to be given for Intangible Assets under Development
(viii)Details of Benami Property held

Where any proceeding has been initiated or pending against the company for holding any
benami property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder,
disclose the following:-
(a)Details of such property,
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(b)Amount thereof,
(c)Details of Beneficiaries,
(d)If property is in the books, then reference to the item in the Balance Sheet,
(e)If property is not in the books, then the fact shall be stated with reasons,
(f)Where there are proceedings against Co. under this law as an abetter of the transaction
or as the transferor then the details shall be provided,
(g)Nature of proceedings, status of same and company's view on same.
(xi)where Co. has borrowings from banks or financial institutions on basis of security of
current assets, it shall disclose following:-
(a)whether quarterly returns or statements of current assets filed by Co. with banks or
financial institutions are in agreement with books of accounts;
(b)if not, summary of reconciliation and reasons of material discrepancies, if any to be
adequately disclosed.
(x)Wilful Defaulter
Where a Co. is declared wilful defaulter by any bank or financial Institution or other
lender, following details shall be given:
(a)Date of declaration as willful defaulter,
(b)Details of defaults (amount and nature of defaults)
(xi)Relation with struck off Cos. to be disclosed.
(xii) Registration of charges or satisfaction with Registrar of Companies (ROC)

Where any charges or satisfaction yet to be registered with ROC beyond the statutory
period, details and reasons thereof shall be disclosed.
(xiii)Compliance with number of layers of companies

Where Co. has not complied with number of layers prescribed under Sec2(87) of Cos. Act read
with the Companies (Restriction on number of Layers) Rules, 2017, name and CIN of companies
beyond specified layers and relationship or extent of holding of company in such downstream
companies shall be disclosed.
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(xiv)Following Ratios to be disclosed:-
(a)Current Ratio,
(b)Debt-Equity Ratio,
(c)Debt Service Coverage Ratio,
(d)Return on Equity Ratio,
(e)Inventory turnover ratio,
(f)Trade Receivables turnover ratio,
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(g)Trade payables turnover ratio,
(h)Net capital turnover ratio,
(i)Net profit ratio,
(j)Return on Capital employed,
(k)Return on investment.
The company shall explain items included in numerator and denominator for computing above
ratios. Further explanation shall be provided for any change in the ratio by more than 25% as
compared to the preceding year.
(xv)Compliance with approved Scheme(s) of Arrangements

Where Scheme of Arrangements has been approved by Competent Authority in terms of Sec
230 to 237 of Companies Act, 2013, disclose that the effect of such Scheme of Arrangements
have been accounted for in books of account in accordance with the Scheme' and in accordance
with accounting standards' and any deviation shall be explained.
(xvi)Utilisation of Borrowed funds and share premium:
(A)Where company has advanced or loaned or invested funds (either borrowed funds or share
premium or any other sources or kind of funds) to any other person(s) or entity(ies),
including foreign entities (Intermediaries) with the understanding (whether recorded in writing
or otherwise) that the Intermediary shall
(i)directly or indirectly lend or invest in other persons or entities identified in any

manner whatsoever by or on behalf of the company (Ultimate Beneficiaries) or
(ii)provide any guarantee, security or the like to or on behalf of the Ultimate
Beneficiaries; the company shall disclose the following:-
(I)date and amount of fund advanced or loaned or invested in Intermediaries with
complete details of each Intermediary.
(II)date and amount of fund further advanced or loaned or invested by such
Intermediaries to other intermediaries or Ultimate Beneficiaries along with complete
details of ultimate beneficiaries.
CA Ravi Agarwal's
(III)date and amount of guarantee, security or the like provided to or on behalf of the
Ultimate Beneficiaries
(IV)declaration that relevant provisions of Foreign Exchange Management Act, 1999 and
Companies Act has been complied with for such transactions and transactions are not
violative of Prevention of Money-Laundering act, 2002.
(B)Where a company has received any fund from any person(s) or entity(ies), including foreign
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entities (Funding Party) with understanding (whether recorded in writing or otherwise) that
Co.shall
(i)directly or indirectly lend or invest in other persons or entities identified in any

manner whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or
(ii)provide any guarantee, security or the like on behalf of Ultimate Beneficiaries,
disclose the following:-
(I)date and amount of fund received from Funding parties with complete details of each
Funding party.
(II)date and amount of fund further advanced or loaned or invested other
intermediaries or Ultimate Beneficiaries alongwith complete details of the other
intermediaries' or ultimate beneficiaries.
(III)date and amount of guarantee, security or the like provided to or on behalf of the
Ultimate Beneficiaries
(IV)declaration that relevant provisions of the FEMA,1999 and Companies Act has
been complied with for such transactions and transactions are not violative of
PMLA, 2002
Additional Balance Sheet

When a Co. applies a/c policy retrospectively or makes restatement of items or when it reclassifies
items in F.S., it shall attach to B.S., a "Balance Sheet" as at beginning of earliest comparative
period presented.
Share Application Money

Share application money pending allotment shall be classified into equity or liability in accordance
with relevant Ind AS. share application money to the extent not refundable shall be shown under
the head Equity and to the extent refundable shall be separately shown under 'Other financial
liabilities'.
Preference Shares
Pref. shares including premium recd on issue, shall be classified and presented as 'Equity' or 'Liability' in
accordance with relevant Ind AS. Disclosure and presentation applicable to relevant class of equity or
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liability shall be applicable mutatis mutandis to the pref. shares. For eg, plain vanilla redeemable pref.
shares shall be classified and presented under 'non-current liabilities' as 'borrowings' and disclosure
requirements in this regard applicable to such borrowings shall be applicable mutatis mutandis to
redeemable pref. shares.
Compound Financial Instruments such as convertible debentures, where split into equity and liability
components, as per requirements of relevant Ind AS, shall be classified and presented under relevant
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heads in 'Equity' and 'Liabilities'
Regulatory Deferral Account Balances shall be presented in the Balance Sheet in accordance with
the relevant Indian Accounting Standards.
Doubt regarding Valuation of Assets
If, in opinion of Board, any of assets other than PPE and non-current investments don't have a value on
realization in ordinary course of business at least equal to amt at which they are stated, fact that
Board is of that opinion, shall be stated.
Statement of Profit & Loss

The provisions of this Part shall apply to income and expenditure account, in like manner as they
apply to a Statement of Profit and Loss,
The Statement of Profit and Loss shall include:
(1)Profit or loss for the Period;
(2)Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"
Revenue from operations shall disclose separately in notes

(a)sale of products (including Excise Duty);
(b)sale of services;
(ba) grants or donations received in case of Sec 8 Co. only and
(c)other operating revenues.
Finance Costs: Finance costs shall be classified as-

(a)interest;
(b)dividend on redeemable preference shares;
(c)exchange differences regarded as an adjustment to borrowing costs; and
(d)other borrowing costs (specify nature).
Other income: other income shall be classified as-

(a)interest Income;
(b)dividend Income; and
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(c)other non-operating income (net of expenses directly attributable to such income)
Other Comprehensive Income(OCI) shall be classified into-
(A)Items that will not be reclassified to profit or loss
(i)Changes in revaluation surplus;
(ii)Re-measurements of defined benefit plans;
(iii)Equity Instruments through OCI;
(iv)Fair value changes relating to own credit risk of financial liabilities designated at fair
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value through P&L;

(v)Share of OCI in Associates and JVs, to the extent not to be classified into profit or loss; and
(vi)Others (specify nature).
(B)Items that will be reclassified to profit or loss;

(i)Exchange differences in translating F.S. of a foreign operation;
(ii)Debt instruments through OCI;
(iii)The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv)Share of OCI in Associates and Joint Ventures, to the extent to be classified into profit or
loss; and
(v)Others (specify nature)
Additional Information:
Disclose via notes, additional info regarding aggregate expenditure and income on following items:
(a)employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to
PF and other funds, (iii) share based payments to employees, (iv) staff welfare expenses).
(b)depreciation and amortisation expense;
(c)any item of income or expenditure which exceeds 1 % of revenue from operations or 10L
whichever is higher, in addition to consideration of 'materiality ';
(d)interest Income;
(e)interest Expense
(f)dividend income;
(g)net gain or loss on sale of investments;
(h)net gain or loss on foreign currency transaction and translation (other than considered as
finance cost);
(i)payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law
matters, (d) for other services, (e) for reimbursement of expenses;
(j)in case of companies covered under section 135, amount of expenditure incurred on CSR
activities; and
(k)details of items of exceptional nature;
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(l)Undisclosed income
The Company shall give details of any transaction not recorded in books of accounts that has been
surrendered or disclosed as income during the year in tax assessments under Income Tax Act, 1961 (such
as, search or survey or any other relevant provisions of Income Tax Act, 1961), unless there is immunity
for disclosure under any scheme and shall also state whether the previously unrecorded income and
related assets have been properly recorded in the books of account during the year.
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(m)Corporate Social Responsibility (CSR)
Where the company covered under section 135 of Companies Act, following shall be disclosed with
regard to CSR activities:-
(i)amount required to be spent by the company during the year,
(ii)amount of expenditure incurred,
(iii)shortfall at the end of the year,
(iv)total of previous years shortfall,
(v)reason for shortfall,
(vi)nature of CSR activities,
(vii)details of related party transactions, e.g.,contribution to a trust controlled by the company
in relation to CSR expenditure as per relevant Accounting Standard,
(viii)where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year shall be shown separately.
(n)details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial
year, the following shall be disclosed:-
(i)profit or loss on transactions involving Crypto currency or Virtual Currency,
(ii)amount of currency held as at the reporting date,
(iii)deposits or advances from any person for purpose of trading or investing in Crypto Currency
or virtual currency.
For Consolidated Financial Statements
·All subsidiaries, associates and JV (whether Indian or Foreign) will be covered under CFS.
·An entity shall disclose list of subsidiaries or associates or JV which have been consolidated in
CFS along with reason of not consolidating.
AUDIT COMMITTEE & CORPORATE
GOVERNANCE:
CA Ravi Agarwal's
AUDIT COMMITTEE & CORPORATE

06 GOVERNANCE:
CORPORATE GOVERNANCE:
Ÿ System by which companies are directed & governed by management, in the best interests of the
stakeholders & others, for better management, greater transparency &Timely reporting of financial
statements.
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Ÿ Responsibility of Board of Directors.
Applicability of LODR:
Unless otherwise provided, these regulations shall apply to the listed entity who has listed any of
the following designated securities on recognised stock exchange(s):
Ÿ specified securities listed on main board or SME Exchange
Ÿ non-convertible securities;
Ÿ Indian depository receipts;
Ÿ securitised debt instruments;
Ÿ security receipts;
Ÿ units issued by mutual funds;
Ÿ any other securities as may be specified by the Board
Issues addressed in LODR Regulations regarding corporate governance are:

i.Composition, meetings, powers, role & responsibilities of the Audit Committee
ii.which is an important pillar of corporate governance.
iii.Responsibilities & key functions of the Board, its composition, compensation & disclosure
iv.Responsibilities and key functions of Board, it's composition, compensation and disclosures;
v.Code of Conduct and vigil mechanism;
vi.Management of subsidiary companies;
vii.Procedures related to risk management;
viii.Disclosures on important issues regarding related party transactions, accounting treatment, etc.;
ix.Content of management discussion and analysis;
x.Information to shareholders;
xi.Compliance Certificate by CEO and CFO;
xii.Compliance Certificate from either auditors or practicing CS regarding compliance of
conditions on corporate governance.
Audit Committee(AC) Under LODR

Qualified & Independent Audit Committee (AC) [Regulation 18(1)]
ØMin 3 directors + 2/3rd ID (Independent Director) [ Listed Entity with Superior Right(SR)
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Equity shares - only Independent Director(ID)]
ØAll financially literate + at least 1 member accounting or Financial Management expertise
ØChairperson - ID + present at AGM to answer shareholder queries
ØCS - secretary to the committee
ØDiscretion to invite finance director/ head of finance/internal audit/ representative of stat auditor
Meeting of Audit Committee [ Regulation 18(2)]

ØAt least 4 times in a year & not more than 120 days lapse b/w 2 meetings
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ØQuorum -2 or 1/3rd (greater) but min 2 ID present
Powers of Audit Committee [ Regulation 18(2)]

Ø To Investigate any activity within terms of reference
Ø To Seek info from any employee
Ø To Obtain legal/professional advice
Ø To Secure attendance of outsiders with relevant expertise
Role of Audit Committee

Ø Oversight of financial reporting process and disclosures to ensure that FS is correct,
sufficient and credible;
Ø Recommendation for appointment, remuneration, terms of appointment of Auditors &
approval for payment auditors for any other services rendered
Ø Review utilisation of loans/advances/investments by holding to subs > 100 Cr or 10% of
asset size of Subsidiary ฀
Ø Reviewing, with Management, annual F.S. and auditor's report before submission to Board
for approval, with particular reference to:
(b)Matters required to be included in the Director's Responsibility Statement to be
included in the Board's report
(c)Changes, if any, in accounting policies and practices and reasons for the same;
(d)Major accounting entries involving estimates based on the exercise of judgment
by management;
(e)Significant adjustments made in the financial statements arising out of audit findings;
(f)Compliance with listing and other legal requirements relating to financial statements;
(g)Disclosure of any related party transactions;
(h)Modified opinion(s) in the draft audit report
Ÿ Consider and comment on rationale, cost-benefits and impact of schemes involving
merger, demerger, amalgamation etc., on listed entity and its shareholders.
Resignation by auditor from listed entities & material subsidiaries

Detailed reasons to be disclosed by listed entities to stock ex. in case of resignation of auditor of
CA Ravi Agarwal's
listed entity as soon as possible but not later than 24 hours of receipt of such reasons from auditor.
Further, conditions to be complied with upon resignation w.r.t. limited review / audit report as per
SEBI LODR Regulations, are as under
A. All listed entities/material subsidiaries

while appointing/reappointing an auditor
shall ensure compliance with
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If auditor resigns within 45 days If auditor resigns after 45 If auditor has signed LR/AR of
from end of Qtr of a FY, then days from end of Qtr of a FY, 1st 3 Qtrs then before such
auditor shall, before resignation, then auditor shall, before resignation auditor shall issue
issue limited review/ audit report resignation, issue limited LR/AR for last qtr as well as
for such Qtr. review/ audit report for such AR for such FY
Qtr as well as next Qtr
Other Conditions shall include :

Ÿ Concern with Management such as non-availability of info/ non-cooperation by Management
- auditor approach Chairman of Audit committee(AC) & AC shall receive concern directly
not wait for Qtr meeting
Ÿ If auditor propose to resign à all concerns brought to notice of AC
Ÿ If due to non-receipt of info/expln à inform AC details info/expln sought & not provided by
Management
Ÿ Deliberation by AC à Communicate views to Management & auditor
Disclaimer in case of non-receipt of information in accordance with the Standards of Auditing as
specified by ICAI/ NFRA.
The practicing CS shall certify compliance by listed entity on above in annual secretarial
compliance report
Note: Above provisions will not apply if the auditor is disqualified due to Section 141
Review of information by Audit Committee - (Mandatory Review)

Ÿ Management Discussion & Analysis of financial conditions & results of operation
Ÿ Statement of significant Related Party Transactions submitted by management
Ÿ Management letters/ letter of IC weakness issued by stat. auditor
Ÿ Internal audit reports relating to Internal Control weakness
Ÿ Appointment, removal & terms of remuneration of Chief Internal Auditor
Ÿ Statement of Deviations (SOD)
üQuarterly SOD including report of monitoring agency
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üAnnual statement of funds utilised for purpose other than stated in offer doc/prospectus/notice
Auditor Role on Review of Audit Committee

Ÿ To check Minutes book & agenda papers
Ÿ To check the Director's report or MDA forms part of annual report
Ÿ To check Segment wise break up as per AS 17/Ind AS 108
The auditors responsibility is only related to the verification and certification of factual implementation of
requirements of corporate governance, Such verification is neither an audit nor an expression of opinion of
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financial statements of the company
Verification regarding Composition of Board [Regulation 17 and 17A]

(i)The auditor should ascertain whether, the BOD comprises an optimum combination of ED and NED ,
with at least 1 woman director and not less than 50% comprising NED. (top 1000 listed entities -
at least one independent woman director)
No listed entity shall continue the directorship of NED who attained the age of 75 (unless with a
special resolution)
(ii)With respect to the maximum number of directorships, including any alternate directorships The
directors -
(1)shall not be a director in more than 7 listed entities.
(2)Notwithstanding the above, any person who is serving as a WTD / MD shall serve as an
ID in not more than 3 listed entities.
(iii)If Chairperson is a NED, at least 1/3rd should comprise of ID, in other case at least half should
comprise ID. (if the NED Chairperson is a promoter or related to promoter or person occupying
management positions at the Board level or at one level below the Board, at least one-half shall
consists of ID)
(iv)BOD of the top 2000 listed entities shall comprise of atleast 6 directors (Min).
(v)The auditor shall ensure that the Chairperson of the board of the top 500 listed entities is -
(a) a non-executive director; (b) not related to the MD or the CEO
(This provision shall not be applicable to the listed entities which do not have any
identifiable promoters as per the shareholding pattern filed with stock exchanges)
(vi)In case of listed company having outstanding SR equity shares, at least half of BOD shall be ID
(vii)To ascertain the independence of ID - examine the Annual disclosure submitted by the directors to
the BOD.
(viii)An independent NED shall not have any material pecuniary relationship with the listed entity, its
holding, subsidiary or associate company, or their promoters, or directors, during the two
immediately preceding FY or CY. Also Himself or with any of his relatives should not be a material
supplier, service provider or customer or a lessor or lessee of the listed entity, and should not be a
substantial shareholder of the listed entity (i.e. should not own more than 2% or voting power)
(ix)The listed entity shall ensure that approval of shareholders for appointment of a person on the Board
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of Directors [or as a manager] is taken at the next general meeting or within a time period of three
months from the date of appointment, whichever is earlier.
(x)Provided that the appointment or a re-appointment of a person, including as a managing director or a
whole-time director or a manager, who was earlier rejected by the shareholders at a general
meeting, shall be done only with the prior approval of the shareholders:
(xi)Provided further that the statement referred to under sub-section (1) of section 102 of the
Companies Act, 2013, annexed to the notice to the shareholders, for considering the appointment
or re-appointment of such a person earlier rejected by the shareholders shall contain a detailed
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explanation and justification by the Nomination and Remuneration Committee and the Board of
directors for recommending such a person for appointment or re-appointment
REMUNERATION OF DIRECTORS [PART OF SCHEDULE V]

Disclosure requirements:
·All pecuniary relationship or transactions shall be disclosed in the Annual Report.
·Criteria of making payments (this may be disseminated on the website and its reference in annual
report)
Additional disclosures under the Companies Act, 2013:
Ÿ Elements of remuneration package summarized as salary, benefits, bonuses, stock etc..
Ÿ Details of Fixed Component & performance linked incentive along with criteria
Ÿ Service contracts, Notice period, Severance fee
Ÿ Stock option if any, whether issued at discount and the period of its accrual & exercisable
Approval of Remuneration:
Ÿ All fees Shall be Recommended by board and approved by share holders (NA to Sitting fees if
within the limits under Companies Act)
Ÿ If remuneration to Single NED > 5% of total annual remuneration to all NED – Special
Resolution
Ÿ The fees or compensation payable to ED who are promoters or members of promoter group, shall
be subject to special resolution, if-
ü exceeds rupees 5 crore or 2.5 % of the net profits, whichever is higher; or
ü If more than one such director, the aggregate to all such directors exceeds 5% of Net Profits
Obligations With Respect To Employees Including Senior Management, Key Managerial Persons,
Directors And Promoters & Provision relating to Board Meetings:
Ÿ Meetings at least 4 times in a year with max gap 120 days in between
Ÿ Quorum: Top 2000 listed entities à 1/3rd or 3 (higher) include 1 ID [VC & Audio visual
means counted]
Ÿ Director shall not be member in more than 10 Committees or Chairperson of more than 5
committees of public ltd cos. (including stakeholder relationship)
Ÿ Periodically review compliance reports of all laws applicable
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Ÿ ID hold at least 1 meeting in a FY without presence of Non -ID
Ÿ The place of ID in case of resignation shall be replaced within, Later of next BM or 3 month
Ÿ Senior management to disclose all material financial and commercial transactions, where they
have personal interest, and are potential conflict to the interest of the company
Code of Conduct
(i)The Board shall lay down code of conduct for Board members and senior Management.
(ii)All Board members and senior Management shall affirm compliance with code on annual
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basis.
(iii)The Annual Report of co. shall contain declaration to this effect signed by CEO.
(iv)The code of conduct shall be posted on website of company.
(v)The Code of Conduct shall suitably incorporate duties of Independent Directors laid down in
Companies Act, 2013.
Auditor should Assertain if such code is present & obtain the copy of same, And also verify all board
member, Senior Management have provided confirmation & it is posted on website.
Vigil Mechanism:
The listed entity shall establish Vigil Mechanism
Ÿ For directors or employees to report genuine concerns
Ÿ Provide for adequate safeguards against victimisation of directors/employees & provide for
direct access to Chairperson of AC in exceptional cases
Ÿ Such Details are to be disclosed on website & in the board report
Subsidiary of Listed entity:

Ÿ Material subsidiary Means - Income/Net Worth >10% of consolidated Income/Net Worth
Ÿ At least 1 ID of the BOD of listed entity shall be Director of Unlisted material subsidiary.
(whether incorporated in India or not)
Ÿ [for this purpose Material subsidiary means - Income/NW >20% Consolodated
income/NW of listed entity + all subsidiaries]
Ÿ Audit Committee to review F/S in particular investments by unlisted mat. Subsidiary
Ÿ Minutes of BM of unlisted Subsidiary laid before BOD of listed entity
Ÿ Management of unlisted Subsidiary bring to notice of BOD of listed entity statement of
significant transactions/arrangement entered.
Ÿ (Significant means – More than 10% of total Revenue/expense/assets/liabilities)
Ÿ Listed Entity shall not dispose shares of Material Subsidiary. Resulting in less than 50%
Shareholding or loss of control without passing SR except under arrangement.
Ÿ Sell, dispose or lease of assets more than 20% of total assets of Subsidiary with out SR
Ÿ (No need of SR: If transaction is Approved by court/tribunal or RP u/s 31 of IBC &
disclosed to stock exchange (RSE) within 1 day of RP approval)
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Ÿ Policy for determining material Subsidiary shall be disclosed in Annual Report
Secretarial Audit & Secretarial Compliance Report

Ÿ Every listed entity and its material unlisted subsidiaries shall undertake secretarial audit and
annex with its annual report, a secretarial audit report, given by a CS in practice.
Ÿ Secretarial compliance is to be submitted within 60 days from end of each FY.
Nomination & Remuneration Committee (NRC) (Reg. 19)
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Composition of NRC:
rd
Ÿ At least 3 directors, all NED & atleast 2/3 - ID
Ÿ Chairperson shall be ID
rd
Ÿ Quorum shall be atleast 2 or 1/3 (higher) with at least 1 ID to be present
Ÿ shall Meet at least once a year
Ÿ Chairperson maybe present at AGM to answer Shareholder queries Role of NRC:
i.Formulation of criteria for determining qualifications, positive attributes & independence of a director
and recommend policy to BOD, relating to remuneration of directors, KMP & other employees;
ii.Formulation of criteria for evaluation of performance of independent directors & BOD;
iii.whether to extend or continue the term of independent director, on basis of their performance
evaluation report.
iv.Devising a policy on Board diversity;
v.Identifying persons qualified to be directors and can be appointed in senior Management as per
criteria, & recommend their appointment & removal to Board;
vi.recommend to board, all remuneration, in whatever form, payable to senior Management.
Stakeholders Relationship Committee (Reg 20)

Listed entity shall constitute a SRC
Ÿ Chairperson shall be Non-Executive Director & present at AGM to answer queries of security holders
Ÿ At least 3 directors, 1 ID (SR Eq. shares then 2/3rd shall be ID)
Ÿ Shall Meet atleast once a year
Ÿ Role of the committee –
(1)Resolving the grievances of the security holders of the listed entity including complaints related
to transfer/transmission of shares, non-receipt of annual report, non-receipt of declared
dividends, issue of new/duplicate certificates, general meetings etc.
(2)Review of measures taken for effective exercise of voting rights by shareholders.
(3)Review of adherence to the service standards adopted by the listed entity in respect of various
services being rendered by the Registrar & Share Transfer Agent.
(4)Review of the various measures and initiatives taken by the listed entity for reducing the
quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual
CA Ravi Agarwal's
reports/statutory notices by the shareholders of the company.
Risk Management Committee :

Ÿ Applicable to top 1000 listed entities & high value debt listed entity.
Ÿ Composition shall be Minimum 3 Members and majority being BOD with atleast 1 ID
rd
Ÿ In case of SR Eq shares atleast 2/3 shall be ID
Ÿ Chairperson shall be Member of BOD
Ÿ Shall meet at least twice a year with Not more than 180 days lapse
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Ÿ Quorum - 2 or 1/3rd (higher) with atleast 1 BOD

Ÿ Role and responsibilities of Risk Management Committee shall mandatorily include performance
of functions specified in Part D of Schedule II.
Ÿ It shall have powers to seek information from any employee, obtain outside legal or other
professional advice and secure attendance of outsiders with relevant expertise, if it considers
necessary.
Statement of Deviation(s) or Variation(s) [Reg. 32]

(a)The listed entity shall submit to stock exchange. following statement(s) on a quarterly basis for
public issue, rights issue, preferential issue etc:
a.indicating deviation in use of proceeds from the objects if any
b.Indicating category-wise variation (capital exp, sales and marketing, working capital etc.)
b/w projected utilisation of funds made in its offer document or explanatory statement
to the notice for general meeting, and actual utilization of funds.
(b)The statement(s) shall be continued to be given till proceeds have been fully utilised or purpose
has been achieved.
(c)Where entity has raised funds through preferential allotment or qualified institutions placement, listed
entity shall disclose every year, utilization of such funds during that year in its Annual Report until such
funds are fully utilized.
The audit committee shall mandatorily review:
(a)Quarterly statement of deviation(s) including report of monitoring agency, if applicable,
submitted to stock exchange(s) in terms of Regulation 32(1).
(b)Annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/ notice in terms of Regulation 32(7).
Information to Shareholders (Reg 36)
Listed Entity shall send soft copy or hard copy of Audit Report not less than 21 days before AGM
to Shareholders.
Transfer or Transmission of Securities [Reg. 40]
The BOD of listed entity shall delegate power of transfer of securities to
Ÿ a committee or
Ÿ to compliance officer or
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Ÿ to registrar to an issue and/or
Ÿ share transfer agents.
The auditor should also verify from records maintained to ascertain whether delegated authority has
attended to share transfer formalities at least once in a fortnight. The auditor may verify whether
any transfer request are pending for more than a fortnight and are not attended to in terms of this
Regulation.
Compliance Certificate
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The CEO and CFO shall certify to Board that:
(a)They have reviewed f/s and CFS for year and that to best of their knowledge and belief:
i.These statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
ii.These statements together present true and fair view of listed entity's affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
(b)There are, to best of their knowledge and belief, no transactions entered into by listed entity
during year which are fraudulent, illegal or violative of listed entity's code of conduct.
(c)They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated effectiveness of internal control systems of listed entity
pertaining to financial reporting and have disclosed to auditors and Audit Committee,
deficiencies in design or operation of internal controls, if any, of which they are aware and
steps taken to rectify deficiencies.
(d)They have indicated to auditors and Audit Committee:
i.Significant changes in internal control over financial reporting during year;
ii.Significant changes in accounting policies during year and same have been disclosed in notes to
F.S; &
iii.Instances of significant fraud of which they have become aware and involvement therein, of
Management or an employee having significant role in listed entity's internal control system
over financial reporting.
Management Discussion & Analysis [SCHEDULE V]

(a)Industry structure and developments.
(b)Opportunities and Threats.
(c)Segment–wise or product-wise performance.
(d)Outlook
(e)Risks and concerns.
(f)Internal control systems and their adequacy.
(g)Discussion on financial performance with respect to operational performance.
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(h)Material developments in Human Resources / Industrial Relations front, including number of
people employed.
Other Disclosures :
Disclosure of events or information
Ÿ Every listed entity shall make disclosures of material events or information.
Ÿ BOD shall authorise 1 or more KMPs to determine materiality, their contact details shall be
on website.
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Ÿ Such disclosures shall be hosted on website for minimum period of 5 years and thereafter as
per archival policy of listed entity, as disclosed on its website.
RPT Disclosures
Ÿ Quarterly compliance report on Corporate Governance to RSE 21 days from end of Quarter
Ÿ The report shall be signed either by the Compliance Officer or Chief Executive Officer.
Ÿ Policy to be disclosed on website & weblink provided in annual report
Ÿ Disclose transactions with promoter having 10% or more shareholding.
Ÿ Submit within 30 days from SFS & CFS half year results, disclosure of RPTs on
consolidated basis to RSE (format as per a/c std) & publish on website
Disclosure of Accounting Treatment:

Ÿ If in preparation of FS treatment different from accouning standard followed,
Ÿ Fact shall be disclosed & Management explanation why it believes alternative treatment
shall give true & fair view of transaction.
Disclosure: Sexual Harassment of Women at Workplace:

a.number of complaints filed during the financial year
b.number of complaints disposed of during the financial year
c.number of complaints pending as on end of the financial year
Report on Corporate governance & Auditors Cerficate:

Entity shall submit a quarterly compliance report on corporate governance in to the stock exchange within
21 days of the end of each quarter. It shall be signed either by the Compliance Officer or the CEO. The
auditor should ascertain whether the BOD have included in the Annual Report a separate section on
corporate governance with a detailed compliance report on corporate governance.
A listed entity shall obtain a compliance certificate the auditors or CS regarding compliance of conditions
of corporate governance and annex it to the Directors' Report.
Adverse or Qualified Statement: Depending upon the facts and circumstances, some situations may require
an adverse or qualified statement or a disclosure without necessarily making it a subject matter of
qualification in the Auditors' Certificate, in respect of compliance of requirements of corporate governance.
AUDIT OF CONSOLIDATED
FINANCIAL STATEMENTS
CA Ravi Agarwal's
AUDIT OF CONSOLIDATED
07 FINANCIAL STATEMENTS
Consolidation of Financial statements - Mandatory under Companies Act,2013
Ÿ Sec 129(3) à where Company has one or more Subsidiary, including JVs & associates, its shall
in addition to its own F.S. prepare CFS of Company & all its Subsidiary
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Ÿ Sec 129(4) à Provisions relating to preparation, adoption & audit (PAA) of F.S. of Holding
Company shall apply mutatis mutandis to CFS
Ÿ CFS shall be made as per Sched III & A/c standards
Ÿ A Company which isn't reqd to prepare CFS, it shall be sufficient if it complies with provisions
of CFS under Sched III
However, the requirement related to CFS shall not apply if it meets the following conditions:
Ÿ It is a wholly-owned or partially-owned subsidiary of another company and all its other
members, including those not otherwise entitled to vote, having been intimated in writing and do
not object to the company not presenting consolidated financial statements;
Ÿ Company whose securities are not listed or not in the process of listing
Ÿ Its ultimate or any intermediate holding company files CFS with the Registrar
Note: An investment entity need not present CFS if it measures Subsidiary at FVTPL (Fair value
through P&L)
Investment Entity is an entity that:

a) obtains funds from one or more investors for purpose of providing investment management
services;
(b)commits to its investor(s) that business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both; and
(c)measures and evaluates performance of substantially all of investments on fair value basis.
However, parent of Investment entity shall prepare CFS unless parent is also an Investment entity.
Responsibility of Parent
The responsibility of CFS is of the management of Parent which includes:
(a)identifying components, and including financial information of components to be included in

the CFS;
(b)where appropriate, identifying reportable segments for segmental reporting;
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(c)identifying related parties and related party transactions for reporting;

(d)obtaining accurate and complete financial information from components;
(e)making appropriate consolidation adjustments;
(f)harmonization of accounting policies and accounting framework; &
(g)GAAP conversion, where applicable.
Auditors Responsibility & objectives in audit of CFS are:

The principal auditor of the CFS is responsible for expressing an opinion on whether the CFS are
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prepared, in all material respects, in accordance with the FRF under which the parent prepares the
CFS in addition to reporting on the additional matters as required under the Companies Act, 2013
and any other statute to the extent applicable :
The audit objectives are as follows:

(a)to satisfy that CFS have been prepared in accordance with requirements of applicable FRF;
(b)to enable himself to express opinion on true and fair view presented by CFS;
(c)to enquire into matters specified in section 143(1) of Companies Act, 2013; and.
(d)to report on matters given in clauses (a) to (i) of section 143(3) of Companies Act, 2013 for other
matters under section 143(3)(j) read with rule 11 of the Companies (Audit and Auditors) Rules,
2014, to comment on the matters specified in sub-rule (a),(b) and (c) to extent applicable;
(e)The auditor should also validate requirement of preparation of CFS for company as per applicable
FRF.
SA's, Statements and Guidance Notes issued by the ICAI apply in the same manner to audit of CFS
as they apply to standalone financial statements
Auditor's considerations - Materiality

Ÿ The auditor is required to compute materiality for group as a whole. This materiality should be
used to assess appropriateness of consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments) that are made by management in
preparation of CFS.
Ÿ The parent auditor can also use materiality computed on group level to determine whether
component's FS are material to group to determine whether they should scope in additional
components, and consider using work of other auditors as applicable.
Ÿ The principal auditor also computes materiality for each component and communicates to
component auditor, if he believes is required for true and fair view on CFS.
Ÿ The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain info required for consolidation and disclosure requirements
etc.
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Audit Plan for CFS
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner:
(a)Understanding of group structure and group-wide controls including assessment of IT system
and related general and applications IT related controls (manual and automated) for
consolidation process;
(b)understanding of accounting policies of parent and its components as well as of consolidation
process including process of translation of F.S. of foreign components;
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(c)determining and programming NTE of audit procedures to be performed based on assessment

of ROMM in consolidation process;
(d)determining extent of use of other auditor's work in audit; and
(e)coordinating work to be performed.
Audit Completeness
To ensure completeness, the auditor should perform the following procedures:
(a)review his working papers for prior years for known components;
(b)review parent's procedures for identification of various components;
(c)make inquiries of management to identify any new components or any component which goes
out of consolidated financial statements;
(d)review investments of parent as well as its components to determine shareholding in other
entities;
(e)review joint ventures and joint arrangements as applicable; (Jvs)
(f)review other arrangements entered by parent that have not been included in CFS
(g)Identify changes in shareholding that might have taken place during reporting period.
Permanent Consolidation Adjustments

Ÿ These adjustments are made on first occasion, or subsequently when there's change shareholding
of entity which is consolidated
Ÿ These are:
üDetermination of Goodwill or capital reserve as per AS
üDetermining equity attributable to Minority /Non-Controlling intt
Ÿ Auditor should verify above calculations
üParticular attention to determine pre-acquisition reserves of components.
üAlso check pre-acquisition reserves properly allocated between parent & minority/NCI
üAlso verify changes in permanent consolidation adjustment on account of subsequent
acquisition or disposal of shares in components
It may happen, in case of one Subsidiary, its goodwill & in case of other Capital Reserve, parent may
net off both & show single amount in B/Sheet as per FRF. Auditor should verify if gross amount of
goodwill & capital reserve shown in notes to CFS.
CA Ravi Agarwal's
Current Period Consolidation Adjustment
These adjustments made in accounting period for which consolidation of F.S. is to be done. These
primarily relate to intra group transactions & account balances including:
i.Intra-group interest paid or received
ii.Unrealized intra group profit on assets acquired/ Transfered from /to other Subsidiary
iii.Record deferred tax on unrealized inter Company profits elimination as per As 12
iv.Intra-group indebtedness
v.Adjustment to harmonizing different accounting policies being followed by Parent & its
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components
vi.Adjustments to recognize subsequent events or transactions that occur between balance sheet
date & date of auditor's report
vii.Adjustment for effects of significant transactions or events b/w date of component's b/sheet
(not already recognized) & auditor's report on Group's CFS
viii.Foreign component, adjustments to convert from Component's local GAAP to GAAP under which
CFS are prepared
ix.Determination of movement in equity attributable to the minorities /NCI
The auditor should review the memorandum records to verify the adjustment entries made in the
preparation of consolidated financial statements:
Apart from reviewing the memorandum records, the auditor should Verify:
Ÿ Intra group transactions and account balances have been eliminated;
Ÿ CFS have been prepared using uniform accounting policies
Ÿ Adequate disclosures have been made in accordance with AS 21 (ensure conformity with the
group's accounting policies in accordance with Ind AS 110)
Ÿ Adjustments made to harmonise the different accounting policies including adjustments made
by management to convert a component's FS prepared under the component's GAAP to the GAAP
under which the CFS are prepared;
Ÿ verify the calculation of minorities/NCI;
Note:
In any case, difference between reporting dates of component FS & date of CFS should not be more
than six months in case of FS under AS and three months in case of financial statements under Ind
AS.
Following information is also required to be disclosed in CFS separately for parent and each of its
components (including foreign component) which has been consolidated:
(i)amount of net assets and net assets as a percentage of consolidated net assets;
(ii)amount of share in profit or loss(P&L) and percentage share in P&L as percentage of
consolidated P&L;
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(iii)amount in other comprehensive income (OCI) and percentage of OCI as a percentage of
Consolidated OCI
The Following information in the notes to CFS need not be given
i.Source from which bonus shares are issued
ii.Disclosure of unutilized monies out of issue indicating form in which they have been invested
iii.Disclosure under MSME Development Act 2006
iv.A statement of investments separately classifying trade investments and other investments,
showing the names of the bodies corporate in whose shares or debentures, investments have
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been made.
v.Value of imports on CIF basis by Company during FY in respect of:
a)Raw material
b)Components & spare parts
c)Capital Goods
vi.Expenditure in forex during FY on account of Royalty, know how etc
vii.Value of imported Raw material, spare parts & components consumed & value of indigenous RM,
SP & C consumed & percentage of each to total consumption.
Management Representations regarding CFS:

the auditor of the consolidated financial statements obtains written representations from parent
management on matters material to the consolidated financial statements
(a)Completeness of components included in the CFS;

(b)Identification of reportable segments for segmental reporting;
(c)Identification of related parties and related party transactions for reporting;
(d)Appropriateness and completeness of permanent and current period consolidation adjustments,
including elimination of intra-group transactions.
Reporting
1.When Parent's Auditor is also Auditor of all its Components
Ø Auditor should report whether principles and procedures for preparation and presentation of CFS
as laid down AS have been followed.
In case of any departure or deviation, auditor should consider requirements given in SA 705 in
audit report so that users are aware of such deviation.
Ø Auditor should issue an audit report expressing opinion whether CFS give true and fair view of
state of affairs of Group as on balance sheet date and whether consolidated P&L statement
gives true and fair view of results of consolidated P&L of Group for period under audit.
Ø Where CFS also include cash flow statement, auditor should also give his opinion on true and
fair view of cash flows presented by consolidated cash flow statements.
2.When the Parent's Auditor is not the Auditor of all its Components
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Ø Auditor should consider requirement of SA 600.
Ø As per SA 706, if auditor makes reference to work of other auditor in his audit report on CFS,
disclose clearly magnitude of portion of FS audited by other auditor.
Ø This may be done by stating aggregate amts, or percentage of total assets, revenues & cash
flows included in CFS not audited by parent's auditor.
Ø Total assets, revenues and cash flows not audited by the parent's auditor should be presented
before giving effect to permanent and current period consolidation adjustments.
Ø Reference in the report of auditor on CFS to fact that part of the audit of the group was made
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by other auditor(s) is not to be construed as a qualification of the opinion but rather as an
indication of divided responsibility between auditors of parent and its subsidiaries.
3.When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework
Different than that of the Parent
Ø Parent's Management performs conversion from component's audited FS from FRF in which its
prepared to FRF for CFS.
Ø The conversion adjustments are audited by Principal Auditor.
Ø The component auditor might prepare FS as per parent's accounting polices based on Group
Accounting Manual (GAM)
Ø Parent auditor shall check if GAM comply with GAAP applicable to Parent
4.Components not audited

Ø Generally, FS of all components included in CFS should be audited or subjected to audit
procedures in context of a multi-location group audit. Such audits and audit procedures can be
performed by the auditor reporting on the consolidated financial statements or by the
components' auditor.
Ø Where FS of one or more components remain unaudited, auditor reporting on CFS should
consider unaudited components in evaluating a possible modification to his report on CFS. The
evaluation is necessary because the auditor has not been able to obtain SAAE in relation to such
consolidated amounts/balances.
In such cases, auditor should evaluate both qualitative and quantitative factors on possible effect
of such amounts remaining unaudited when reporting on CFS using guidance provided in SA 705,
“Modifications to Opinion in Independent Auditor's Report”.
AUDIT OF BANKS
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08 AUDIT OF BANKS
Special Audit Consideration & Legal Framework:

Special considerations arise in audit of banks because of:
Ÿ Particular nature of risks associated with the transactions undertaken;
Ÿ scale of banking operations and resultant significant exposures which can arise within short period
of time;
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Ÿ extensive dependence on IT to process transactions;
Ÿ effect of the statutory and regulatory requirements;
Ÿ continuing development of new products and services and banking practices which may not be
matched by the concurrent development of accounting principles and auditing practices.
Ÿ Evolution of technology and providing services through Net Banking and Mobiles has exposed banks
to huge operational and financial risk.
Legal Framework Principal enactments governing functioning of bank are:
Co-operative Societies Act 1912 for Co-operative Banks RBI Act, 1934
Banking Regulation Act, 1949 SBI Act 1955
Banking Companies (Acquisition & Transfer of Securitization & Reconstruction of Financial Assets &
Undertakings) Act, 1970 Enforcement of Security Interest Act 2002
Regional Rural Banks Act, 1976 SBI (Subsidiary Banks) Act, 1959
Banking Companies (Acquisition & Transfer of Payments & Settlement System Act 2007
Undertakings) Act, 1980
Information Technology Act, 2000 Credit Information Companies (Regulation) Act 2005
Prevention of Money Laundering Act, 2002 Companies Act 2013
Form and content of Financial Statements:

rd
Form A - 3 Schedule - Contains the form of Balance Sheet and
Form B – Contains form of Profit and Loss Account.
Comply with the disclosure requirements under the various AS.
Contents of Appointment Letter
Most banks appoint 4 or more CA firms as Statutory Central Auditors. The appointment letter sent by
banks in connection with the appointment of SCAs typically contains the following
Ø Period of appointment.
Ø Particulars of other central auditors.
Ø Particulars of previous auditors.
Ø Procedural requirements to be complied with in accepting the assignment
Ø A statement of division of work and review and reporting responsibilities amongst joint auditors in
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case of nationalised banks
Ø Scope of assignment which included spl certificates or reports to be given by CSAs
Ø Basis of computation of audit fee and scale of travel and related allowances and conveyance charges
and other expense reimbursement entitlements, if any.
Authority appointing the auditor:

Ÿ Banking Co. shall be Appointed at the AGM of the shareholders
Ÿ Nationalised bank shall be appointed by concerned bank acting through its BOD
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Ÿ In either case, approval of RBI is required before appointment is made

Ÿ SBI shall be appointed by C&AG in consultation with CG
Ÿ Regional rural banks are to be appointed by concerned bank with approval of CG
Conduct of Audit
1. Initial Considerations
Ÿ Acceptance & Continuance: Assessing engagement risk prior to acceptance.
Ÿ Declaration of Indebtness: Written confirmation that credit facilities obtained by auditors & their
family members have not become NPAs.
Ÿ Internal Assignments in Banks by Statutory Auditors: Not take stat audit assignment if associated
with internal audit assignment
Ÿ Terms of Audit Engagements: As per SA 210, agree terms of engg before beginning fieldwork
Ÿ Communication with Previous Auditor: As per Clause 8 of Part I of First Schedule of CA Act 1949
Ÿ Planning: Documenting NTE of audit procedures & flexible to make changes
Ÿ Establish Engagement Team: Qualified & experienced professionals to manage engg risk
2.Understanding
Ÿ Understanding the Bank and Its Environment including Internal Control
Ÿ Understand Bank's Accounting Process
Ÿ Understanding Risk Management Process
Ø Oversight by TCWG: They should approve risk mgt policies consistent with bank's objectives,
strategies, regulatory requirement etc
Ø Identification, Measurement and Monitoring of Risks: Risks should be identified, measured &
monitored against pre-approved criteria
Ø Control Activities: Segregation of duties, verification & approval of transactions, physical security
Ø Monitoring Activities: Conducted by independent risk mgt unit
Ø Reliable information systems: That provide adequate compliance, financial & operational info
3.Risk Assessment
Ÿ Identifying and assessing ROMM: As per SA 315, Identifying & assessing ROMM at F.S. level &
assertion level for Class of transn, a/c balance & disclosures
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Ÿ Assess the risk of fraud including Money Laundering: As per SA 240, assess risk due to fraud
Ÿ Assess specific risk: ROMM at F level relating to banking industry & use of IT
Ÿ Risk of outsourcing activities: Used for reducing costs as well as making use of services of an expert
not available internally but risk associated with it.
4.Execution: Engagement team discussion, Response to assessed risks, Establishing Audit strategy,
Determining audit materiality, Consider Going concern
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Special considerations in IT Environment:
Considering the importance of IT systems in preparation and presentation of financial statements, it is
imperative that bank should share detailed information with auditors like: -
Ÿ Overall IT policy, structure and environment of Bank's IT system
Ÿ Data processing and data interface under various systems
Ÿ Data integrity and data security
Ÿ Business Continuity plans and disaster control plans
Ÿ Accounting manual and critical a/c entries, their processes and involvement of IT systems
Ÿ Controls over key aspects, use of various a/c heads,expense booking,overdue identification etc.
Ÿ Controls on recording of various e-banking and internet banking products and channels
Ÿ MIS reports being generated and their periodicity
Ÿ Major exception reports and process of generation including embedded logic
Note:
Ÿ Overall review of IT environment and computerized a/c system has to be taken at HO level.
Ÿ Branch auditors don't have access to IT policy and processes implemented by bank.
Hence, based upon guidance and info received from SCAs, branch auditors need to ensure that data review
and analysis through CBS is carried out and TOCs and substantive checking of sample transactions is
carried out at branch level and results are shared with SCAs.
Key control aspects that an auditor needs to address while undertaking audit in a Computerised bank.
ØEnsure authorised, accurate and complete data available for processing
ØEnsure in case of power failure, system restarts without affecting completion of entries/records
ØEnsure system prevents unauthorised amendments to programme
ØVerify segregation of duties ensured while granting system access to users
ØVerify balance in general ledger tallies with subsidiary book
ØVerify backup media stored in fireproof cabinet with lock & key. offsite backup for emergency.
ØVerify that exceptional transaction are authorised and verified on a daily basis. It is important for auditor
to understand the nature of exception and its impact on financials
ØVerify latest anti-virus software installed.
ØVerify access to computer system only to authorised persons.
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Stress Testing
These are designed to understand whether bank has enough capital to survive plausible adverse economic
conditions and to maintain enough buffer to stay afloat under extreme scenarios.
BASEL III framework :

Basel III norms relate to Capital Adequacy requirement compliance which the Bank has to achieve as
contained in BASEL III accord.
Basel capital adequacy norms are meant for protection of depositors and shareholders by prescriptive rules
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for measuring capital adequacy, thereby evolving methods of determining regulatory capital and ensuring
efficient use of capital.
Aim:
a)improving the banking sector's ability to absorb shocks arising from financial and economic stress
b)improving risk management and governance practices
c)strengthening banks' transparency and disclosure standards.
Risk-based Internal audit is conducted based upon risk assessment of business and control risks of
branches.
The risk assessment process includes: -
Ÿ Identification of inherent business risks in various activities undertaken by branches (Business risk)
Ÿ Assessment of effectiveness of control systems for monitoring inherent risks of business activities
of branch (Control risk)
Ÿ Making an assessment of level and direction of various risk areas and assess level and direction of
overall business risk and control risk
Ÿ Drawing up of risk matrix taking into account factors viz. Risk of branch
Internal Controls
General:
Ÿ The staff of bank shifted from one position to another frequently and without prior notice.
Ÿ Work of one person should always be checked by another person (Internal check)
Ÿ The arithmetical accuracy of books should be proved independently every day.
Ÿ All bank forms (e.g. Cheque books, demand draft/pay order books, travelers' cheques, foreign currency
cards etc.) should be kept in possession of an officer, and another officer should verify issuance and
stock of such stationery.
Ÿ Mail should be opened by a responsible officer. Signatures on all letters and advices received from other
branches of bank or its correspondence should be checked by officer with the signature book.
Ÿ Signature and telegraphic code book kept with responsible officers and access should be allowed only
to authorised officers.
Ÿ The bank should take out insurance policies against loss due to all the risks such as fire, natural
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calamities, theft and employees' infidelity.
Ÿ Surprise inspection of HO & Branches by Internal Audit Dept
Cash:
ØCash should be kept in joint custody of 2 responsible officers.
ØTest-checked daily and counted in full occasionally by a responsible officer other than those handling the
cash.
ØThe cashier should have no access to customer's ledger accounts and the Day Book.
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ØPayments should be made only after vouchers (e.g. cheques, demand drafts etc.) have been passed for
payment
ØHigh value cash receipts and payments should be verified by a higher officer/ branch manager
Clearings
Ø Under Cheque Truncation System (CTS) implemented by RBI, electronic image of cheque is
transmitted to paying branch through clearing house, along with relevant info. like data on MICR
band, date of presentation, presenting bank, etc. This effectively eliminates associated cost of
movement of physical cheques, reduces time reqd for their collection.
Ø As per RBI guidelines, branch is required to either call customer or email him for any cheque recd for
amt of 5L & above in respect of inward clearings. Auditor may verify compliance on test check basis.
Ø Auditor is to check whether sign of drawer of cheque is being verified by staff or not as else there will
be liability of paying bank under all circumstances.
Ø The unpaid cheques received in outward clearing should be either sent to customers at their recorded
address or customers be informed to collect the same from bank branch.
Bill for collection

Ø Docs recd & entered in register by responsible officer
Ø Accounts credited only after bill collected or advice recd from bank branch or agent to which they
were sent for collection
Ø Ensure à Bill sent by 1 branch to another not taken in bills for collection twice in amalgamated B.S.
of Bank. So, receiving branch needs to reverse the entries at end of year for closing purpose.
Bills Purchased
Ø All documents of title should be assigned to bank
Ø Sufficient margin à cover decline in value of security
Ø Unable to collect on due date à immediate steps to recover amt.
Ø Irregular a/c report to H.O.
Loans & Advances
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4Make advances after verifying creditworthiness of borrowers & Obtaining sanction from proper
authorities of bank.
4All the necessary documents (e.g., agreements, demand promissory notes, letters of hypothecation,
etc.) Should be executed by the parties before advances are made.
4Sufficient margin should be kept against securities taken to cover any decline in the value thereof.
4Securities should be kept in Joint custody of two responsible officers.
4All securities are accompanied by documents sufficient to give title of the bank.
4Market value of goods in the possession of bank should be checked by officers of the bank By personal
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enquiry in addition to the invoice value given by the borrower.

4All accounts should be kept within both the drawing power & sanctioned limit as per prescribed norms
4Irregular accounts should be reported to Head Office regularly.
4Operation (in each advance account) should be reviewed at least once every year
Telegraphic Transfers & Demand Drafts

4Signatures on a demand draft should be checked by an officer with the Signature Book.
4All the telegraphic transfers & demand drafts sold/ issued by a branch should be
4Immediately confirmed by an advice to the paying branch.
4Paying branch receives proper confirmation of telegraphic transfers & demand drafts from issuing
branch
4Receives credit in its account with that branch,
4If not, it should take immediate steps to ascertain the reasons.
Inter Branch Accounts

Ÿ Accounts should be adjusted only on the basis of advices
Ÿ Not on the strength of entries found in the statement of account received from other branches,
Ÿ Prompt action should be taken preferably by central authority,
Ÿ If any entries (particularly debit entries) are not responded to by any branch within a reasonable time.
Demand Drafts
ØCheck signature with signature book
ØDD sold/ issued confirmed by advice to paying branch
ØPaying branch not receive confirmation or credit in account à steps to ascertain reasons
Credit Card Operations

£ There should be effective screening of applications with reasonably good credit assessments.
£ There should be strict control over storage and issue of cards.
£ There should be a system of prompt reporting by merchants of all settlements accepted by them
through credit cards.
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£ Reimbursement to merchants should be made only after verification of validity of merchant's
acceptance of cards.
£ All reimbursement (gross of commission) should be immediately charged to customer's account.
£ There should be a system to ensure that statements are sent regularly and promptly to customer.
£ There should be a system to monitor and follow-up customers' payments.
Compliance with SLR/CRR Requirements

Cash Reserve Ratio: min. fraction of deposits in cash/ deposits with RBI. Check master circular of RBI to
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check compliance.
Statutory Liquidity Ratio: Required to maintain gold/cash/govt approved securities/other liquid assets.
Report submitted to top mgt & RBI.
·Correctness of compilation of DTL
·Maintenance of liquid Assets
Ÿ Verify compliance on 12 odd dates, not being Fridays
Ÿ Report to management and RBI, covering
ØCorrectness of compilation of DTL position
ØMaintenance of liquid assets u/s 24 of Banking Regulation Act
Ÿ Audit procedure:
ØUnderstand circular/direction of RBI
ØRequest branch auditor à weekly trial balance on Friday-consolidation at H.O. Also on dates
selected by auditor. Specific request examine cash balance on selected dates.
ØTest basis examine consolidation Demand Time Liability position with reference to branch returns
ØExclusions from liabilities:
ü Paid up capital, reserve, any cr. balance in P&L a/c of bank, amt of loan taken from RBI and amt
of refinance taken from EXIM bank, NHB, SIDBI and NABARD
ü Part amounts of recoveries from borrowers in respect of debts considered bad and doubtful.
ü Amounts recd in Indian currency against import bills and held in sundry deposits pending
receipts of final rates.
ü Un-adjusted deposits/balances lying in link branches for agency business like dividend, interest
warrants etc. to the extent of payment by other branches but not adjusted by link branched
ü Margins held & kept in sundry deposits for funded facilities
ØInclusions in liabilities:
ü Net credit balance in branch adjustment accounts including relating to foreign branches.
ü Borrowings from abroad by banks in India considered as 'liability to other' taken at gross level
can't be netted off (Adverse balance in Nostro Mirror A/C)
ü interest accrued but not accounted for in books
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Verification of Assets
VERIFICATION OF INVESTMENTS
Ÿ Internal Control Evaluation & Review of Investment Policy
ü To ensure that they are in accordance with the RBI's guidelines.
ü To ensure that investment objectives are separate for the Investments on its own account &
investments on behalf of customers.
Ÿ Separation of Investment Functions
ü Check the segregation of duties in terms of Executing trades, settlement & monitoring of such
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trades, and accounting of the same.

Ÿ Examination of Reconciliation
ü Examine the reconciliation of the investment account, Physically verify the securities on hand,
obtain confirmations etc.
Ÿ Examination of Documents
ü Ascertain whether the investments made by bank are within its authority & supported by
documentation.
ŸPhysical Verification
ü Investment scrips should be physically verified at the close of business on balance sheet date.
ü In respect of scrip less dealings in investments (e.g. OTC Exchange),
ü Auditor should verify the year-end confirmation certificates of the depository organization.
ü Examine confirmations of counterparty banks w.r.t. Bills Receivables issued by other banks & on
hand with the bank at the year-end.
Ÿ Examination of Valuation
ü Examine whether method of accounting of investments, including their year-end valuation, is
appropriate.
ü Examine compliance with the guidelines of the RBI relating to valuation of investments.
ü Ensure adequate disclosure of any change in method of valuation of investment is made.
ü Examine whether the profit or loss on sale of investments has been computed & accounted for
properly.
Ÿ Securities on Behalf of Others
ü Examine whether prior approvals have been obtained.
ü Examine whether income has been recorded fairly.
Ÿ Special-Purpose Certificates Relating to Investments
ü Examine whether the bank is maintaining separate accounts
ü For the investments made by it on their own Investment Account,
ü on PMS client's account, & on behalf of other constituents (including brokers).
ü As per the RBI guidelines, banks are required to get their investments under
ü PMS separately audited by external auditors.
ŸExamination of Classification & Shifting
ü Examine that entire investment portfolio of bank is classified under three categories i.e.HTM, HFT
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and AFS and shifting of securities is as per regulatory norms and laid down policy. Examine whether
the shifting of the investments from 'available for sale' to 'held to maturity' is Approved by the Board
of Directors of the bank.
Balance with RBI

Ÿ Verify ledger balance w.r.t confirmation certificates and reconciliations.
Ÿ Review recos. with spl. attention to:
Ø Cash transn unresponded
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Ø Revenue items requiring adjustment/write off
Ø Other cr. and debit entries originated in Statement provided by RBI remaining
responded for more than 15 days.
ŸWR from mgt. for reasons of old outstanding bal. in BRS unadjusted for 1 year.
Money at call/short notice

Ÿ Examine-proper system of authorization + compliance with HO instructions
Ÿ Verify call loans wrt to certificates of borrowers & call loan receipts held by bank
Ÿ Examine-balance in registers tally with control a/c as per GL
Ÿ Examine subsequent repayments-verify balance at year end. Call loans made can't net off
with loans recd.
Ÿ Verify-interest accrued & accounted year end
Spl purpose certificates relating to investments

ŸExamine-bank maintain separate accounts for investments
üOwn a/c
üPMS clients
üOther constituents (including brokers)
ŸRBI Guidelines-separate audit of investments under PMS-external auditor
Note: There should be half yearly reviews of Investment portfolios (30th Sept & 31st Mar)
Advances: Substantive Audit Procedures

Ÿ Verify correctness of master data of loan a/cs updated in CBS. Check parameters like
Ÿ instalments, EMI, rate of intt, tenure of loans etc.
Ÿ Verify that each customer of bank is tagged under single customer id in respect of all it's
a/cs including those in which cr. facilities are granted.
Ÿ Examine a/cs identified to be problem a/cs but which have not yet slipped into NPA
category. This can be done by obtaining list of SMA1 and SMA2 borrowers from bank and
same can be considered for selection of problematic accounts.
Ÿ Examine those a/cs à adversely commented upon by concurrent auditors/bank's
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internal inspection/RBI inspection team.
Ÿ Examine list of restructured a/cs to ensure that restructure is as per RBI
guidelines. Remember restructured a/c portfolio requires additional provisioning.
Ÿ Examine quick/early mortality accounts. Any advance slippage to NPA within 12 months
of its sanction is called as quick/early mortality case.
Ÿ Examine all large advances & others on sample basis
Ÿ Completeness & accuracy of interest charged
Ÿ Carry out appropriate analytical procedures
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ÜRecoverability of advances
ØReview periodic statements submitted by borrower
Ø Latest financial statements of borrower
Ø Reports on inspection of security
Ø Review audit report à borrower enjoying cr limit >=10 Lakh for working capital
Provisioning of NPA
Classification & Provision
Ÿ Verify whether bank has a system of ongoing identification and classification of
advances through CBS without manual intervention and its accuracy in crystallising
date of NPA.
Ÿ Examine classification appropriate à particularly those advances with threat to recovery
Ÿ Examine-secured & unsecured portion segregated correctly and calculation of provision
Ÿ Review and compare date of NPA of loan a/cs mentioned in current year statements with
that of PY. Reasons for any change should be ascertained.
Ÿ A/c regularised before b/s date à payment from genuine sources à need not be classified as
NPA
Ÿ If subsequently, branch lends funds to borrower à auditor assess genuineness of source of
payment
Ÿ Inherent weakness in a/c à deemed NPA
Ÿ Classification as per position as on date and review of all std accounts on balance sheet date
Ÿ Recognition on basis of Past Due/Overdue Concept & not based on balance sheet date.
Drawing power calculation (DP)
Ÿ Ensure calculation as per extant guidelines i.e. credit policy of bank formulated by Board & agreed
by stat auditors reflected in respective sanction letters
Ÿ Spl consideration should be given to proper reporting of sundry creditors and stocks covered under
LCs/guarantees for purposes of calculating drawing power.
Ÿ Stock audit for a/c funded exposure > stipulated limits. Review report of stock auditor with spl.
focus to comments
Ÿ Calculated carefully à working capital advances to Cos. in construction business. Valuation of WIP
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proper & consistent manner. Mobilisation advance reduced to calculate DP.
Accounts with temporary deficiencies
Ÿ Banks shouldn't classify an advance a/c as NPA merely due to existence of some deficiencies which
are temporary in nature such as non-availability of drawing power (DP) based on latest available
stock statement, balance o/s exceeding the limit temporarily and non-renewal of limits on due date.
Ÿ However, stock statements relied upon by banks for determining DP should not be older than 3
months.
Ÿ The o/s in the account based on DP calculated from stock statements older than 3 months are
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considered as irregular. Ensure adherence to these guidelines.
Limits not reviewed

Where ad hoc/ regular limit not reviewed within 180 days from due date, consider as NPA. Also ensure
review not done on repetitive basis.
Asset classification - Borrower wise & not facility wise

It is to be ensured that all facilities granted by a bank to borrower will have to be treated as NPA and not
particular facility which has become irregular. Further, if debits arising out of devolvement of LC or
invoked guarantees are kept in separate a/c, outstanding balance should be treated as part of borrower's
principal a/c for purpose of application of prudential norms on asset classification, income recognition
and provisioning.
Govt Guaranteed Advances

Ÿ If it becomes NPA, income recognition on realisation basis
Ÿ Asset classification
Ÿ CG guarantee: treat NPA if CG repudiates guarantee when invoked
Ÿ SG: no such exception, i.e. NPA if overdue > 90 days
Ÿ If CG guarantee not invoked for long à report in LFAR
Agricultural Advance
Ÿ Ensure NPA norms applied in accordance with crop season determined by State Level Bankers'
Committee in each State. Depending upon the duration of crops – short term/ long term - raised by an
agriculturist, NPA norms would also be made applicable to agricultural term loans availed of by them.
Also ensure that these norms are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
Ÿ In respect of agricultural loans, other than those specified in circular, ensure that identification of NPAs
has been done on the same basis as non-agricultural advances.
Restructured Advance
Restructuring is an act in which a lender, for economic or legal reasons relating to borrower's financial
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difficulty, grants concessions to borrower.
It may involve modification of terms of advances including alteration of amount of instalments/alteration
of repayment period/rate of interest/sanction of additional credit facilities etc. to help in curing of default.
ª The auditor should verify compliance with requirements of circular issued in this regard.
ª Banks may restructure a/cs classified under std, substandard or doubtful categories. Banks can't
restructure a/cs with retrospective effect.
ª Once bank receives an application/proposal in respect of an a/c for restructuring, it implies that
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account is intrinsically weak. Accordingly, during the time account remains pending for restructuring,
auditors need to take a view whether provision needs to be made in respect of such a/cs, pending
approval for restructuring.
ª On restructuring, account will be downgraded from Standard to substandard. NPAs will remain in same
category.
Upgradation of Account
ŸExamine all accounts upgraded from NPA to std. category during the year, to ensure that upgrading of
each account is strictly in terms of RBI guidelines.
ŸThere can be a possibility of incorrect upgradation of a/c on basis of partial recoveries made in the a/c
and overdue portion might not have wiped out completely. There can also be a possibility of
recoveries being made in account after cut-off date and a/c being upgraded as on date of balance
sheet.
Sale/ Purchase of NPAs

General points to examine:
Ø Policy of BOD relating to procedures, delegation of power and valuation
Ø Only such NPA can be sold àremained in books atleast 2 years
Ø Sale/purchase without recourse only
Ø Subsequent to sale bank doesn't assume 'any risk'
Ø NPA sold at cash basis only
Ø Bank don't purchase NPA already sold
Ø
Ø Spl. Points for Sale of NPA
Ø Removed from books after sale
Ø Shortfall on sale charge to p&l i.e. Sale below Net Book Value
Ø Sale > Net book value, excess retained to meet loss on sale of other NPA (don't recognize profits)
Ø
Ø Spl points for purchase of NPA
Ø Provision as per classification status in books of purchaser
Ø Any recovery first adjust against acquisition cost, & excess as profit
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Ø Capital adequacy – 100% risk weight to NPAs purchased from other banks
Ø
ØStationery & Stamps
Ø Ensure that item “Stationery and Stamps” includes only exceptional items of expenditure on
stationery like bulk purchase of security paper which is to be written off over period of time. Such
items should be valued at cost. Normal expenditure on stationery is charged to p&l a/c. Therefore, this
item may not appear at branch level as considerable part of stationery is supplied to branches by head
office.
Ø Check Internal Controls
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Ø Physical verification at year end
Ø Check cost charged to p&l
Non-Banking assets acquired in satisfaction of claims

Ø Ensure that the heading includes those immovable properties/tangible assets which bank has acquired
in satisfaction of debts due or its other claims and these are being held with intention of being
disposed off.
Ø Verify with ref. to documentary evidence, eg. order of court, or award of arbitration
Ø Check ownership legally vested with bank. If dispute, check if recording as asset appropriate? If
dispute arise later on, check if provision reqd as per AS 29.
Ø Ensure compliance with Sec 9 of Banking Regulation Act
Ø [Prohibits banking Co. from holding any immovable property, howsoever acquired, for period
exceeding 7 years from date of acquisition, except required for own use]
Ø Ensure that as at date of acquisition, assets should be recorded at lower of net book value of advance
or NRV of asset acquired.
Verification of capital & liabilities:

Ø Capital Risk Adequacy Ratio = (Eligible total capital funds/Risk weighted assets & off balance sheet
items ) * 100
Ø RBI requires banks to maintain minimum 9% CRAR.
Ø
Ø Verification of Liabilities
Ø Deposits
Ø Verify balance on sample basis
Ø Examine bal. of subsy ledger tallies with general ledger
Ø Check calculation of interest on test check basis.
Ø Examine if periodic confirmations obtained, check on sample basis
Ø Conversion of foreign currency deposits at rates notified by H.O.
Ø Resultant increase/decrease taken to P&L
Ø Intt on deposits on basis of 360 days in year
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Ø Intt accrued but no due shown under 'other liab & provisions’
Ø
Ø Borrowings
Ø Obtain & verify confirmation certificates & other docs
Ø SA 505, “External Confirmation” –audit evidence to respond to significant risks
Ø Examine- clear distinction b/w rediscount and refinance, as rediscount doesn't appear in this head
Ø Examine borrowing at call & short notice-authorised
Ø
Ø Bills payable
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Ø Evaluate the existence, effectiveness and continuity of internal controls over bills payable. Controls
should usually include the following-
Ø Drafts, mail transfers,etc. made out in std printed forms.
Ø Unused forms relating to drafts, traveller's cheques, etc. kept under custody of responsible officer.
Ø The bank have a reliable private code known only to responsible officers of branches, coding and
decoding of telegrams should be done only by such officers.
Ø The signatures on demand draft, checked by officer with specimen signature book.
Ø All TTs and DDs issued by a branch should be immediately confirmed by advices to the branches
concerned. On payment, paying branch should send a debit advice to originating branch
Ø Examine sample of outstanding items comprised in bills payable accounts with relevant registers.
Reasons for old outstanding debits in respect of drafts or other similar instruments paid without advice
should be ascertained.
Correspondence with other branches after year-end should be examined specially for large value items
outstanding on balance sheet date
Contingent Liabilities
Management Representation:
The auditor should obtain representation from mgt that:-
(i)all off-balance sheet transactions have been accounted in books of a/cs as and when such
transaction has taken place;
(ii)all off balance sheet transactions have been entered into after following due procedure laid down;
(iii)all off balance sheet transactions are supported by the underlying documents;
(iv)all year end contingent liabilities have been disclosed;
(v)disclosed contingent liabilities don't include any crystallised liabilities which are of nature of loss/
expense and which require creation of a provision/adjustment in F.S;
(vi)estimated amounts of financial effect of contingent liabilities are based on best estimates in terms
of AS 29, including consideration of possibility of any reimbursement;
Contingent Liabilities (Presentation)

-Claims against the bank not acknowledged as debts
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-Liability for partly paid investments
-Liability on account of outstanding forward exchange contracts.
-Guarantees given on behalf of constituents (within India; outside India)
-Acceptances, endorsements and other obligations
-Other items for which the bank is contingently liable
Audit procedures:
Contingent Liability (CL)
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Ÿ Adequte Internal Controls ensure transn executed by persons authorised
Ÿ Verify in case of Letter of Credits for import of goods, payments made in terms of LC
Ÿ Test completeness of recorded obligations
Ÿ Review reasonableness of year end contingent liab in light of prev experience
Ÿ Review whether comfort letters issued included in CL
Claims against bank not acknowledged as debt

Ÿ Examine relevant evidence, e.g. correspondence with lawyers, workers, officers etc.
Ÿ Review minutes of meetings of BOD/committees of BOD, contracts, agreements & arrangements,
etc
Ÿ Ascertain from mgt: status of claims o/s at year end
Ÿ Review of subsequent events: completeness & valuation
Guarantees
Ÿ Check Internal Controls over issue of guarantees
Ÿ Controls over unused guarantee forms e.g. under custody of responsible officers
Ÿ Examine guarantee register- procedure of marking off expired guarantees
Ÿ Check guarantee register- ensure all included in disclosures
Ÿ If claim risen, provision as per AS 29
Auditor's Reports
In case of nationalized bank, report is issued to Central Govt. stating following:
Ÿ Whether, in auditor's opinion, balance sheet is full and fair balance sheet containing all necessary
particulars and is properly drawn up to exhibit true and fair view of affairs of bank.
Ÿ In case auditor had called for any explanation or information, whether it has been given and whether it
is satisfactory.
Ÿ Whether or not transactions of bank, which have come to auditor's notice, have been within powers of
bank.
Ÿ Whether or not returns received from offices and branches of bank have been found adequate for
purpose of audit.
Ÿ Whether profit and loss account shows true balance of profit or loss for period covered by such
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account.
Ÿ Any other matter which auditor considers should be brought to notice of Central Government.
Long Form Audit Report (LFAR)

LFAR is to be given by statutory branch auditors as well as SCAs. LFAR for branch auditors is in form of
questionnaire where observations/comments have to be provided on range of matters including cash,
balance with banks, investments, advances, deposits etc. These are submitted by statutory branch auditors
to statutory central auditors.
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The consolidation is done at head office level and LFAR for bank is submitted by SCAs to mgt. LFAR, on
the bank, after due examination, should be placed before ACB of bank indicating action taken/proposed to
be taken for rectification of irregularities, if any, mentioned therein; and a copy of LFAR and relative
agenda note, together with Board's views or directions, is submitted to RBI within 60 days of submission of
LFAR by statutory auditors.
Notes:
Ÿ In case of fraud report to:
Ø RBI
Ø Chairman/MD/CEO of bank
Ø CG u/s 143(12)
SCAs have to furnish following reports in addition to main report:

Ÿ Report on ICFR as per Sec 143(3)(I) of Cos Act 2013
Ÿ Long Form Audit Report (LFAR)
Ÿ Report on compliance with SLR Requirements
Ÿ Report on income recognition, asset classification & provisioning as per RBI Guidelines
Ÿ Report on fraud u/s 143(12) of Companies Act,2013
Ÿ Asset Liability Management
Concurrent Audit
Scope of Concurrent Audit in Banks
Ø Cash
Ø Deposits Advances
Ø Investments
Ø Foreign Exchange House
Ø Keeping
Ø Other Items
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Coverage of Business/Branches for concurrent Audit
Banks are required to cover 50 % of total deposits and 50 % of total advances under concurrent audit.
Ÿ Large and very large branches
Ÿ Special branches handling Foreign Exchange, Merchant Banking, large Corporate Wholesale
Banking and Forex dealing room operations
Ÿ Large problem branches rated as poor/very poor
Ÿ Head Office department dealing with Treasury/Funds management and handling Investment
portfolio.
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Ÿ Any other branches or departments where in the opinion of the Bank concurrent audit is desirable.
Areas of focus in Concurrent Audit:

Cash
Ÿ Daily cash transactions with particular reference to any abnormal/high value receipts and payments.
Ÿ Proper accounting of inward and outward cash remittances.
Ÿ Proper accounting of currency chest transactions, its prompt reporting to the RBI.
Ÿ Expenses incurred by cash payment involving sizeable amount.
Investments
Ÿ Purchase/sale of securities should as per:
ØHO instructions
ØRates beneficial to bank
Ÿ Securities in books à should be physically held by it
Ÿ Compliance with RBI/HO guidelines
Advances
Ÿ Ensure proper sanction of advances
Ÿ Securities properly recd and regd in name of bank.
Ÿ Proper post disbursement supervision & follow-up
Ÿ LC issued within delegated power
Ÿ BG issued, properly worded & recorded in register
Ÿ Classification as per RBI guidelines
Ÿ Claims to ECGC & DICGC submitted in time
Ÿ Foreign Exchange
Ÿ Check foreign bills negotiated under letters of credit.
Ÿ Check FCNR and other non-resident accounts whether debits and credits are permissible under rules.
Ÿ Check whether inward/outward remittance have been properly accounted for.
Ÿ Examine extension and cancellation of forward contracts for purchase and sale of foreign currency.
Ensure that they are duly authorised and necessary charges have been recovered.
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Ÿ Ensure that balances in Nostro accounts in different foreign currencies are within prescribed limit.
Ÿ Ensure adherence to guidelines issued by RBI/HO of bank about dealing room operations.
Ÿ Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.
Appointment of concurrent auditor

Ÿ Option: own staff or external auditor
Ÿ If own official: experienced, trained & senior + independent of branch where audit is conducted
Ÿ AC Board of bank shall decide max. tenure of external concurrent auditor. It'll not be more than 5
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years. No auditor will continue with a branch/Business unit for more than 3 years.
Ÿ If omission/commission by auditor report to RBI & ICAI & appointment maybe cancelled
Reporting Systems in case of concurrent audit

Ÿ There should be proper reporting of findings of concurrent auditors. For this purpose, each bank
should prepare a structured format.
Ÿ There should be zone-wise reporting of findings of concurrent audit to ACB and annual
appraisal/report of audit system should be placed before ACB.
Ÿ Before submission of report auditor should discuss important issues with branch manager and
concerned officers. This will enable auditor to consider opposite view point and clarify any
doubts.
Ÿ Minor irregularities pointed out by concurrent auditors are to be rectified in timely manner.
Serious irregularities should be reported to controlling offices/ Head Offices for immediate action.
Ÿ Whenever fraudulent transactions are detected, they should immediately be reported to
Inspection & Audit Department (Head Office) as also Chief Vigilance Officer as well as Branch
Managers concerned (unless branch manager is involved).
Ÿ Follow-up action on concurrent audit reports should be given high priority by controlling
office/Inspection and Audit Department and rectification of features done without any loss of
time.
Audit Committee of Bank

The membership of audit committee is restricted to
4Executive Director,
4nominees of the Central Government and the RBI,
4Chartered Accountant director and
4one of the non-official directors
AUDIT OF INSURANCE
COMPANIES
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AUDIT OF INSURANCE
09 COMPANIES
LEGAL FRAMEWORK:
Ü Insurance Act, 1938
Ü IRDA Act 1999
Ü IRDA Regulations
Ü Companies Act 2013
Ü GIC (Nationalization Act,1972)
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Ü PROHIBITION OF INSURANCE BUSINESS BY CERTAIN PERSONS

Ü Prohibits persons other than an Indian insurance company to begin to transact the insurance
business
Ü SEC-64 (VB) OF INSURANCE ACT prohibits an insurer from assuming risk without receipt of funds.
Ü The minimum paid-up equity share capital of an Indian insurance company should be `100 crores
excluding preliminary expenses incurred in the formation and registration of company. The insurer
may enhance the same in accordance with the provisions of the Companies Act, 2013, SEBI Act,
1992 and the rules
Ü No risk to be assumed unless premium is received in advance-
1)No insurer shall assume risk in India in respect of any insurance business on which
Premium is not ordinarily payable outside India unless & until
Premium payable is received by him or is guaranteed to be paid.
2)Risks for which premium can be ascertained in advance,
Risk may be assumed not earlier than date on which premium has been paid.
Ü The additional reporting requirement under Companies (Auditor's Report) Order, 2020 is exempted
for an insurance company as defined under the Insurance Act, 1938
Types of Life insurance products:

l Term / Protection: covers the policy holder for specific period and pays the death benefits only if the
policy holder dies during the policy period.
l Endowment/ Pure Endowment: Endowment policies cover the risk for a specified period and at the
end of the policy the sum assured is paid back to the policyholder along with all bonus accumulated.
l Money Back Plan: Money Back policies are type of Endowment policies which provides periodic
payments of partial benefits during the term of policy so long as the policy holder is alive.
l Whole Life Insurance Product: It provides cover through out the life time of the person. Unlike
Endowment plans they do not carry any maturity value and sum assured is paid to the family in
case of unfortunate death.
l Unit Linked Insurance Plan (ULIP): It allows protection and flexibility in Investment. The Premium
paid is used for the purchase of units in Investment assets.
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l Pension or Retirement Plans: A pension plan is retirement solution where policyholder decides the
age retirement age and agrees to pay premium till the time of the retirement and thereafter he has
option to commute the a part of his fund value and take an annuity for the balance.
l Annuities: Annuity is a contract where Insurer in return for the payment at regular intervals till
fixed date make series of agreed payments at regular intervals from fixed date.
l Group Insurance: Group Insurance is an insurance that covers a group of people, who are the
members of the societies, employees of an organisation or professionals in common group.
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Others
Difference between Life Insurance & General Insurance
Life Insurance can be seen as an investment General Insurance, mostly, doesn’t give any
apart from insurance as it offers maturity maturity benefits but promises
benefits after specific tenures payout in case of loss due to unavoidable
circumstances
Term may be fixed or variable. Term is fixed (usually 1 year).
Pay-outs are certain either as claims or Pay-outs are uncertain as claims may or may
maturity benefits. not arise.
Multi -purpose (e.g. investment, tax Solely for the purpose of insurance.
benefits, insurance).
Requirements of Schedule A to the IRDA (Preparation of Financial Statements and Auditors' Report of
Insurance Companies) Regulations, 2002:
Part I: Accounting Principles for Preparation of Financial Statements
Ü Applicability of Accounting Standards
Ü Premium: shall be recognized as income when due
Ü Acquisition costs: shall be expensed in the period in which they are incurred
Ü The ultimate cost of claims shall comprise the policy benefit amount and specific claims settlement
costs, wherever applicable.
Ü Actuarial valuation- Liability for Life Policies
Ü Insurance companies not only cater valuable death cover under policy but also extend helping hand
by way of granting loan under policies during life time of policyholder
Ü The accounting principles used for valuation of Investments are to be consistent with principles
Ü The funds for future appropriation represent all funds, the allocation of which, either to policyholders
or to the shareholders, has not been determined by the end of the financial year.
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Part II: Disclosures forming part of Financial Statements

A.The following shall be disclosed by way of notes to the Balance Sheet:
1.Contingent Liabilities:
(a)Partly-paid up investments
(b)Underwriting commitments outstanding
(c)Claims, other than those under policies, not acknowledged as debts
(d)Guarantees given by or on behalf of the company
(e)Statutory demands/liabilities in dispute, not provided for
(f)Reinsurance Obligations to the extent not provided for in accounts
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(g) Others (to be specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.

3. Encumbrances to the assets of the Company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed Assets.
5. Basis of amortisation of debt securities
6. Claims settled and remaining unpaid for a period of more than six months as on closing date.
7. Value of Contracts in relation to Investment for (a) Purchases where deliveries are pending;
(b) Sales where payments are overdue.
8. Operating expenses relating to insurance business, basis of allocation of expenditure to various
segments of business
9. Computation of managerial remuneration.
10. Historical costs of those Investments valued on fair value basis.
11. Basis of revaluation of Investment property.
REGULATORY REQUIREMENTS OF INSURANCE ACT 1938

ÜREQUIREMENT AS TO CAPITAL – SEC 6
TYPE OF INSURANCE BUSINESS MINIMUM PAID-UP EQUITY

Life Insurance or General Insurance Rs. 100 Crores
Health Insurance Rs. 100 Crores
Re-Insurance Rs. 200 Crores
(Besides re-insurer shall not be registered
UNLESS he has net owned funds of not less than
Rs. 5000 Crores.)
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Additional Disclosure
Investments made in accordance with any statutory requirement should be disclosed

separately together with its amount, nature, security and any special rights in and outside
India;
Segregation into performing/non-performing investments for purpose of Income

recognition as per the directions, if any, issued by the Authority;
Assets to the extent required to be deposited under local laws or otherwise encumbered
C in or outside India;
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Percentage of business sector-wise
A summary of financial statements for the last five years, in the manner as may be
prescribed by the Authority
Bases of allocation of investments and income thereon
¤ Accounting Ratios as may be prescribed by the Authority
Audit of Accounts of Life Insurance Companies:

1.Actuarial Process: Auditors in the Audit report are required to certify, whether the actuarial valuation of
liabilities is duly certified by the appointed actuary, including to the effect that the assumptions for
such valuation are in accordance with the guidelines and norms.
Actuarial department broadly concentrates following key areas of Insurance business:
i Product Development/ Pricing and Experience analysis.
i Model Development.
i Statutory Valuations and reserving.
i Business Planning.
i Solvency management.
i Management reporting on various business valuations and profitability models of the Life Insurance
business.
2.Underwriting: While verifying the process of underwriting, the objective of the Audit should be to
review the process of acceptance of risk through the underwriting process, and evaluate and test the
effectiveness of internal controls in place to ensure timely and accurate Insurance policy, adherence
to the IRDA Act and Rules and regulations made thereunder
3.Reinsurance: The primary objective of the audit should be to check and confirm that reinsurance
premium calculation and payment is in accordance with the agreement with the reinsurer. Necessary
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provision has been made for outstanding reinsurance premium and is properly accounted for in
books of accounts under respective heads.
The audit in this regard would normally cover the followings areas of the reinsurance:
Verification of agreements entered with the reinsurer.
Updating/ renewals of agreements and verifying whether Insurer has adhered to the terms and
conditions of the agreement.
Verification of payments made to the reinsurer and verifying whether adequate provisions are carried
out in books.
4.FLC : Free Look cancellation:
FLC refund is calculated as follows:
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FLC premium paidXXX

(Less) - proportionate risk premiumXXX
(Less)-medical charges. If any, by the insurer.XXX
The primary objective of the audit is to check and confirm that FLC requests are received within 15
days from receipt of policy document by the policy holder, verification of signatures of the policy
holder and processing of FLC request within TAT defined by the insurer. Also checking of
appropriate accounting entries are recorded for refund.
5.Policy lapse and retrieval:

Lapse” is the discontinuance of the policy owing to non- payment of premium dues. The term “lapse”
is not defined in the insurance legislation, except stating that “a policy which has acquired a
surrender value shall be kept alive to the extent of the paid-up sum assured” The primary objective
of the audit is to check and confirm that due dates are recorded and monitored properly and polices
are marked as “lapsed” on non-receipt of renewal premium within due dates/grace period. In case
of revival request, whether adequate checks are in place for receipt of outstanding amounts and
adequate documents are obtained before reviving the policy.
6.Policy surrender: Surrender of an insurance policy refers to the voluntary termination of the
insurance contract before the expiry of the term of the contract. The process of surrender is
initiated by the policy holder. A policy becomes eligible for surrender on completion of 3 years from
the commencement of the policy provided that 3 years premium have been paid within the due
dates. Check whether surrender amount is paid only to the policy holder and is paid only as per
terms and conditions mentioned in the policy document and appropriate accounting entries are
passed.
7.Premium Collection, Accounting and reconciliation: Income is recognized as:

New business premium - premium received for the first policy year and
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Renewal premium - premium received for subsequent policy years.
Premium received but not identifiable against any policy would be treated as 'unallocated premium'/
'suspense amount'.
8.Claims:
1. Auditor should review the standard policy document template to ensure that the policy document
prescribes the minimum documentary evidence needed to support a claim. 2.Ensure that the Insurer
maintains a register or record of claims, in which every claim is entered along with the date of the
claim and date on which the claim was discharged.
3.In case the claims are rejected, the reasons for the rejections should be closely reviewed.
4.Check whether all claims received are registered and enter into the system.
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5.It should be ensured that there is a system of collecting appropriate KYC documents, as required,
and discrepancies, if any, are intimated to the policyholders within 15 days of intimation.
6.It should be ensured that all the processed claims are accounted into the system properly.
7.It should be ensured that appropriate provisioning has been carried out, in the cases of all the claims
intimated but not paid.
8.It should be ensured that Claims cost includes the Claims settlement Cost.
9.In case of living/ survival/ maturity / annuity benefits it should be ensured that liability is
automatically triggered.
10.It should be ensured that there is system of regular reconciliation is carried out between claims
management system and General ledger.
11.Liability of claims should be booked net of reinsurance.
9. Investments: The Auditor during his review of Investment Department should mainly consider the
following:
Review the Investment management structure to ensure adequate segregation of duties between
Investment Front office, Mid Office and Back office;
Review of insurer's Standard Operating Procedures which are prescribed by the IRDA Regulations and are
required to cover the entire gamut of investment related processes and policies;
Review of insurer's Investment policy;
Review of functioning and scope and minutes of Investment Committee;
Compliance of all Investment regulations, various other circulars specified by IRDAI and other
regulations specified in the Insurance Act, 1938;
Review of insurer's Disaster Recovery, Backup and Contingency Plan;
Review of access Controls, authorization process for Orders and Deal execution, etc.;
Review of insurer's Cash Management System to track funds available for Investment considering the
settlement obligations and subscription and redemption of units, etc.
Determine the extent of activities outsourced and the controls over such activities; Controls over NAV
computation and declaration;
Controls over various system interfaces such as Seamless integration of data, between front office and
back office, in the Investments accounting system;
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Flow of data from PMS to the Investment Accounting system;
Controls around personal dealings, insider trading and front running.
10. Agent's commission: The Auditor during his review of Commission paid to Agents should mainly consider
the following:
Review the system established by the Insurer with respect to calculation of commission to eligible
agents accurately and processing the same in timely manner.
Review the commission payment system is in sync with the premium collection system.
Check whether commission paid is within the limit prescribed under Insurance Act.
Check whether commission is clawed-back on the cancelled policies.
Check the completeness of commission processing system.
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ÜSOLVENCY MARGIN-
1)REQUIREMENT OF SOLVENCY MARGIN - Every insurer and re-insurer shall at all times
ÜMaintain an excess of value of assets over the amount of liabilities of,
ÜMaintain a MINIMUM SOLVENCY RATIO OF 150% of the amount of minimum capital.
2)NON-COMPLIANCE OF SOLVENCY MARGIN - Insurer or re-insurer, who does not comply with
ÜRequirement of solvency margin shall be deemed to be insolvent &
ÜMay be wound-up by court on application made by IRDA.
3)SUBMISSION OF FINANCIAL PLAN- If, at any time insurer or re-insurer does not maintain
ÜRequired level of solvency margin he shall submit a financial plan indicating a
ÜPlan of action to correct deficiency within a specified period not exceeding 6 months.
ÜRESERVES FOR UNEXPIRED RISKS

mIRDA (General Insurance claim reserving) regulations, 2013 requires creation of a
mMinimum amount of unexpired risks reserves at a specified % of net premium as under-
mMARINE HULL INSURANCE - 100% of net premium
mFIRE, MARINE CARGO AND MISCELLANEOUS BUSINESS- 50% of net premium.
AUDIT OF GIC - REVENUE ITEMS
ÜPREMIUM INCOME-
1)REVIEW OF INTERNAL CONTROL-
Ü Issue of proper cover notes
Ü Serial no. of cover notes
Ü Internal check on stamps, stationery etc.
2)ACCOUNTING-
Ü Recognition of premium income for all risks incepted.
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Ü Proper record for Fire, Marine, Motor & Other Insurance.

Ü Accounting for premium received in advance & premium outstanding
Ü Recording at gross figure without providing for reserve.
Ü Premium collections are credited to separate bank account &
Ü No withdrawals are normally permitted from that account for meeting general expenditure.
Ü Auditor should check whether bank guarantees against which policies are issued are valid &
Ü There is a tracking mechanism of the amounts of policies issued against the guarantees.
3)INCEPTION OF RISKS-
Ü Issue of policy documents
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Ü No risk w.r.t premiums received in advance and outstanding
4)CO-INSURANCE-
Ü Proper booking of share of premium.
CLAIMS PAID-
1)REVIEW OF INTERNAL CONTROL-
Ü Payment of only bona-fide claims
Ü Sanctioned by appropriate authority
Ü Collection of information from branches
2)CLAIMS PAID-
Ü Coinsurance - proper booking
Ü Settlement Amount - must include all incidental expenses
Ü Claims communicated after year end - accounting for provisions
Ü Accounting for salvage and letter for subrogation - in accordance with procedure
Ü Amount deposited with Court - not treated as claim till final decision
Ü Unqualified discharge note - in case of final settlement
Ü Calculation of claims incurred but not reported (IBNR) & Claims incurred but not enough
reported (IBNER) is done by Appointed Actuary of insurance company based on probability
weighted estimations & statistical models approved by the Actuarial Standards.
3)CLAIMS OUTSTANDING AT YEAR END-
Ü Provision for all unsettled claims
Ü Provision for legally enforceable claims
Ü Provisions should not be made in excess
Ü Application of average clause.
Ü Consideration of Salvage value.
Ü 4) CLAIMS REGISTER
Claims intimation register Claims paid register Salvage register
Claim Dockets Report of Quality Assurance Team Claims disbursement book
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COMMISSION
l Role of Auditor: The auditor should, inter alia, do the following for verification of commission:
l Ensure that commission/brokerage is not paid in excess of the limits specified by IRDAI
l Ensure that commission/brokerage is paid as per rates with the agent and rates filed with IRDAI
l Ensure that commission/brokerage is paid to the agent/broker who has solicited the business
l Ensure that the agent/broker is not blacklisted by IRDAI and is not terminated for fraud etc.
l Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
l Check whether the vouchers are authorised by the officers-in–charge as per rules in force and
income tax is deducted at source, as applicable.
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l Test check correctness of amounts of commission allowed.

l Scrutinise agents' ledger and the balances, examine accounts having debit balances, if any, and
obtain information on the same. Necessary rectification of accounts and other remedial actions
have to be considered.
l Check whether commission outgo for the period under audit been duly accounted.
RECEIPT & PAYMENT A/C

Ü SEC-11 OF INSURANCE ACT, 1938-
Ü Financial statements to include receipt & payment account (R&P A/c)
Ü AUDITOR DUTIES-
Ü Report whether R&P account of insurer is in agreement with books of accounts & returns.
Ü Express an opinion as to whether the R & P account has been prepared
üIn accordance with the provisions of the relevant statues
Ü Express an opinion whether R&P A/c gives a true & fair view of receipts & payments of insurer.
AUDIT OF GIC - BALANCE SHEET ITEMS

üINVESTMENTS-
Ü Physically verify the securities on the balance sheet date or a date as near as possible.
Ü Prepare reconciliation statement where verification is carried out on date
üOther than Balance Sheet date.
Ü Obtain separate lists of securities held physically and those held in demat form.
Ü Examine records for investments held at branches and
üRequest the respective branch auditors to issue a certificate to this effect.
Ü Examine in detail investments on which income has not been received for a long period &
üThose which have not been redeemed even after redemption date.
Ü Where certificates are held by other persons such as nominees, share transfer agents etc.
üThe auditor should obtain written certificates from such person.
Ü Examine that norms relating to valuation and disclosure in F.S. have been complied with.
Ü Examine whether income from investments is property accounted for
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Ü Ensure that certificates of TDS are properly maintained.

Ü Ensure compliance of Sections 27, 27A and 278 of the Insurance Act, 1938 as well as
üThe guidelines issued from time to time by the Ministry of Finance through GIC.
vOUTSTANDING ITEMS
Ü Scrutinize & review control account debit balances & their nature should be enquired into.
Ü Examine in-operative balances &
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üTreatment given for old balances with reference to company rules.
Ü Enquire into the reasons for retaining the old balances.
Ü Verify old debit balances which may require provision or adjustment.
Ü Notes of explanation may be obtained from the management in this regard.
Ü Check age-wise, sector-wise analysis of outstanding premium.
Ü Verify whether outstanding premiums have since been collected.
Ü Check availability of adequate bank guarantee or premium deposit for outstanding premium.
vCONTINGENT LIABILITIES
Ü Partly paid-up investments.
Ü Underwriting Commitments outstanding.
Ü Claims, other than those under policies, not acknowledged as debts.
Ü Guarantees given by or on behalf of the Company.
Ü Statutory demands & Liabilities in dispute, not provided for.
Ü Reinsurance obligations to the extent not provided for in the accounts.
vCOMMISSION PAYABLE TO AGENT

- Insurance business is generally solicited by Insurance agents.
Ü Auditor during his review of Commission paid to Agents should mainly consider-
Ü Review the system established by the Insurer with respect to calculation of commission
üTo eligible agents accurately & processing the same in timely manner.
Ü Review the commission payment system is in sync with the premium collection system.
Ü Check whether commission paid is within the limit prescribed under Insurance Act.
Ü Check whether commission is clawed-back on the cancelled policies.
Ü Check the completeness of commission processing system.
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AUDIT OF GIC - MISCELLANEOUS
CO-INSURANCE
Ü MEANING & CONCEPT
üSharing of Business between more than one insurer at agreed percentages is known as co-
insurance.
üThe Lead Insurer issues documents, collects premium and settles claims.
üStatement of accounts is rendered by the Lead insurer to the other co-insurers.
v INCOMING CO-INSURANCE
üEnsure that Premium Account is credited on the
Ü Basis of statements received from Lead insurer.
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üIn case, the statement is not received, the premium is accounted for on the basis of advices
Ü To ensure that all premium in respect of risks assumed
Ü in any year is booked in the same year.
üFor this purpose, the auditor may examine the communication in the post-audit period &
Ü Obtain a written confirmation to effect that all incoming advices
Ü have been accounted for.
üThe auditor should also verify claims provisions and claims paid
Ü with reference to advice received from the Lead insurer.
vOUTGOING CO-INSURANCE
üAuditor should scrutinize the transactions relating to the outgoing business,
Ü i.e., where company is the Lead Insurer.
üThese should be checked with reference to the relevant risks assumed under policies &
Ü Correspondingly for debits arising to the co-insurer on account of their share of claims.
vTRADE CREDIT INSURANCE

Ü It provides protection to suppliers against the risk of non-payment of goods or services
Ü By their buyers who may be situated in the same country (domestic risk) or in
Ü Another country (export risk) against non -payment as a result of insolvency of the buyer or
Ü Non-payment after an agreed number of months after due date.
Ü Trade credit insurance product is offered subject to following requirements-
üPolicyholder's loss arises due to non-receipt of trade receivable.
üPolicyholder is a supplier of goods or services for a consideration.
üBuyer is liable to pay a trade receivable to the policyholder in return for the goods &
ÜServices received by him from the policyholder.
üPremium for the entire Policy Period has been paid.
üOther requirement that may be specified by the Authority from time to time.
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AUDIT OF GIC - REINSURANCE
üVERIFICATION OF REINSURANCE INWARD
Ü Evaluate internal control system in the area of reinsurance accepted to ensure determination
üof correct amount for reinsurance accepted, proper valuation of assets & liabilities
üArising out of reinsurance transaction & adherence to legal provisions & regulations.
Ü Ascertain whether adequate guidelines and procedures are established
üwith respect to granting reinsurance.
Ü Reconcile reinsurance underwriting returns received from various units with the
üFigures of premium, claims paid and outstanding claims for the company as a whole.
Ü Examine whether premium received and commission paid on reinsurance accepted
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üis as per the terms of the agreement with the Principal Insurer.
Ü Examine whether claims paid have been accounted on a regular basis.
Ü Examine whether remittances from foreign Principal Insurer
üare as per foreign exchange regulations.
Ü Examine whether confirmations have been obtained regarding balances
üwith Principal Insurer.
Ü Review individual accounts of Principal Insurers.
v VERIFICATION OF REINSURANCE OUTWARD

Ü Evaluate internal control system in the area of reinsurance ceded to ensure determination
üof correct amount for reinsurance ceded, proper valuation of assets and liabilities
üArising out of reinsurance transaction and adherence to legal provisions & regulations.
Ü Ascertain whether adequate guidelines and obtaining reinsurance.
Ü Reconcile reinsurance underwriting returns received from various units with the
üFigures of premium, claims paid and outstanding claims for the company as a whole.
Ü Examine whether commission on reinsurance ceded is
üAs per the terms of the agreement with the re-insurers.
Ü Examine the computation of profit commission for automatic treaty arrangements in the light
üof periodic accounts rendered & in relation to outstanding loss pertaining to the treaty.
Ü Examine whether loss recoveries have been claimed and accounted on a regular basis.
Ü Examine whether outstanding losses recoverable have been confirmed by re- insurers.
Ü Examine whether remittances to foreign re- insurers are as per foreign exchange.
Ü Examine whether confirmations have been obtained regarding balances with re-insurers.
Ü Review individual accounts of re-insurers to evaluate
üWhether any provision/write off or write back is required
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v FACULTATIVE AND TREATY REINSURANCE
Ü FACULTATIVE- Reinsurance whereby contract relates to one particular risk &
üis expressed in the reinsurance policy.
üEach transaction has to be negotiated individually. The Insurance is used when-
Ø Automatic cover has exhausted.
Ø Risk is excluded from treaties
Ø Reinsurance treaties have not to be overburdened.
Ø Insurer has no automatic cover.
Ø Technical guidance is required at each stage of acceptance of risk.
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Ü TREATY- A treaty type of coverage is in effect for a specified period of time,

üRather than on a per risk, or contract basis. For the duration of contract.
üThe reinsurer agrees to cover all or a portion of the risks that
ümay be incurred by the insurance company being covered.
v PROPORTIONAL TREATY –
üThe reinsurer will receive a prorated share of the premiums of all the policies
Ü Sold by the insurance company being covered. Consequently, when claims are made,
Ü the reinsurer will also bear a portion of the losses. Proportion of the premium &
Ü Losses that will be shared by the reinsurer will be based on agreed percentage.
üIn a proportional coverage, the reinsurance company will also
Ü Reimburse insurance company for all processing business acquisition & writing costs.
v NON-PROPORTIONAL TREATY –
üThe reinsurer will only get involved if the insurance company's losses exceed a
Ü Specified amount, which is referred to as priority or retention limit. Hence reinsurer
Ü does not have a proportional share in the premiums & losses of insurance provider.
üThe priority or retention limit may be based on
Ü A single type of risk or an entire business category.
v TYPES OF PROPORTIONAL TREATIES

üQUOTA SHARE TREATY- Ceding company binds itself to cede a fix %age of
Ü All policies issued by it under a defined scope of business covered by the agreement.
üSURPLUS TREATY- Only the amount which a company cannot or does not want to retain
Ü For itself is ceded. If certain risk is totally retained, no surplus is left to be ceded.
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v AUTO-FAC TREATY-
Ü Amount that remains after cession of its surplus treaties are ceded up to a defined limit.
Ü It is obligatory for the reinsurer to accept reinsurance within the purview of agreement.
üPOOLS- Two or more insurers may form a Pool under an agreement whereby its
Ü Members cede a predetermined portion of a particular category of business
Ü directly written by them into the pool.
v TYPES OF NON-PROPORTIONAL TREATIES

vEXCESS OF LOSS (XL) TREATIES
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Ø Reinsurer's liability arises only when a claim exceeds a predetermined figure
Ø relating to a specific branch of the ceding company's business.
Ø The treaty would provide for maximum liability as well as the amount up to which,
Ø The ceding company would bear the loss itself, which is called the 'underlying limit'.
v EXCESS OF LOSS COVER ON PREVENT BASIS

Ü If as a result of one event, serial risks are affected, the loss under each risk is,
Ü Arrived at separately and the underlying limit is applied,
Ü To each risk to determine the liability of the insurer.
EXCESS OF LOSS COVER ON NON-PREVENT BASIS

Ü If as a result of one event, serial risks are affected, aggregate amount of loss,
Ü is determined & one loss underlying limit is deducted from the
Ü Aggregate amount of loss to determine the liability of reinsurer.
v STOP LOSS TREATIES

Ü It protects the company from losing more than a specified amount,
Ü For a given class of business.
Ü Normally, the amount is fixed in relation to the ceding company's annual,
Ü Premium income for the class of business and is represented as a percentage.
Ü Reinsurer is liable for the losses which exceed the agreed percentage of loss ratio.
AUDIT OF NBFC
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10 AUDIT OF NBFC
Meaning of NBFC
Sec. 45-I(f) of the RBI (Amendment) Act, 1997 defines a NBFC as
Ÿ A Financial Institution which is a Company
Ÿ A non-banking institution (NBI) which is a Co. & principal business receiving deposits & lending
Ÿ Such other institution as RBI may with approval of CG & notif. in official gazette specify
To identify a particular company as Non-Banking Financial Company (NBFC),
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Financial Assets (FA) > 50% of total assets & Income from FA > 50% of gross income. If both
criteria fulfilled, qualify as NBFC & regd. with RBI.
Sec 45 IA of RBI Act 1997, No NBFC can do business of NBI w/o
Ÿ Certificate of Reg (CoR) issued by RBI
Ÿ Min Net owned Funds (NOW) of 2 Cr.
Categories of NBFC
Ÿ Deposit taking & Non-Deposit taking (NBFC-ND)
Ÿ Non Deposit taking further classified into Systemically important & Non systemically important
(NBFC-NDSI & NBFC-ND)
Types of NBFC:
Ÿ Investment and Credit Company (ICC)
Ÿ Infrastructure Finance Company
Ÿ Systemically Important Core Investment Company (CIC):
Ÿ Infrastructure Debt Fund-NBFC:
Ÿ Nbfc-Micro Finance Institution (MFI):
Ÿ Non-Banking Financial Company – Factors (NBFC-Factors):
Ÿ Non-Operative Financial Holding Company (NOFHC):
Cos exempt from RBI registration (Doing financial business but regulated by other regulators)
© Housing Fin Institution (regulated by NHB)
© Merchant banking cos. (SEBI)
© Stock ex. (sebi)
© Stock broking/sub-broking(sebi)
© Venture cap fund (SEBI)
© Nidhi (MCA, GOI)
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© Insurance (IRDA)
© Chit (Chit fund Act)
© Alt Inv Fund Cos.
© Mutual Benefit Cos.
© Mortgage Guarantee Cos.
© Core investment Cos with asset size <=100 Cr not accessing public funds
Difference between Bank & NBFC

a.NBFC can't accept DD, but some NBFC can accept Term Deposits
b.NBFCs don't form part of payment & settlement system & can't issue cheques drawn on itself
c.Deposit insurance facility of DICGC not available to depositors of NBFC unlike banks
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d.No min. exposure to priority sector in case of NBFC
Prudential Norms
Capital Adequacy Ratio
Ÿ Min capital ratio consisting of tier I & II capital not less than 15% of agg. Risk weighted assets
Ÿ Tier I not less than 10% at any point of time. In case of lending against Gold jewellery, min tier
I cap 12%
Risk Weights
Nos Head Weight
1 Cash Bank 0
2 Approved securities 0
3 Loan & advances fully secured + loans to employees 0
4 TDS Deducted 0
5 Advance tax 0
6 Intt on Govt security 0
7 Fund based claims on CG 0
8 CG Guarantee claims 0
9 SG securiti es 0
10 SG guarantee claims, not in default 90 days 20
11 Bonds of PS Banks 20
12 Post commercial operations date (PCOD) projects exist over 1 yr operation 50
13 Others 100
Provisioning (%) Loss Assets: 100%

Doubtful Assets: Unsecured 100%
Period for which Secured Asset has been % of Provision

considered as doubtful
Up to 1 year 20
1 -3 years 30
More than 3 years 50
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Sub Standard asset: 10%
Standard asset: 0.40% for systemically imp. & 0.25% for non-systemically imp
6/3*Months 18/12*Months
Due Date NPA Sub Std Doubtful
*3/12 months in case of NBFC-Systemically Imp. (Deposit taking or Non deposit taking)
Special point for NPA: The lease rental and hire purchase instalment, which has
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become overdue for period of 12 months or more; (NBFC SI its 3 months only)
Audit Procedures
1.Ascertaining business of Co
Ÿ Check MOA & AOA (Memorandum & Articles)
Ÿ Check business policy à ascertain main business of co.
Ÿ Minutes of Board Meeting & discuss with top level management
2.Evaluation of Internal Control System
Ÿ Understand a/c system & related internal controls
Ÿ Review effectiveness of system of recovery
Ÿ Periodical review of advances facilitate monitoring & follow up
3.Registration with RBI
Ÿ Sec 45 IA, min Net owned fund of 2 cr
Ÿ Obtain copy of Certificate of Reg, or copy of application
Ÿ If NBFC holds Public Deposits à invest % in liquid assets as per RBI
Ÿ Qtr return filed with RBI maintenance of liquid assets
4.NBFC Acceptance of Public Deposit Directions (NBFC Acceptance of Public Deposits (Reserve
Bank) Directions, 2016)
i)Check NBFC appropriately classified
ii)Ceiling on quantum of deposits as per credit rating by approved credit rating agency
Ÿ Obtain copy of cr. Rating & check PD as per the rating assigned
Ÿ In event of up/downgrading à increase/decrease deposits à inform RBI
Ÿ If downgraded below min investment grade, regularise excess deposits as under:
ØNot accept fresh deposits & not renew existing ones
ØExisting deposits run off till maturity
ØReport 15 days à Reg. office RBI where its regd
Øno matured public deposit shall be renewed without express and voluntary consent of depositor
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iii)test check intt calculations, to check no excess intt paid
iv)Acceptance/renewal only after written application from depositor on form supplied by NBFC
v)Verify deposit register & test check particulars with supporting receipts
vi)Check investments in liquid assets in safe custody with scheduled comm. Bank
vii)Check filed returns in timely manner
viii)NBFC not accepting/holding PD à BR passed
5.NBFC Prudential Norms

i)Check compliance with prudential norms (income recog, a/c stds, asset classification, PDD, capital
adequacy norms, prohibition of grant in loans against own shares)
ii)Auditor should Ensure BOD granting/ intending to grant demand/call loans shall frame &
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implement policy for Co.

iii)Auditor Assess compliance with prudential norms à advance properly classified as std, sub std,
doubtful & loss assets & proper provisions made
iv)In case of NPA à unrealised income not taken to p&l on accrual basis
v)Accounts classified as NPA in prev year continue shown as such in CY also. If made regular,
check with directions.
Classification of Frauds by NBFC

(a)Misappropriation & criminal breach of trust
(b)Fraudulent encashment through forged instruments, manipulation of Books of a/c or fictitious
a/cs
(c)Unauthorised cr. Facilities extended for reward or illegal gratification
(d)Negligence & cash shortages
(e)Cheating & forgery
(f)Irregularities in forex transn.
(g)Any other type of fraud
Case of (d) & ( f) to be reported as fraud if intention proved/suspected In following cases it'll be
fraud:
ØCash shortage > 10,000 &
ØCash shortage > 5,000 if detected by mgt/auditor/inspector & not reported by cashier.
Audit Check list -- NBFC - Investment and Credit Company (NBFC-ICC)
(i)Physically verify all shares & securities held by NBFC.

(ii)Verify no loan advanced against security of its own shares.
(iii)Verify dividend income wherever declared recd by NBFC & intt wherever due (except NPA)
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accounted for.
(iv)Dividend income on shares & units of MF recog. on cash basis.
(v)Test check bills/contract notes recd from brokers with reference to prices vis-à-vis stock mkt
quotations on respective dates.
(vi)Verify Board minutes for purchase & sale of investments. Ascertain from BR à long term/short
term.
(vii)In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
(viii)Check whether requirements of AS 13 “Accounting for Investments” have been complied with.
(ix)Check the classification of loans and advances (including bills purchased and discounted) made by a
NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and the adequacy
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of provision for bad and doubtful debts as required by NBFC Prudential Norms.
Auditor's duty to Report

The Auditors report on the accounts of NBFC shall include a statement on the following matters,
namely.
(A)In case of all NBFCs

I.Examine whether Co. obtained CoR (Certificate of Registration)
II.In case Co. holding CoR whether its entitled as per principal business criteria as on 31st March of
year
III.Whether its meeting NOF criteria laid down in master direction
A certificate from Auditor required within 1 month of finalization of B/sheet not later than Dec 30th
of year.
(B)NBFC holding/accepting public deposits

i)Whether PD held by it with other borrowings within limits of provisions of NBFC Acceptance of
Public Deposits (RB) Directions, 2016
ii)Where PD excess of quantum à regularised in manner provided in Directions
iii)Whether its accepting PD w/o min investment grade rating from approved institution as per
Directions
iv)Whether Cap Adequacy Ratio(CAR) correctly determined & compliance with min CRAR
prescribed therein
v)Whether Co has made default in paying intt/principal after they became due
vi)Whether Co. has furnished to RBI within stipulated period return on deposits as specified in NBS
1 to – NBFC Returns (Reserve Bank) Directions, 2016;
(C)NBFC not accepting deposits
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i)BOD passed BR non-accept of deposits
ii)Whether Co accepted any deposits during year
iii)Whether Co. complied with prudential norms (I/R, a/c std, Asset classification, PDD)
iv)In respect of NBFC- NDSI
(a)Whether capital adequacy ratio disclosed in NBS-7 correctly arrived & compliant with min CRAR
(b)Whether Co has furnished to RBI, annual statement of capital funds, risk asset ratio in NBS 7
v)Whether NBFC correctly classified as NBFC Micro Finance Institution (MFI) as per the
Directions
Reasons for Unfavourable/ Qualified statements

Where, in auditor's report, statement regarding any of items referred to in paragraph 3 is
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unfavourable or qualified, auditor's report shall also state reasons for such unfavourable or qualified
statement, as case may be. Where auditor is unable to express opinion on any of items referred to
in para 3, report shall indicate such fact together with reasons therefor.
Obligation of auditor to submit an exception report to the RBI

(I)Where, in case of a NBFC, statement regarding any of items referred to in para 3 above, is
unfavourable or qualified, or in opinion of auditor company has not complied with:
a)provisions of Chapter III B of RBI Act (Act 2 of 1934); or
b)NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
c)NBFC– Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions,
2016 and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company
and Deposit taking Company (Reserve Bank) Directions, 2016.
It shall be obligation of auditor to make report containing details of unfavourable or qualified statements
and/or about non-compliance in respect of company to concerned Regional Office of Department of Non-
Banking Supervision of RBI under whose jurisdiction regd office of company is located as per first
Schedule to NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
(II)The duty of Auditor under sub-para (I) shall be to report only contraventions of provisions of RBI
Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report
shall not contain any statement with respect to compliance of any of provisions.
Ind AS Applicability:
Accounting period beginning
1.4.18: Listed and unlisted having NW 500 Cr or more
1.4.18: Listed and unlisted having NW 250 Cr or more
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Difference b/w Division II (Ind AS- Other than NBFC) & Division III (Ind AS NBFC) of Schedule III
a)NBFC allowed present items of balance sheet in order of liquidity
b)Disclose by way of note item of 'other income/expense' > 1% of total income. Div II requires
disclosure of item > 1% of Revenue or 10 L (whichever is higher)
c)NBFC separately disclose under receivables debt due from LLP - Director partner/member
d)Disclose items comprising Revenue from operations & other income on face of SPL instead of
only notes
e)Separate disclosure of T/R significant increase in Cr risk or Cr impaired
Condition or restrictions for distribution attached to stat reserves separately disclosed
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AUDIT UNDER
FISCAL LAWS
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11 AUDIT UNDER FISCAL LAWS
Audit Report
Form 3CA: Person carrying Business/profession + required audit under any other law (Eg.
Company)
Form 3CB: Person carrying business/profession but no audit required by other law
Form 3CD: Particulars to be furnished with Audit Report
Who can Audit under Income Tax?

·Audit can be conducted by the 'Chartered Accountant', as defined in explanation to Sec-288(2) of
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the Act.
·Certificate of Practice (COP) is eligible as an auditor under IT Act, 1961
Audit of Public Trust

An auditor should conduct routine checking during course of audit of public trust, in following
manner:
(i)Check books of account and other records having regard to system of accounting and internal
control;
(ii)Vouch the transactions of trust to ensure that:
•transaction falls within ambit of trust;
•the transaction is properly authorized by trustees or other authority permissible in law;
•all incomes due to trust have been properly accounted for on basis of system of accounting
followed;
•all expenses and outgoings appertaining to trust have been recorded on basis of system of
accounting;
•amounts shown as applied towards object of trust are covered by objects of trust as specified
in the document governing the trust.
(iii)Obtain trial balance on closing date duly certified by trustee;
(iv)Obtain Balance Sheet and Profit & Loss Account of trust authenticated by trustees and check
with trial balance with which they should agree.
Notes:
ØCharitable or religious trust or institution to make an application for registration within 1 year
from date of creation of trust or establishment of institution.
ØThe report of audit of accounts of a trust or institution which is required to be furnished under
Clause (b) of Section 12A should be in Form No. 10B.
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Tax Audit U/S 44 AB
Ÿ Business - T/o > 1 Cr*
w.e.f AY 20-21 its 5Cr if 95% transn through banking channels
Ÿ Profession - Gross receipts > 50 L
Ÿ Business u/s 44AE, 44BB, 44BBB - claims profits lower than deemed
Ÿ Profession- profits deemed u/s 44ADA - claims profits lower than deemed
Ÿ Business - provision of Sec 44AD(4) applicable i.e. declares profits as per 44AD for AY & fails to
do that in any 5 succeeding AY - ineligible to claim benefit of 44AD
Notes:
Ÿ 44AD isn't applicable to commission income
Ÿ Computation of Turnover to determine eligibility of Tax Audit
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(i)Discount allowed in sales invoice deducted from turnover.

(ii)Cash discount not allowed in a cash memo/sales invoice is in nature of a financing charge and
is not related to turnover. Therefore, should not be deducted from the turnover.
(iii)Turnover discount is normally allowed to a customer if sales made to him exceed a particular
quantity. As per trade practice, it is in nature of trade discount and should be deducted from
the figure.
(iv)Special rebate allowed to customer can be deducted from sales if it is in nature of trade
discount. If it is in nature of commission on sales, then it cannot be deducted.
(v)Price of goods returned should be deducted from turnover even if returns are from sales made in
earlier year/s.
(vi)Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part
of turnover. However, if shares, securities, debentures etc., are held as stock-in-trade, sale
proceeds thereof will form part of turnover.
Considerations while furnishing particulars in Form 3CD

i.If item of income/expenditure is covered in more than one of specified clauses in statement of
particulars, suitable cross reference to such items be given at appropriate places.
ii.If there is difference in opinion of tax auditor and assessee in respect of any info furnished in Form,
auditor should state both viewpoints and relevant info to enable tax authority to decide in the matter.
iii.If any clause is not applicable, he should state that same is not applicable.
iv.In computing allowance or disallowance, he should keep in view law applicable in relevant year, even
though form of audit report may not have been amended to bring it in conformity with amended law.
v.The info in Form should be based on books of accounts, records, documents, information and
explanations made available to tax auditor for examination.
vi.In case auditor relies on judicial pronouncement, he may mention the fact.
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Revision of Tax Audit Report
(a)Normally, report of tax auditor cannot be revised later.
(b)However, when accounts are revised in following circumstances, tax Auditor may have to revise
his Tax audit report also.
i.Revision of accounts of company after its adoption in AGM.
ii.Change in law with retrospective effect.
iii.Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments, etc.
The Tax Auditor should state it is a revised Report, clearly specifying the reasons for such revision
with a reference to the earlier report.
Disclosure of GST Registration (Clause 4)

ŸClause 4 requires auditor to ensure whether assessee is liable to pay indirect tax like excise duty,
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service tax, sales tax, goods and service tax, custom duty, etc.
ŸIf yes, furnish registration no. or GST no. allotted for same.
ŸThus, auditor is primarily required to furnish details of registration nos. as provided to him by
assessee. The reporting is required to be done in manner or format specified by e-filing.
NR Co. engaged in extraction of mineral oils claiming lower than deemed income u/s 44BB
Clause 8: Auditor reqd to mention clause of sec 44AB under which tax audit is conducted.
Clause 12: If p&l includes profits & gains assessable to tax on presumptive basis, indicate the amt &
relevant sections. Tax auditor will state clause (c) of sec 44AB under clause 8 & as per clause 12
report profits u/s 44BB of Income Tax Act 1961.
Method of accounting [Clause 13]

ŸIt requires to state method of accounting employed in PY.
ŸIt also requires to state change in method of accounting vis---vis the preceding year.
ŸIf so, details of change and effect on profit or loss are to be stated.
ŸAlso details of deviation thereof, if any, from accounting standards prescribed under section 145
and effect thereof on profit or loss are stated.
ŸSection 145 provides that method of accounting be either cash or mercantile. Hybrid system is
not permitted.
Method of Valuation of Closing stock (Clause 14)

(a)Method of valuation of closing stock employed in PY.
(b)Details of deviation from method of valuation prescribed under section 145A and effect on P&L.
Non- Maintenance of Stock Register by Printing Entity that receives variety of Job Orders & having
variety of Materials - Is it fine?
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ŸExplanation of entity for use of varieties of raw materials for different jobs undertaken may be
valid.
ŸAuditor needs to verify specified job-orders received and different raw materials purchased for
each job separately.
ŸThe use of different papers (quality, quantity and size) ink, colour etc. may be examined.
ŸAuditor enquire with other similar printers in locality to ensure prevailing custom.
ŸAt the same time, he has to report and certify under the clause 35(b) and clause 11(b) of Form
3CD read with the Rule 6G(2) of the Income-tax Act, 1961, about details of stock and account
books (including stock register) maintained.
ŸHe (or his deputy) must verify closing stock of raw materials, work-in-progress and finished goods
of the concern, at least on date of its balance sheet.
ŸIn case the said details are not properly maintained, he has to specifically mention the same with
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reasons for non-maintenance of stock register by the entity.
Capital Asset converted to Stock in Trade [Clause 15]

Give the following particulars of the capital asset converted into stock-intrade:-
(a)Description of capital asset;
(b)Date of acquisition;
(c)Cost of acquisition;
(d)Amount at which the asset is converted into stock-in-trade.
Audit checklist:
Ÿ Ask assessee whether he has converted any capital asset into SIT during PY.
Ÿ Details of capital assets converted into SIT during the year to be given.
Ÿ Check whether assessee has converted any capital asset into SIT during year under audit.
Ÿ If yes, then obtain details as to nature of such capital asset, its date and cost of acquisition and
amount at which asset has been converted into stock-in-trade.
Clause 16: Amounts not credited to the profit and loss account, being,-
(a)the items falling within the scope of section 28;
(b)proforma credits, drawbacks, refund of duty of customs or excise or service tax, or sales tax or
VAT, where such credits, drawbacks or refunds are admitted as due by authorities concerned;
(c)escalation claims accepted during the previous year;
(d)any other item of income;
(e)capital receipt, if any.
Proforma Credits, Drawbacks, Refund of Duty, Etc. [Clause 16(b)]

ØEnquire whether there has been admitted any claim in respect of proforma credits/drawbacks/refund
of duties of customs or excise or both/sale tax/service tax/VAT by authorities. If yes, then obtain
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schedule from assessee indicating details of all such claims admitted by authorities but not credited
to P&L a/c.
ØCross check the details contained in schedule with the claim papers and other relevant
correspondence including assessment orders.
ØEnsure that claims have been admitted as due by concerned authorities.
ØNote that the item admitted by authorities will mean the item admitted before closing of a/cs.
ØEnsure that accounting of such claims is in accordance with method of accounting regularly
followed by assessee.
ØEnsure that all claims admitted have been cr. to p&l a/c. Any exception should be reported.
ØWhere cash system of accounting is followed then this fact should be stated in the report.
Escalation claims to Customers not accounted as income [Clause 16(c)]
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Ÿ A tax auditor has to report under clause 16© of Form 3CD on any escalation claim accepted
during PY and not credited to P&L account.
Ÿ If such amount not credited to P&L a/c fact should be reported.
Ÿ The system of accounting followed in respect of this particular item may also be brought out in
appropriate cases.
Ÿ If assessee is following cash basis of accounting with reference to this item, it should be clearly
brought out since acceptance of claims during relevant PY without actual receipt has no
significance in cases where cash method of accounting is followed.
Ÿ Escalation claims should normally arise pursuant to a contract (including contracts entered into in
earlier years), if so permitted by contract.
Ÿ Only claims to which other party has given unconditional acceptance could constitute accepted
claims.
Ÿ Mere making claims by assessee or claims under negotiations cannot constitute accepted claims.
After ascertaining relevant factors as outlined above, decision whether to report or not, can be
taken.
Instances of Capital Receipt not cr. to P&L A/c [Clause 16(e)]

Guidance for reporting capital receipts: Capital receipts are not generally credited to p&l hence auditor
should take enough care to check out any transaction generating capital receipts by –
Ÿ Enquiring whether assessee is in receipt of any amount of capital nature during the previous year.
Ÿ Going through financial statements, in particular reserve account, to ascertain whether assessee
has received any such receipts and credited them directly to reserve account.
Ÿ Enquiring whether assessee has credited such receipts to p&l a/c.
Ÿ Checking that any such receipts is accounted in terms of method of accounting followed by
assessee.
Illustrative examples of capital receipts:
(a)Capital subsidy received in form of Government grants, which are in nature of promoters'
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contribution. For e.g., Capital Investment Subsidy Scheme.
(b)Government grant in relation to specific fixed asset where such grant is shown as a deduction
from gross value of asset by concern in arriving at its book value.
(c)Compensation for surrendering certain rights.
(d)Profit on sale of fixed assets/investments to the extent not credited to profit and loss
account.
Sale of Property at Price < Stamp duty Value
Clause 17 of Form 3CD requires tax auditor to furnish information if land or building is transferred
during PY for consideration less than value adopted by any authority of a State Government as
under:
Details Consideration Value adopted Whether provisions of 2nd proviso to subsection (1)
of Received or or assesses or of section 43CA or 4 proviso to clause(x) of sub
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Property Accrued assessable section (2) of section 56 applicable? [Yes/No]
Ø Auditor should obtain list of all properties trfd by assessee during PY and furnish amt of consideration
received or accrued, as disclosed in books of account of assessee.
Ø For reporting value adopted or assessed or assessable, auditor should obtain from assessee copy of
regd sale deed. In case property is not regd, auditor may verify relevant docs from relevant authorities
or obtain third party expert like lawyer, solicitor representation to satisfy compliance of sec 43CA /
section 50C of the Act.
Capital expenditure incurred for scientific research assets [Clause 19]

Expenditure on Scientific Research covered under sec 35 of IT Act, 1961, is to be reported by
tax auditor under clause 19 of Form 3CD.
The tax auditor is required to report following:
(a)amount debited to profit and loss account, and
(b)amounts admissible as per provisions of the Income-tax Act, 1961 and also fulfils specified
conditions.
Payment to Clubs [Clause 21(a)]

ŸAs per Clause 21(a) of Form 3CD, amt of expenditure incurred at clubs by assessee during
year being entrance fees and subscriptions, and cost for club services and facilities used
should be indicated.
ŸThe payments made may be for directors and other employees in case of companies, and
partners or proprietors in other cases.
ŸThe fact whether such expenses are incurred in course of business or whether they are of
personal nature should be ascertained.
ŸThe tax auditor is required to furnish details of amounts debited to P&L a/c, being in nature
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of capital, personal, advertisement expenditure etc.
Advertisement expenditure in Brochure of political Party [Clause 21(a)]

As per Clause 21(a), auditor is reqd to furnish details of amts debited to P&L a/c, being in nature of
advertisement exp. in any souvenir, brochure, tract, pamphlet or the like published by political party
in tax audit report.
Clause 21(b): Amounts inadmissible under section 40(a):

(i)As payment to non-resident referred to in sub-clause (i) [Pay to NR]
(A)Details of payment on which tax is not deducted:
(I)date of payment (II)amount of payment
(III)nature of payment (IV)name and address of the payee
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(B)Details of payment on which tax has been deducted but has not been paid during the
previous year or in the subsequent year before the expiry of time prescribed under section
200(1)
(I)date of payment (II) amount of payment (III) nature of payment (IV) name
and address of the Payee (V) amount of tax deducted
(ii)As payment referred to in sub-clause (ia) [Pay to Resident]

(A)Details of payment on which tax is not deducted:
(I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and
address of the payee
(B)Details of payment on which tax has been deducted but has not been paid on or before
the due date specified in subsection (1) of section 139.
(I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and address
of the payer* (V) Amount of tax deducted (VI) Amount out of (V) deposited, if any
Cash Payments to Parties > Limit u/s 40A(3) [Clause 21(d)]

Ÿ Rs 35,000 for Goods Carriage & 10,000 for others per party per day
Ÿ If client says cash payment made because other party insisted then also report them
Ÿ Limit is per party not per bill
Ÿ Limit of 35k applies only if payee is engaged in goods carriage business not payer
Payment to Specified Persons u/s 40A(2)(b) [Clause 23]

Section 40(A)(2) provides exp. for which payment has been to certain specified persons
(Related Party) may be disallowed if, in opinion of Assessing Officer, expenditure is excessive or
unreasonable having regard to:
(i)fair market value of goods, services or facilities for which payment is made; or
(ii)for legitimate needs of business or profession of assessee; or
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(iii)benefit derived by or accruing to assessee from such expenditure.
Clause 25: Any amount of profit chargeable to tax under section 41 and computation thereof.
The tax auditor should obtain a list containing all the amounts chargeable under section 41 with the
accompanying evidence, correspondence, etc. He should in all relevant cases examine the past records
to satisfy himself about the correctness of the information provided by the assessee. The tax auditor
has to state the profit chargeable to tax under this section. This information has to be given
irrespective of the fact whether the relevant amount has been credited to the profit and loss account
or not. The computation of the profit chargeable under this clause is also to be stated.
The tax auditor should maintain the following in his working papers for the purpose of furnishing
details required in the format provided in the e-filing utility:
S No. Name of person Amt of income Section Description of transn Computation if any
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Delay in depositing GST or other indirect tax/cess/fees [Clause 26]

Any amt of GST/Tax payable on last day of PY (opening balance) as well as on last day of current
year has to be reported in Tax Audit Report under clause 26(A) and 26(B) in reference of Sec
43B.
Clause 26 (A) dealt GST/VAT payable pre-existed on the first day of previous year but was not
allowed in assessment of any preceding previous year and was either paid {clause 26(A) (a)}/
or/ and/ not paid during the previous year {clause 26(A)(b)}
Sec 26(A) The details will be as under in regard to opening balances:
S No Section Nature of o/s opening Amount paid Amt written Amt unpaid
Liability balance not /set off back to p&l at end of
allowed in PY during year (a) a/c year (b)
Sec 26(B) Liability incurred during the previous year:
S.No Section Nature Amount incurred Amount paid/set off before due Amount unpaid on due of
of in PY but date of filing return/date upto filing of return/date upto
Liability remaining o/s on which reported in tax audit which reported in tax audit
last day of PY(a) report, whichever is earlier. report, whichever is earlier(b)
Clause 27(a): Amount of GST credits availed of or utilized during the PY and its treatment in
profit and loss account and treatment of outstanding GST credits in the accounts.
The amount of CENVAT/GST availed and utilised should be reported under this sub-clause. In some
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cases, CENVAT/GST availed may be lesser than the CENVAT /GST credit utilised during the year on
account of opening balance in CENVAT/GST account or vice-versa and as such it would be advisable, in
order to avoid any misleading conclusion and inferences, to report the opening and closing balances of
CENVAT/GST. Further the sub-clause requires reporting of the credits availed of or utilized during the
previous year, it is desirable to report both the credits availed and the credits utilized.
In so far as the reporting of accounting treatment of CENVAT/GST credit is concerned the clause
requires that its treatment in profit and loss account and the treatment of outstanding CENVAT/GST
credit in the account have to be reported upon.
The tax auditor should verify and maintain the following information in his working papers for the
purpose of reporting in the format provided in the e-filing utility:
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CENVAT/GST Amount Treatment in P&LA/c
Opening Balance
GST Availed
GST Utilised
Closing balance
Income or Expenditure of Prior period cr/dr to P&L A/c [Clause 27(b)]

Particulars of income or expenditure of prior period credited or debited to P&L a/c to be verified:
(i) Clause would be relevant only where assessee follows mercantile system of accounting.
(ii) Under cash system of accounting, expenses debited/ income credited to P&L a/c would be
current year's expenses/income even though they may relate to earlier years.
(iii) The tax auditor should obtain particulars of expenditure or income of any earlier year debited or
credited to p&l a/c of relevant PY when mercantile system of accounting is followed.
(iv) Business or profession audited under any other law, info. may be available from annual
accounts.
(v) Business or profession not required to get his accounts audited, close scrutiny of ledger in
regard to period for which expenditure or income is entered in books may be necessary.
(vi) Tax auditor should maintain following information in his working papers file for purpose of
reporting in format provided in the e-filing utility:
S No Type Particulars Amount Prior Period to which it relates
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IFOS Reporting [Clause 29]
Clause 29: Whether during PY assessee recd consideration for issue of shares > FMV of shares as ref
in sec 56(2)(viib), if yes, furnish details.
29A: Amt included in IFOS u/s 56(2)(ix), if yes furnish details.
56(2)(ix): Amt recd as advance for capital assetà forfeited à treated as income
29B: Amt of income chargeable to tax u/s 56(2)(x), if yes furnish details
Sec 56(2)(x): where any person receives, in any PY, from any person or persons on or after 1.4.17,—
(a)any sum of money, w/o consideration, > 50,000, whole of aggregate value of such sum;
(b)any immovable property,—
(A)without consideration, SDV > 50,000, SDV of such property;
(B)for a consideration, (SDV- consideration), if amount of such excess is more than higher of
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following amounts:—
(i) 50,000; and
(ii) amount equal to 10% of consideration:
(c)any property, other than immovable property,—
(A)without consideration, aggregate FMV of which exceeds 50,000, whole of aggregate FMV of
such property;
(B)for a consideration < aggregate FMV of property by an amount exceeding 50,000, à (FMV-
Consideration)
Clause 30:
Details of any amount borrowed on hundi or any amount due thereon (including interest on the
amount borrowed) repaid, otherwise than through an account payee cheque. [Section 69D].
Clause 30A.
(a) Whether primary adjustment to transfer price, as referred to in Sec 92CE(1), has been made
during the previous year? (Yes/No)
(b)If yes, please furnish the following details:-
(i)Under which clause of sub-section (1) of section 92CE primary adjustment is made?
(ii)Amount (in Rs ) of primary adjustment:
(iii)Whether excess money available with associated enterprise is required to be repatriated to
India as per the provisions of of section 92CE(2)? (Yes/No)
(iv)If yes, whether the excess money has been repatriated within the prescribed time (Yes/No)
(v)If no, the amount (in Rs) of imputed interest income on such excess money which has not
been repatriated within the prescribed time.
Clause 30B – Limitation on Interest Deduction 30B.
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(a)Whether the assessee has incurred expenditure during PY by way of interest or of similar nature
exceeding 1 Cr as referred to in section 94B(1)?(Yes/No)
(b)If yes, please furnish following details:-
(i)Amount (in Rs) of expenditure by way of interest or of similar nature incurred:
(ii)EBITDA during PY (in Rs):
(iii)Amount (in Rs) of expenditure by way of interest which exceeds 30% of EBITDA
(iv)Details of interest expenditure brought forward as per subsection (4) of section 94B
(v)Details of interest expenditure carried forward as per subsection (4) of section 94B
Business Receipt in Cash

Clause 31 (a): Particulars of each loan or deposit in an amount exceeding limit specified in section
269SS (i.e. 20,000) taken or accepted during PY:-
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(i)name, address and PAN (if available with assessee) of lender or depositor;
(ii)amt of loan or deposit taken or accepted;
(iii)whether loan or deposit was squared up during PY;
(iv)maximum amt o/s in the account at any time during PY;
(v)whether loan or deposit was taken or accepted by cheque or bank draft or use of ECS through a
bank a/c; (v) in case loan or deposit was taken or accepted by cheque or bank draft, whether
the same was taken or accepted by an account payee cheque or an a/c payee bank draft.
*(These particulars need not be given in the case of Govt co., banking company or corporation
established by a Central, State or Provincial Act.)
For reference:
Sec 269SS: Prohibits Accepting loan/deposit from a person(cumulatively) >= 20,000 otherwise than
by a/c payee cheque/bank draft
Section 269ST: no person shall receive >=2L from a person/day in a single transaction/event/occasion
during PY other than a/c payee cheque/bank draft/ECS
Clause 31 (ba) particulars of each receipt in an amount exceeding limit specified in Sec 269ST (i.e. 2L), in
aggregate from a person in a day or in respect of a single transaction or in respect of transactions relating
to one event or occasion from a person, during PY, where receipt is otherwise than by cheque or bank draft
or use of ECS through bank account:-
i.Name, address and PAN (if available with assessee) of payer
ii.Nature of transaction
iii.Amount of receipt
iv.Date of receipt
Particulars need not be given in case of receipt by or payment to a Govt. company, a banking
Company, a post office savings bank, cooperative bank
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Speculation loss on Purchase & sale of securities [Clause 32(e)]
A tax auditor has to furnish details of speculation loss incurred during PY, under Clause 32(e) of Form
3CD, regarding whether Co. is deemed to be carrying on speculation business as referred in expln to Sec 73.
Expln. to sec 73 provides that where any part of business of Co. consists in purchase and sale of shares of
other companies, such Co. shall, for purpose of this section, be deemed to be carrying on speculation
business to extent to which business consists of purchase and sale of such shares.
Disqualifications in Cost Audit Report

Ÿ A tax auditor is reqd to check under Clause (37) of Form 3CD whether cost audit was carried out & if
yes, provide details of disqualification or disagreement on any matter/item/value/qty as may be
reported/identified by cost auditor.
Ÿ The tax auditor should obtain copy of cost audit from assessee.
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Ÿ Even though tax auditor is not reqd to make detailed study of such report, he has to take note of details
of disqualification or disagreement on any matter/item/value/qty as may be reported/identified by the
cost auditor.
Ÿ The tax auditor need not express any opinion in a case where such audit has been ordered but same has
not been carried out.
Accounting Ratios (Clause 40)

Details regarding turnover, gross profit, etc., for PY and preceding PY should be provided as follows:
S No. Particulars PY Preceding PY
1 Total turnover of assessee
2 Gross profit or turnover of assessee
3 Net profit/turnover of assessee
4 Stock in trade/turnover
5 Material consumed/FG produced
Ÿ Details reqd to be furnished for principal items of goods traded or manufactured or services
rendered.
Ÿ These ratios have to be calculated only for assessees who are engaged in manufacturing or
trading activities.
Ÿ This clause is not applicable to assessees carrying on profession.
Ÿ Moreover, ratios have to be given for business as a whole and need not be given product wise.
Demand raised under Tax laws other than Income tax Act (Clause 41)
Please furnish details of demand raised or refund issued during PY under any tax laws other than
Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant proceedings.
·Tax auditor should obtain copy of all demand/ refund orders issued by govt authorities during PY
under other tax laws. Even though demand order issued in current PY it may relate to other PY then
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also reporting reqd.
Adjustments of refund against demand also to be reported
S Name Demand Date of FY to which Amt of Adjustment Remarks

No. or demand demand or demand of refund
of
Act Refund raised/ refund raised/refund against
order refund issued relates issued demand, if any
SFT Reporting (Clause 42)

Clause 42 (a) Whether the assessee is required to furnish statement in Form No.61 or Form No. 61A or
Form No. 61B? (Yes/No)
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(b) If yes, please furnish:
With respect to Form 61, tax auditor should verify whether taxpayer has entered into any transaction
where the other party was required to quote PAN. He should verify whether taxpayer has obtained
declaration in Form No. 60 where the other party has not furnished his PAN. Wherever the taxpayer has
received declarations in Form No. 60, the auditor should verify if the taxpayer has filed Form No. 61
including therein all the necessary particulars.
With respect to Form 61A, the tax auditor should ascertain whether the taxpayer is required to report any
transactions under Section 285BA read with Rule 114E. It may be noted that specified transactions
under Section 285BA include the issue of bonds, issue of shares, buyback of shares by a listed company,
etc. These transactions may not happen every year and hence special attention should be given in the
year when a company taxpayer issues any security or a listed company undertakes buyback of shares.
While verifying the same, the tax auditor should ensure that the provisions of Rule 114E(3) have been
properly considered and applied. Failure to do so may result in a certain transaction not being reported. It
may be noted that the payment may be received for various transactions and on different dates, and
hence these may not be covered under Section 269ST but will have to be reported under Section 285BA.
With respect to Form 61B, the tax auditor should review the due diligence procedures carried out by the
taxpayer in accordance with provisions of Rule 114H and the results of such procedures. The tax auditor
should review the list of Reportable Accounts identified by the due diligence process and the information
to be maintained and reported by the taxpayer.
In case any reportable account has been omitted, or there is any error or omission in Form 61B, the same
may be reported under the Form No. 3CD. The auditor should verify if the taxpayer has filed Form No.
61B for correcting errors or omissions in the form filed originally. In such a case the auditor
should give details of both the forms filed. The errors in the original Form 61B which are corrected in
the revised Form 61B need not be reported under Form No. 3CD.
The tax auditor should verify that Form 61B is duly signed by the designated director and filed.
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Country by Country Reporting
Clause 43 (a) Whether the assessee or its parent entity or alternate reporting entity is liable to
furnish the report as referred to in section 286(2) (Yes/No)
(b) if yes, please furnish following details:
(i)Whether report has been furnished by assessee or its parent entity or an alternate reporting
entity
(ii)Name of parent entity
(iii)Name of alternate reporting entity (if applicable)
(iv)Date of furnishing of report
Ÿ Under Sec 286, international group has to furnish CbCR containing info about whole group
comprising of various constituent entities.
Ÿ Such report is to be filed in India if parent entity is resident of India or international group
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has appointed constituent entity resident in India to file CbCR on behalf of whole group.
Ÿ The report under Sec 286(2) is filed by parent entity which is resident in India or
alternate reporting entity resident in India.
Ÿ The tax auditor should verify if taxpayer is required to file Form 3CEAC based on
satisfaction of the conditions prescribed.
Ÿ Tax auditor should also verify if taxpayer whose parent is non-resident has filed Form No.
3CEAC.
Ÿ The tax auditor may obtain a necessary certificate from taxpayer in respect of constitution
of the international.
Reports vs Certificate Distinction between Audit Report & Certificate

Ÿ The term 'report' is used where an expression of opinion is involved.
Ÿ The term 'certificate' is preferable where auditor comments on or verifies facts such as a
verification of investment by inspection or the checking of ballot papers on a poll in a
company meeting.
Ÿ Under the Companies Act, 2013, a number of situations are there where an auditor is
required to issue a certificate rather than a report, like under Section 66 of the Companies
Act, 2013, an auditor is required to file a certificate in the tribunal where company is
proposing for the reduction of capital.
Ÿ However, the report under Section 143 of the Companies Act, 2013, is an opinion based
report and is not a certificate.
Some situations where Audit Reports and Certificates are required is given below -
(1)Under the Payment of Bonus Act, 1965, CA may be required to issue a 'report' on
computation of bonus payable.
The report may be as under:
“We have reviewed the figures in above computation in comparison with books and records produced to us,
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audit of which has already been completed by us and report that subject to the notes given on face of the
computation in our opinion, and to the best of our knowledge and belief and according to information and
explanation given to us, above computation is in due accordance therewith and has been made on a basis
reasonably consistent with provisions of Payment of Bonus Act, 1965.”
Place:
Date:
For X & Co.

Chartered Accountants
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(2)Auditor's Report in accordance with Regulation 54 of the SEBI (Mutual Fund) Regulations, 1993.
(i)All Mutual funds shall be required to get their accounts audited in terms of a provision to that
effect in their trust deeds. The Auditor's Report shall form part of Annual Report. It should
accompany the Abridged Balance Sheet and Revenue Account. The auditor shall report to Board of
Trustees and not to unit holders.
(ii)The auditor shall state whether:

1.He has obtained all information and explanations which, to the best of his knowledge
and belief, were necessary for the purpose of his audit.
2.The Balance Sheet and the Revenue Account are in agreement with the books of
account of the fund.
(iii)The auditor shall give his opinion as to whether:

1.The Balance Sheet gives a true and fair view of the scheme wise state of affairs' of the
fund as at the balance sheet date, and
2.The Revenue Account gives a true and fair view of the scheme wise surplus/deficit of the
fund for the year/period ended at the balance sheet date.
AUDIT OF PUBLIC SECTOR
UNDERTAKINGS
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AUDIT OF PUBLIC SECTOR

12 UNDERTAKINGS
= Categories for Organisation of PSU's

= 1.Departmentally managed Undertakings which form part & parcel of Government activities. (Ex-
Indian Railways, Postal Services, Security Printing Press, CSD)
= 2.Government & Deemed Government companies, Set up under the Companies Act, 2013
= 3.Corporations setup under the specific acts of legislature. (Ex- LIC, UTI, etc.)
=
= Framework for Government Audit: Government Company [Sec 2(45)]
= >= 51% of paid-up share capital held by
= Central Govt
= Any state govt(s)
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= Partly by both
= Includes subsidiary Co. of a govt Co.
Articles of Constitution
Article = Appointment of C&AG by President
148 = Special procedure for removal of C&AG, only on the ground of proven misbehaviors or incapacity.
= Salary and other conditions of service to be determined by the Parliament.
Article = The C&AG's (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and
149 powers of C&G.
Article = On the advice of the C&AG, President to prescribe such form in which accounts of the Union
150 and States shall be kept.
Article = Audit reports of C&AG on A/Cs of Central/ State Government should be submitted to
151 President/Governor of State who shall cause them to be laid before Parliament/State
Legislative Assemblies.
C&AG shall hold office for term of six years or upto age of 65 years, whichever is earlier
Organizations subject to C&AG Audit

t All Union and State Government departments and offices including Indian Railways and Posts
and Telecommunications.
t Public commercial enterprises controlled by Union and State govts, i.e. govt cos
and corporations.
t Non-commercial autonomous bodies and authorities owned or controlled by Union or States.
t Authorities and bodies substantially financed from Union or State revenues.
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Committees:
Parliament & state legislature set up 3 Committees to scrutiny of the annual accounts & audit report
thereon
1.Public Accounts Committee: Duty to satisfy itself that:
(i)that moneys were disbursed legally on service or purpose to which they were applied;
(ii)that expenditure incurred was authorised;
(iii)that re-appropriation has been made in accordance with provisions made (i.e.
distribution of funds).
(iv)to examine statement of accounts of autonomous and semi - autonomous bodies, audit
of which is conducted by C&AG
2.Estimates Committee: The Committee examines estimates with a view to:

(i)report what economies, improvements in organization, efficiency or administrative
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reform,consistent with policy underlying estimates may be effected;

(ii)suggest alternative policies;
(iii)examine whether money is well laid out within limit; and suggest form in which
estimates shall be presented to Parliament.
3.Committee on Public Undertakings (COPU)
(i)to examine reports and accounts of PSUs
(ii)to examine reports of C&AG on public undertakings
(iii)to examine autonomy and efficiency of psu and to see whether they are being
managed in accordance with sound business principles and prudent commercial
practices
(iv)to exercise such other functions vested in PAC and Estimates Committee not covered above
and as may be allotted by Speaker from time to time
C&AGs Role to The above Committess (Friend, Philosopher and guide)

w Report generally forms basis of committee's working
w Scrutinises notes submitted by ministries to committees to check correctness of submissions
w Financial Committees present their Report to Parliament/ State Legislature with their
observations and recommendations.
The various Ministries / Deptt of Govt are required to inform Committees of the action taken
by them on recommendations of Committees (which are generally accepted) and Committees
present Action Taken Reports to Parliament / Legislature;
[Financial committees à Report à Parliament/ State legislature
(observations/recommendations) Ministries/Dept à Inform action à Committees à Action
taken report à Parliament/State legislature]
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wIf A/R couldn't be discussed in detail, written ans. obtained from dept/ministries to ensure
A/R not taken lightly by Govt even if entire report not deliberated by committee
Objective & Scope of Public Enterprise Audit

1.Audit of PSU not constrained to Financial & Compliance audit
2.Propriety audit
3.Comprehensive audit
4.Org decision by competent authority
5.Helping govt
6.Highlight issues of efficient & economic operations
7.Fiscal & managerial accountability
Fiscal Accountability: Audit of provision of funds, sanctions, compliances, propriety etc
Managerial Accountability: Efficiency, Economy & effectiveness
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Elements of PSU Audit:
Basic Elements Auditor: The role is Fullfilled by SAI, CAG
Three Parties Responsible Party : Auditable Entities,TCWG
Intended User : Individual, Organization to whom the auditor prepare his report
Subject matter Subject Matter : Info, Condition, Activity that is measured
criteria & Subject Criteria : Benchmark used to evaluate
Matter Information Subject Matter Info : Outcome of evaluation Subject matter against Criteria
Types of engagement Attestation Engagements : responsible party measures subject

matter against criteria, on which auditor then gathers SAAE to
provide reasonable basis for expressing conclusion
Direct Reporting Engagement : is auditor who measures or

evaluates subject matter against criteria
Financial audits are always attestation engagements, as they are based on financial information
presented by responsible party. Performance audits and compliance audits are generally direct reporting
engagements.
Principles of PSU Audit
General Principles Principles relating to Audit process
mEthics & Independence
mProfessional Judgement, due care and skepticism mPlanning the audit (Agreeing terms of engg,
mQuality Control understanding entity, developing audit plan)
mAudit Team Management & Skill mConducting Audit (Performing audit
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mAudit Risk procedures, evaluating evidence & drawing
mMateriality conclusions)
mDocumentation mReporting & follow up (Reporting based on
mCommunication conclusions & following up on reported matters)
Audit of Government Companies:

Role of C&AG in Audit of Govt Cos.
1.143(5) C&G direct manner a/c audited + auditor includes in report (*3) Directions issued+ action
taken thereon + impact on a/cs & financials
2.143(6)(a) Supplementary Audit
Within 60 days from date of receipt of audit report
3.143(6)(b) C&AG Comment upon/ supplement audit report à Sent by Co. to every person
entitled to secure copies of audited f/s + place before members in AGM
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4.Test Audit u/s 143(7)

Provisions of sec 19A of C&AG (Duties, Powers & Conditions of Services Act,1971) shall apply
to such test audit
Financial Audit:
It is primarily conducted to :
·Express an Audit Opinion on the Financial Statements:
·Enhance the degree of confidence of intended users in the Financial Statement
Compliance Audit
Compliance audit is independent assessment of whether given subject matter is in compliance
with applicable criteria.
Compliance audit is concerned with:

(a)Regularity- adherence of subject matter to formal criteria emanating from relevant laws,
regulations and agreements applicable to entity.
(b)Propriety- observance of general principles governing sound financial management and
ethical conduct of public officials.
Perspective of Compliance Audit:

It is a part of combined Audit and is generally conducted either-
(i)in relation with audit of F.S, or
(ii)separately as individual compliance audits, or
(iii)in combination with performance auditing.
Performance Audit
A performance audit is objective and systematic examination of evidence for purpose of providing an
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independent assessment of performance of govt organization, program, activity, or function in order to

provide info to improve public accountability and facilitate decision-making by parties with responsibility
to oversee or initiate corrective action. The objective of Performance audit is evaluation of economy,
efficiency, effectiveness of policy, programmes, Organization and management. Performance audit
addresses the following issue:
(i)Economy: Minimize cost of resources used for an activity, having regard to qty, quality
andbest price.
(ii)Efficiency: Input-output ratio. Max output with min input. Or min input for given quality
& qtyof output
Following to be checked:
wSound procurement policies
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wResources are protected & maintained
wEfficient utilization of physical, financial & HR
wPublic sector prog/entities/ activities efficiently managed
wObjectives met cost effectively
(iii)Effectiveness: Extent to which objectives achieved & relation b/w intended & actual
impact of activity
Check:
wObjectives & means provided (legal, financial etc) for public sector prog. consistent with
policy
wExtent to which results achieved
wAssess & establish with evidence that social & economic impact due to policy or other
causes
wIdentify factors inhibiting satisfactory performance
wAssess compliance with laws & regulations
wAssess effectiveness of prog or individual components
Planning for performance Audit

·Understanding entity/programme Sources of
understanding the entity
Documents of Legislative Policy Academic or Past Audits Media

the entity documents documents spl research Coverage
(i)Documents of the entity: Documents on administration and functions of entity, policy

files, annual reports, budget docs, accounts, minutes of meetings, information on website,
CA Ravi Agarwal's
internal audit reports, electronic databases and MIS reports, RTI material etc.
(ii)Legislative documents: Legislation, parliamentary questions and debates, reports of Public
Accounts Committee, Committee on Public Undertakings, Estimates Committee and letters
from MP.
(iii)Policy documents: Documents of Planning Commission, Ministry of Finance etc.
(iv)Academic or special research: Independent evaluations on entity, academic research and
similar work done by other govts and other SAIs.
(v)Past audits: Past financial and performance audits of entity provide major source of info
and understanding.
(vi)Media coverage: Print and electronic media - their systematic documentation on regular
basis in a transparent manner.
Ÿ Defining objectives and scope of audit
Ÿ Determining audit criteria: Stds to determine if program meets expectations
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Audit criteria can be obtained from following sources:

ªProcedure manuals of entity
ªPolicies, std, directives, guidelines
ªIndependent expert opinion or know how
ªScientific knowledge or other reliable info
ªGeneral mgt & subject matter literature
Ÿ Deciding audit approach: Selection of approach also determines methods & means to
conduct performance audit.
Methods & means for conducting Performance audit:

i.Analysis of procedures: It involves review of the systems in place for planning, conducting,
checking and monitoring the activity.
ii.Case studies: A case study is a descriptive analysis of an entity, scheme or a programme.
It involves analysis of a particular issue within the context of the whole area under review.
iii.Use of existing data: The audit staff should investigate the data held by entity mgt and
by other relevant sources.
iv.Surveys: Survey is a method of collecting information from members of a population to
assess the interrelation of events and conditions.
v.Analysis of results: It requires the auditor to carry out actual output-input analysis to
determine the efficiency of the programme.
vi.Quantitative analysis: It involves examination of available data relating to financials like
earnings, revenue, or data relating to programme implementation like details of
beneficiaries etc.
sDeveloping audit questions
sAssessing audit team skills and whether outside expertise required
sPreparing Audit Design Matrix
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sEstablishing time table and resources
sIntimation of Audit programme to audit entities
Comprehensive Audit
Efficiency cum performance audit. Locate area of weakness and extravagance for management info.
Some of issues examined in comprehensive audit are:
sOverall cost of capital compared with approved planned cost? Is there a substantial
increase? If yes any extravagance or unnecessary expenditure?
sAccepted prodn or output achieved? Underutilisation of installed capacity or shortfall in
performance?
sPlanned rate of return achieved?
sSystem of project formulation and implementation sound?
sAre cost control measures adequate?
sDoes enterprise have R&D program?
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sDoes enterprise have adequate system of Repair & Maintenance (R&M)
Propriety Audit
Verification of transaction under test of public propriety, commonly accepted customs, & stds of
conduct.
Principles of Propriety
sExpenditure not prima facie more than what occasion demands + sufficient vigilance by
officers
sAuthority utilising power to sanction expenditure not accruing to its own benefit
sFunds not to be utilised to benefit particular person(s)
sApart from agreed remuneration & reward no other avenue benefit indirectly mgt person,
employee or others
Provisions of Cos Act relating to Propriety
1.Sec 143(1) requiring enquiry into certain specified matters (Covered in Co. Audit)
2.143(6) & (7) à Supplementary & test audit
3.Sec 148 àCost records & Audit à Cost consciousness in mgt
4.Additional info. Part II of Schedule III
Parts of Audit Report of C&AG
·Introduction containing general review of working results of Govt Co/ deemed govt co.
·Results of comprehensive appraisals of selected undertakings conducted by Audit board
·Resume of Co. Auditor's report submitted under directions of C&AG & that of comments on
A/Cs of govt cos.
·Significant results of audit of undertakings not taken up for appraisal by audit board.
LIABILITIES OF
AUDITOR
CA Ravi Agarwal's
13 LIABILITIES OF AUDITOR
Taking assistance in the discharge of his duties

wWork of an auditor must be performed either by him or by his persons under his supervision since he
himself remains finally responsible.
wOnly to ensure that this scheme shall be adhered to in all cases,
m Clause (12) of part i of first schedule to the CA (amendment) act, 2006
m Makes it obligatory that reports on financial statements would be-
m Signed either by member or his partner
Professional negligence:
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It means negligence, which is culpable (criminal), generally consists of undermentioned
(a)existence of duty or responsibility owed by one party to another to perform some act with certain
degree of care and competence.
(b)Occurrence of a Breach of such duty &
(c)Loss or Detriment, being suffered by party to whom duty was owed as a result of negligence.
Civil Liabilities under Companies Act,2013

Damage for Negligence: Mis-statement in prospectus u/s 35 of Companies Act, 2013, are:
(1)Where person subscribed for securities of Co. acting on any statement included, or inclusion or
omission of any matter, in prospectus which is misleading and has sustained any loss or damage,
company and every person who—
(a)is a director of Co. at time of issue of prospectus;
(b)has authorized himself to be named in prospectus as director of company or has agreed to become
such director either immediately or after an interval of time;
(c)is promoter of company;
(d)has authorised issue of prospectus; and
(e)is expert referred to in sub-section (5) of sec 26, shall, without prejudice to any punishment to
which any person may be liable under sec 36, be liable to pay compensation to every person who
has sustained such loss or damage.
Where it is proved that prospectus has been issued with intent to defraud applicants for securities of
company or any other person, every person referred to in subsection (1) shall be personally responsible,
without any limitation of liability, for all or any of losses or damages that may have been incurred by any
person who subscribed to securities on the basis of such prospectus.
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No person shall be liable, if he proves—
(a)that, having consented to become a director of Co., he withdrew his consent before issue of
prospectus, and that it was issued without his authority or consent; or
(b)that prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or
consent.
(c)that, as regards every misleading statement purported to be made by an expert or contained in

what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct
and fair representation of the statement, or a correct copy of, or a correct and fair extract from,
report or valuation; and he had reasonable ground to believe and did up to the time of the issue of
the prospectus believe, that person making statement was competent to make it and that said
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person had given the consent required by subsection (5) of section 26 to issue of the prospectus
and had not withdrawn that consent before delivery of a copy of prospectus for registration or, to
the defendant's knowledge, before allotment thereunder
Criminal Liability
Criminal liability for Misstatement in Prospectus –
As per Sec 34 of Companies Act, 2013, where prospectus issued, circulated or distributed includes any
statement which is untrue or misleading, every person who authorises issue of prospectus shall be liable
under section 447.
This section shall not apply to person if he proves that such statement or omission was immaterial or that
he had reasonable grounds to believe, that statement was true or inclusion or omission was necessary.
Punishment for false statement - According to Sec 448 of Companies Act, 2013 if in any return, report,
certificate, financial statement, prospectus, statement or other document required by, or for, purposes of
any of provisions of this Act or rules made thereunder, any person makes a statement —
(a)which is false in any material particulars, knowing it to be false; or
(b)which omits any material fact, knowing it to be material, he shall be liable under section 447.
Punishment of Fraud u/s 447

Amount of Fraud more than or equal to 10L or 1% of turnover of Co. (lower)
Imprisonment - 6 months – 10 Years & Fine of amt of fraud..max 3 times
If it involves public interest - Imprisonment Minimum - 3 years
Amount of fraud < 10 L or 1% of turnover of Co.(Lower)

Punishment of imprisonment extend to 5 yrs or fine upto 50 L or both
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Liabilities under Income Tax Act 1961
Sec 288:
wPerson who has been convicted of any offence connected with any Income Tax proceeding or on whom a
penalty has been imposed under said Act is disqualified from representing an assessee.
wCA found guilty of professional misconduct by Council of ICAI, cannot act as a representative for such
time that order of Council disqualifies him from practising.
Sec 278:
Any person who acts or induces another person to make & deliver to IT Authorities false a/c, statement, or
declaration, relating to taxable income which he knows to be false or does not believe to be true is
punishable:
swith imprisonment from 6 months to 7 years & fine if tax evaded exceeds ₹ 25 Lacs
swith imprisonment from 3 months to 2 years & fine if tax evaded is up to ₹ 25 Lacs
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Rule 12A
wA CA who as authorised representative prepared return filed by assessee, has to furnish to A.O.,
particulars of a/cs, statements and other docs supplied to him by assessee for preparation of return.
wWhere CA has conducted an examination of such records, he has also to submit a report on scope and
results of such examination.
wIf this report contains any information which is false and which CA either knows or believes to be false
- liable to rigorous imprisonment which may extend to 7 years and fine.
Sec. 271J
For incorrect info in any report or certificate furnished under this Act or Rules, A.O. or CIT (Appeals) may
impose a penalty of ₹ 10,000 for each such report or certificate.
INTERNAL AUDIT,
MANAGEMENT AND
OPERATIONAL AUDIT
CA Ravi Agarwal's
INTERNAL AUDIT, MANAGEMENT AND

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OPERATIONAL AUDIT
Internal Audit
Internal Audit provides Independent assurance on effectiveness of internal controls and risk management
processes to enhance governance and achieve organisational objectives
The objectives and scope of IA Function as per SA 610 includes:

wMonitoring of internal controls : Monitoring through Exception Reports of Continuous Control
Management Tool in ERP system
wExamination of financial and operating information: Internal Audit for identifying reasons of
Year to Year deviation in Profit & Loss Account Items
wReview of operating activities: Reviewing Store Management Practices vis-a-vis Indutry's Best
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Practices
wReview of compliance with laws and regulations: Review of compliance with newly applicable Tax
Regime.
wRisk management: Evaluation and management of Risk Exposure for complex financial instruments
transactions
wGovernance: Assessment of Governance Process in the accomplishment of objectives on ethics
and values.
Applicability of Internal Audit :

Sec 138 of Companies Act, 2013 read with Rule 13 of Companies Accounts Rules 2014
The following shall be required to appoint an internal auditor:
wEvery Listed Cos
wUnlisted public Companies
ØDeposits >= 25 Cr (anytime) or
ØPSC >= 50 Cr or
ØO/S Loans or Borrowings (Bank/FI) > 100 Cr (anytime) or
ØT/o >= 200 Cr
wEvery Private companies
ØBorrowings > 100 Cr (anytime) or
ØT/o >= 200 Cr
Internal Auditor
lIndividual/firm/body corporate - CA/Cost aaccountant /any other professional whether in practice or
not
lMay or may not be employee of Co.
CA Ravi Agarwal's
Main Responsibilities of Internal Auditor
wMaintain adequate system of Internal Control (IC) by continuous Examination
wTo operate independently of accounting staff
wNot involve himself in executive functions to maintain objective outlook
wTo observe facts & situations & bring them to notice of authorities
wAssociate closely with Management & keep knowledge upto date about business
wAt all times, enjoy independent status
Scope of Internal Auditor's work includes review of:

1.Internal control systems & procedures
wReview and Assess design & operating efficiency & effectiveness of IC
wTo minimize overall internal audit risk, inherent risk, control risk & detection risk
wControls should be inbuilt in operating functions - cost effective
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wReview should consider limitations of Internal Control - cost benefit, human errors, collusion & abuse
by process owner
2.Review of Custodianship & Safeguarding of Assets

•Involves Verification of existence of assets
•Review Segregation of Duties is in place
•Ensure all assets accounted fully
•Review control systems for intangible assets e.g. procedures related to credit control
3.Review of Compliance with Policies, Procedures & Regulations

•Point out specific weakness & suggest remedial action
4.Review of Relevance & Reliability of Information

•Review information systems
•Examine whether reporting by exception i.e reports highlight significant & distinctive features
5.Review of Organisation structure

Ÿ Manner in which activities of organisation are grouped for managerial control
Ÿ Examine organisation chart - check structure is simple & economical & no function enjoys undue
dominance over the others
Ÿ Responsibilities of staff at headquarter shouldn't overlap with CEO of operating units
Ÿ Reasonableness of Span of control of each executive (no. of subordinates that executive controls)
Ÿ Where dual responsibilities can't be avoided, primary one should be specified
Ÿ Evaluate process of management development in enterprise
6.Review of utilisation of Resources
Ÿ Check proper operating std & norms established
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Ÿ Whether – detailed enough to be identified with specific operating responsibility
Ÿ Review method of establishing stds & norms
Ÿ Wide divergence – b/w actual performance & std – reasons maybe considered
7.Accomplishment of Goals & Objectives

Ÿ Objectives clearly stated & attainable
Ÿ Expressed in quantifiable terms
Ÿ Sufficient flexibility in plan to permit improvements
Integrity, Objectivity & Independence of Internal Auditor

1)Internal Auditor shall be free from undue influences which force him to deviate from truth. The
independence shall not only be of mind but also in appearance.
2)Internal Auditor shall be honest, truthful & be person of high integrity
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3)Internal Auditor shall complete work in highly objective manner. Shall not allow be biased & prejudice
to override objectivity especially while arriving at conclusions or reporting opinion.
Qualities of Internal Auditor

1)SpecInternal Auditorl expertise for evaluating mgt controls esp. financial & accounting controls
2)Accounting & financial expertise
3)Expected to evaluate operational performance & non-monetary controls. Requires basic knowledge of
technology & commercial practices of entity
4)Basic knowledge of commerce, laws, taxation, cost accounting, tax, economics, EDP systems,
5)Understanding of management principles & techniques (MTP)
6)By his conduct should provide assurance to management that the confidentiality will be maintained
Internal Audit Report

SIA 370 Reporting by Internal Auditor in 2 stages:
1)At end of assignment Internal Audit Report covering specific area, fn or part of entity is prepared
highlighting key observations. Issued with details of manner of conducting assignment & key findings
from audit. Issued to Auditee with copies to local management agreed in planning phase.
2)On periodic basis, at close of plan period, report on Internal Audit activities covering Entity & plan
period is prepared by Chief Internal Auditor (or EP in case of external service provider). Normally done
on Quarterly basis & submitted to Audit Committee. A part of Internal Audit report may form part of
the Periodic Report shared with AC.
This SIA pertains to responsibility to issue only Internal Audit report pertaining to specific assignments.
Key Elements of Internal Audit Report

a)Overview of scope, objective & approach (SOA) of audit assignments
b)Fact that Internal audit completed as per Standard on Internal Audit (SIA)
CA Ravi Agarwal's
c)Executive summary of key observations covering important aspects & specific to scope of assignment
d)Summary of corrective actions required (or agreed by management) for each observation
e)Nature of assurance, if any, which can be derived from observations.
Content & form depends on Prof judgment of Internal Auditor in consultation with auditee & Draft report
to be issued before Final Report
Follow Up
Ÿ As per SIA 390 Monitoring & Reporting of Prior Audit Issues(PAI), Chief Internal Auditor responsible
for continuous monitoring closure of PAI through timely implementation of action plans.
Ÿ The responsibility to implement action plans stays with the management.
Ÿ Internal Auditor should review follow up action taken by management based on his observations. If no
action taken in reasonable time - draw management attention to it. Where management not acted on
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his suggestions or implemented recommendations - Internal Auditor ascertain reasons

Ÿ Where management has accepted recommendations & initiated necessary action, Internal Auditor
periodically review the manner & extent of implementation of recommendations & report which
recomm. not implemented fully/partly.
Relationship between Internal Auditor(IA) & External Auditors(EA)

Ÿ Scope & objective of Internal audit dependent on size & structure of entity & requirements of
management. IA reviews a/c systems & internal control, examines financial & operating info for mgt,
there's a lot of overlap b/w work of IA & EA.
Ÿ Work done by IA has important bearing on work of EA. Function of IA is integral part of system of
Internal Control.
Ÿ It's a statutory requirement as per sec 138, Audit committee in consultation with IA formulate scope,
functioning, methodology, & periodicity (SFMPE) for conducting Internal audit.
Ÿ Its obligatory for stat auditor (EA) to examine scope & effectiveness of work carried out by Internal
Auditor. He should examine internal audit dept of org, strength of staff & qualification & powers.
Ÿ Extent of independence exhibited by Internal Auditor & status in organisation, determine effectiveness
of audit.
Ÿ EA should evaluate internal audit function to determine NTE of compliance & substantive procedures.
Difference between Internal & External Audit
Basic Internal Audit External Audit

Examination Ongoing audit function performed within an Audit function performed by independent
organisation by separate internal audit dept body not part of organisation
Appointment Examines operational efficiency of Examines accuracy & validity of F.S.
organisation
CA Ravi Agarwal's
Users of Report By mat By members

Management Stakeholders
Period Continuous process throughout year Done once in a year
Opinion On the effectiveness of operational acts of On truthness & fairness of F.S.
organisation
Status of Auditor Could be employee Can't be employee
SA 610 Deals with certain matters with certain aspects on relationship between Internal & External
Auditor:
Determining whether in which Areas & what extent the work of IA function can be used:
Evaluation of IA Function: Includes Appraisal Activity, Evaluation adequacy and effectiveness of
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Internal Controls
Scope of IA Function: Monitoring Internal controls; Review of operating activities
Objective of evaluation of IA Function: Assurance to management, Evaluate and improve the
effectiveness
฀Sole responsibility of audit opinion à External Auditor
฀External auditor has to obtain SAAE that work of INTERNAL AUDITOR Function or
Internal auditor providing direct assistance is adequate for purpose of audit
฀Scope of SA:
a)Using work of INTERNAL AUDITOR Function in obtaining audit evidence &
b)Using internal auditors to provide direct assistance (DA) under Direction, Supervision &
Review of External auditor (DSR)
฀This SA doesn't apply if entity doesn't have INTERNAL AUDITOR function
Objectives of Auditor where entity has internal audit function:

Ÿ To determine if work of INTERNAL AUDITOR function or direct assistance of Internal auditor
can be used
Ÿ If using work of INTERNAL AUDITOR Function, determine whether work is adequate for Audit
purpose
Ÿ If using INTERNAL AUDITOR to provide DA, to DSR their work
Internal Audit Function: A function of entity that performs assurance and consulting activities
designed to evaluate and improve effectiveness of entity's governance, risk management and
internal control processes (GRC).
Direct Assistance: The use of internal auditors to perform audit procedures under direction,
supervision and review of external auditor.
CA Ravi Agarwal's
Evaluating whether work of Internal Audit Function can be used for Audit Purpose
(a)The extent to which internal audit function's organizational status and relevant
policies and procedures support objectivity of internal auditors;
(b)The level of competence of internal audit function; and
(c)Whether internal audit function applies a systematic and disciplined approach, including
quality control. (DISCO)
Determining Nature & Extent of work of Internal Audit Function that can be used
Types of Work of internal audit function that can be used by external auditor include following:
• Testing of operating effectiveness of controls.
• Substantive procedures involving limited judgment.
• Observations of inventory counts.
• Tracing transactions through the information system relevant to financial reporting.
• Testing of compliance with regulatory requirements.
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• In some circumstances, audits or reviews of financial information of subsidiaries that are

not significant components to group (where this does not conflict with the requirements of
SA 600).
To determine adequacy of specific work performed by internal auditors for external auditor's purposes,
external auditor shall evaluate whether:
i.The work was performed by internal auditors having adequate technical training and
proficiency;
ii.The work was properly supervised, reviewed and documented;
iii.Adequate audit evidence has been obtained to enable internal auditors to draw reasonable
conclusions;
iv.Conclusions reached are appropriate in circumstances and any reports prepared by internal
auditors are consistent with results of work performed; and
v.Any exceptions or unusual matters disclosed by internal auditors are properly resolved.
Written Agreements: Prior to using internal auditors to provide direct assistance for purposes of audit
(a)Obtain written agreement from authorized representative of entity that INTERNAL AUDITOR will
be allowed to follow external auditor's instructions, and entity will not intervene in work the
internal auditor performs for external auditor; and
(b)Obtain written agreement from internal auditors that they will keep confidential specific matters
as instructed by external auditor and inform external auditor of any threat to their objectivity.
Areas where Internal auditor can't provide Direct Assistance:

(a)Involve making significant judgments in audit;
(b)Relate to higher assessed RMM where judgment required in performing relevant audit
CA Ravi Agarwal's
procedures or evaluating audit evidence gathered is more than limited;
(c)Relate to work with which internal auditors have been involved and which has already been,
or will be, reported to Mgt or TCWG by internal audit function; or
(d)Relate to decisions external auditor makes in accordance with this SA regarding internal audit
function and use of its work or direct assistance.
Significant judgments include following:

4 Assessing risks of material misstatement (RoMM) ;
4 Evaluating sufficiency of tests performed;
4 Evaluating appropriateness of management's use of going concern assumption;
4 Evaluating significant accounting estimates; and
4 Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor's report.
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Documentation: External auditor uses Internal Auditor to provide direct assistance
(a)Evaluation of existence and significance of threats to objectivity, and level of competence of
internal auditors used to provide direct assistance;
(b)Basis for decision regarding nature and extent of work performed by internal auditors;
(c)Who reviewed work performed and date and extent of that
review in accordance with SA 230;
(d)Written agreements obtained from authorized representative of entity and the internal auditors
(e)Working papers prepared by internal auditors who provided direct assistance on the audit
engagement.
Management Audit
Management Audit and Operational Audit
The scope and content of management audit should cover everything that we know as operational
audit and, in addition, it should also include review of adequacy and competence of objectives, plans,
policies and decisions of top mgt.
¨Management audit is concerned with “Quality of managing”, whereas operational audit focuses on
“Quality of operations”.
¨Management audit is “Audit of management” while operational audit is “Audit for the
management”. The focus of Management audit is on “Quality of Decision Making” rather than
effectiveness or efficiency of operations.
¨The basic difference b/w two audits, then, is not in method, but in level of appraisal. In a
Management audit, the auditor is to make his tests to the level of top management, its formulation
of objectives, plans and policies and its decision making.
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What knowledge necessary to be a mgt. auditor?
i.Purpose for which organization. has been created
ii.Management structure including delegation of authority, planning & budgeting
iii.Reports required & reports actually received for Management
iv.Internal Controls
v.Production Planning
vi.Factory layout, design & installed capacity
vii.Sales Management & sales planning
viii.Personnel policy & personnel mgt including requirements, training, welfare, incentives
& disincentives
Desirability or Importance of Management Audit

¨The principle reason is the need for Detecting & overcoming current managerInternal Auditorl
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deficiencies in ongoing operations. It represents a positive, forward looking approach that

evaluates
Ø how well Management accomplish its objectives
Ø how effective management is planning, organising, directing, controlling, & coordinating
org acts.
This evaluation is aided with Management Audit Questionnaire.
¨Managerial problems & operational difficulties can be spotted before the fact. They can help
pinpoint problems developing from small scale.
Ïts another Management tool to achieve org objectives. Capability of mgt audit questionnaire to
pinpoint problem areas is a plus factor.
¨Management audit is Clearly helpful in case of ailing industries, to isolate problems & account for
their ailments.
Öften, Management audits conducted prior to investments in entity, M&A, or b4 any other
strategic decision.
Organising the management Audit

1.Devising statement of Policy
¨Management support must be reflected clearly & policy statement to be specific
Ït should Spell out clearly scope & status of Management auditing in enterprise, authority
to carry out audits, issue reports, make recommendations, & evaluate corrective action
¨Statement of policy should Lay in clear terms scope of activities to be performed by
Management auditor
¨Statement must categorically say that Management auditor is capable of reviewing admin &
Management controls over any activity within Co.
2.Location of audit function within organisation
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The function should be entirely independent as possible of pressures from various group.
3.Allocation of Personnel
lIt is important that all Persons selected & assigned should have good understanding of
audit theory, fundamentals of organisation & Management, the principles and effective
method of control and requirement of conducting scientific appraisal
lBasic knowledge of:
ØTechnology & commercial practices
ØCommerce, law, tax, cost a/c, Economics, EDP systems
4.Staff training program

lIt Will help to achieve quality in Performing audit assignments, it acts as an incentive for
drawing capable people in dept & to retain them.
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5.Time & other aspects
Time and other aspects varies Depending on nature & scope of work.
6.Frequency
It is considered to be long time frame, but interval shouldn't exceed 3 years.
Conducting management Audit

1.Getting facts through interviews
·Adequate prep necessary to avoid waste of time & effort, Begin by stating purpose of audit.
·Emphasis on getting facts essentInternal Auditorl to review & appraise the area of study,
Exchange of info should be friendly & conducted in open atmosphere
2.Management Audit Questionnaire

·Aims at comprehensive & continuous examination of org Management, its concerned with appraisal
of mgt actions in accomplishing org objectives
·Primary objective it to Highlight weakness & deficiencies of mgt for possible improvements, It
enables Management auditor to synthesise elements causing mgt difficulties & deficiencies
(d&d)
Management Audit Reports

The reporting results covers wide spectrum of types, the important one are as follows.
1.Oral Reports: For emergency reporting and should befollowed up with written report
2.Interim written report: Inform about significant developments during audit for early
consideration
3.Regular written reports: it will vary based on audit assignments and generally are Issued after
audit
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4.Summary written reports:
ØAlso referred as Flash Reports, They summarize individual reports. These are primarily for audit
committees or higher level Management
ØEspecially useful for top level managers who don't actively review individual reports. Also useful
for general auditor to see overall reporting effort with more perspective & on integrated basis
Steps to prepare Mgt Audit Report

1.Planning the audit report
2.Supporting Information: Supplement report with audit evidence that sufficiently &
convincingly supports conclusions
3.Preparing Draft Report - Before issue of final report
1.Writing & issuing final report: When completely satisfied with draft report, before that
discuss conclusions & recommendations with Management
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2.Follow up audit report: Review whether follow up action taken by Management

3.Action/response of mgt on Audit report: Where mgt has not acted upon suggestions of
auditor or not implemented his recommendations, auditor should ascertain reasons for same
Behavioural Aspects encountered in Management Audit

Nature & Cause of behavioural problems:
1.Relationship conflict between mgt auditor & other personnel
Management auditors maybe employee of Co. & other persons will regard them as employee only. On
other hand, Management auditor being specialist of field, may think their approach & solutions, only
way to resolve mgt problems.
2.Control: Management auditor evaluates effectiveness of controls, auditees may feel that
auditor's report might create incompetent impression on Management, this creates feeling of
antagonism
Causes of Antagonism are as follows:
ØFear of criticism stemming from adverse audit findings.
ØFear of changes in day-today working habits because of changes resulting from audit
recommendations.
ØPunitive action by superiors prompted by reported deficiencies.
ØInsensitive audit practices - reports which are overly critical, reports which focus on
deficiencies only, and the perception that auditors gain personally from reporting
deficiencies.
ØHostile audit style - a cold and distant aspect is a lack of understanding of the
auditee's problems, an absence of empathy, an excessive concentration on insignificant
errors, & prosecutional tone when asking questions.
3.Resistance to change: Auditor's study of systems & procedures give room for
recommendations for changes in systems.
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Solutions to behavioural problems:
There is a need to demonstrate to extent possible that:
1.The audit is part of an overall programme mandated by higher-level authority to meet higher-
level organisational needs for both protection and maximum constructive benefit.
2.The objective of review is to provide maximum service in all feasible managerInternal Auditorl
dimensions.
3.The review will be conducted with minimum interference with regular operations of the
operating personnel.
4.the responsible officers will be kept fully informed and have opportunity to review findings
and recommendations before any audit report is formally released.
It is essential to create an atmosphere of trust and friendliness so that audit reports

will be understood in their proper perspective.
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1.Constructive criticism - He should also make obvious in his report the value of his comments in
tangible terms. Only then would suggestions carry weight with the auditees and they will feel
convinced that the auditor has been objective in his remarks in the report.
2.Reporting methods - Adopting friendly but firm tone in report. It is always possible to disagree
without being disagreeable and to criticise without being critical. The reports should concentrate on
areas that need improvement rather than listing inefficiencies and deficiencies in performance of
auditee.
3.Participative approach - Auditor's reports have better acceptability if improvements suggested are
discussed with those who have to implement them and made to feel that they have participated in
the recommendations made for improvements.
Operational Audit
Operational Audit: It involves evaluating the effectiveness & efficiency of operations. Not a one-time
activity should be conducted at least once in 3 years.
Operational vs Internal Audit
The difference in approach of both of these audits is illustrated below:
1.Perception - Traditionally, internal auditors have been engaged in a sort of protective function. They
view and examine internal controls in financial and accounting areas to ensure that possibilities of
loss, wastage and fraud are not there; they check accounting books and records to see, whether
internal checks are properly working and resulting accounting data are reliable.
2.Issues - The basic difference that exists in technique of operational auditing is in auditor's role in
recommending corrections or in installing systems and controls.
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A further distinction lies in attitude and approach to whole auditing proposition. Every aspect of
operational auditing programme should be geared to management policies, objectives and goals.
3.Objectives - Main objective of operational auditing is to verify fulfilment of plans and sound
business requirements as also to focus on objectives and their achievement objectives; operational
auditor should not only have a proper business sense, he should also be equipped with thorough
knowledge of policies, procedures, systems and controls, he should be intimately familiar with
business.
Today, however, concept of modern internal auditing suggests that there is no difference in internal and
operational auditing. The modern internal auditing performs both protective as well as constructive
functions.
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Qualities of Operational Auditor

The Auditor should possess some very essential personal qualities to be effective in his work.
1.His knowledge beyond accounting and finance would be scanty and this is reason which should make
him even more inquisitive.
2.He should ask the who, why, how of everything. He should try to visualise whether simpler
alternative means are available to do a particular work.
3.He should try to see everything as to whether that properly fits in business frame and organisational
policy. He should be persistent and should possess attitude of skepticism.
4.He should imbibe collaborative and constructive approach rather than fault-finding approach and
should give feeling that his efforts are to help to attain an improved operation and not merely fault
finding.
5.If auditor succeeds in giving feeling of help and assistance through constructive criticism, he will be
able to obtain co-operation of persons who are involved in operations. Try to develop a team
comprised of people of different backgrounds. The involvement of technical people in operational
auditing is generally helpful.
Why Operational Audit?

The need for operational auditing has arisen due to inadequacy of traditional sources of information for
effective management of company where management is at a distance from actual operations due to
layers of delegation of responsibility, separating it from actualities in organisation.
Operational audit is considered as a specialised management information tool to fill the void that
conventional information sources fail to fill. Conventional sources of management information are
departmental managers, routine performance report, internal audit reports, and periodic special
investigation and survey. These conventional sources fail to provide information for best direction of
departments. The shortcomings of these sources can be stated as under:
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(I)Executives and managers are too preoccupied with implementation of plans and achieving of targets.
(ii)Managers or their aides are generally relied upon for transmitting information than for booking for
information or for analysing situations.
(iii)The information that is transmitted by managers is not necessarily objective - often it may be
biased for various reasons.
(iv)Conventional internal audit reports are often routine and mechanical in character and have
definite leaning towards accounting and financial information. They are also historical in nature.
(v)Other performance reports contained in annual audited accounts and routine reports prepared by
operating departments have own limitations.
(vi)Surveys and special investigations, are very useful but these are at best occasional in character.
Also, they are costly, time consuming and keep departmental key personnel busy during the period
they are on.
Types of Operational Audits:
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Functional Audits: Categorizing the activities of business, Focuss on one function of the organization say
production engineering. Considerable expertise in one area. Disadvantage is it fails to evaluate
interrelated functions.
Organizational Audit: Focusses on entire Organizational unit
Special Assignments: They arise at the request of management.
Objectives of Operational Audit

ÜAppraisal of Controls
ÜEvaluation of Performance
ÜAppraisal of Objectives and Plans
ÜAppraisal of Organisational Structure: Organisational structure provides line of relationships and
delegation of authority and tasks.
In evaluating organisational structure, aspects that may be considered by operational auditor may be
as follows:
(i)Is organisational structure in conformity with management objectives?
(ii)Whether organisational structure is drawn up on basis of matching of responsibility and
authority?
(iii)Whether line of responsibility from top to bottom is clearly discernible from structure?
(iv)Whether delegation of responsibility and authority at each stage is clear and overlapping are
avoided?
Review of system & procedures:

To determine whether the system or procedure is meeting current requirements, the following among other
things should be considered:
1.Is the system or procedure designed to promote achievement of company's objectives, and is it
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accomplished effectively?
2.Does the system or procedure operate within framework of organisational structure?
3.Does system or procedure adequately provide methods of control in order to obtain maximum
performance with least expenditure of time and effort?
4.Does system or procedure provide means for effective coordination between one deptt and another?
5.Have all required functions been established?
Management Audit Questionnaire:

Ït is an important tool for conducting the management audit.
Üsed to make an inquiry into important facts by measuring current performance.
¨Primary Objective
lHighlights weaknesses & deficiencies of organization.
lReview management functions of planning, organizing, directing & controlling. Evaluating an
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organization's ongoing operations by examining its major functional areas.

¨Designing of MAQ-
lThere are three possible answers to the MAQ: Yes, No, Not Applicable
Ø“Yes” indicates acceptable performance
Ø“No” indicates unacceptable performance & therefore, it requires written explanation
Ø“Not Applicable” indicates that the question does not apply.
Differences between Financial and Operational Auditing

(i)Purpose - The financInternal Auditorl auditing is concerned with opinion whether historical
information recorded is correct or not, whereas operational auditing emphasizes on effectiveness
and efficiency of operations for future performance.
(ii)Area - FinancInternal Auditorl audits are restricted to matters directly affecting approprInternal
Auditorteness of presented financInternal Auditorl statements but operational auditing covers all
activities that are related to efficiency and effectiveness of operations directed towards
accomplishment of objectives of organization.
(iii)Reporting -The financInternal Auditorl audit report is sent to all stockholders, bankers and other
persons having a stake in the Organisation. However, operational audit report is primarily for
management.
(iv)End Task - The financInternal Auditorl audit has to report findings to persons getting the report as
its end objective, however, the operational auditing is not limited to reporting only but includes
suggestions for improvement also.
DUE DILIGENCE,
INVESTIGATION &
FORENSIC AUDIT
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DUE DILIGENCE, INVESTIGATION &

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FORENSIC AUDIT
Due Diligence:
=Process of investigation,
=Performed by investors,
=Investigation into details of a potential investment
=Such as an examination of operations &
=Management & the verification of material facts.
=It involves conducting inquiries for timely, sufficient &
l Accurate disclosure of all material information which may influence outcome of the transaction
Difference between due diligence and audit:

l Audit: An independent examination & Evaluation of the financial statements with a view to express
an opinion thereon
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l Due Diligence: An examination of a potential investment To confirms all material facts of
prospective business opportunity. It involves review of financial & non-financial records as deemed
relevant & material.
Importance of Due Diligence

There are many reasons to carry out Due Diligence including
=To confirm that the business is what it appears to be;
=To identify potential 'deal killer' defects in target company and avoid bad business transaction;
=To gain information that will be useful for valuing assets, defining representations and warranties,
and/on negotiating price concessions; and
=To verify that transaction complies with investment or acquisition criteria.
Classification of Due Diligence

ÜCommercial/Operational: Evaluation from commercial, strategic and operational perspectives. For
example, whether proposed merger would create operational synergies.
ÜFinancial: Analysis of books of accounts and other info pertaining to financial matters of entity.
ÜTax: The accountant has to look at tax effect of merger or acquisition.
ÜInformation system: It pertains to all computer systems and related matter of entity.
ÜLegal: Legal aspects of functioning of Entity are reviewed.
ÜEnvironmental Due Diligence: It is carried out in order to study entity's environment, its flexibility
and adaptiveness to acquirer entity.
ÜPersonnel Due Diligence: to ascertain that entity's personnel policies are in line or can be
changed to suit the requirements of restructuring.
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Financial Due Diligence
In order to achieve the objective, the process can include any or all of the following objectives.
a)Brief history of target Co. & background of promoter
b)Accounting policies:
c)Review of F.S.
d)Taxation:
e)Cash flow
It is necessary to check that:
(a)Is the company able to honor its commitments to its trade payables, to the banks, to
government and other stakeholders?
(b)How well is the company able to turn its trade receivables and inventories?
(c)How well does it deploy its funds?
(d)Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e)What is investment pattern of company and are they easily realisable?
f)Financial projection: For next 5 years with detailed assumptions & workings
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g)Management & employees

h)Statutory compliance:
The objective of due diligence will look specifically at the following:
1. Hidden Liabilities
ØShow cause notice not matured into demand. Maybe material & imp.
ØLetters of comfort to Banks & Financial Institutions.
ØTax liab. Under direct & indirect tax
ØLong pending sales tax assess.
ØPending final assess. of custom duty
ØAgreement to buyback shares at stated price
ØFuture lease liability
ØUnresolved labour litigations
2. Over-Valued Assets
ØUncollected/uncollectable receivables.
ØObsolete, slow non-moving inventories or inventories valued above NRV
ØUnderused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
ØIntangible assets of no value
ØLitigated assets and property.
ØInvestments carried at cost though realizable value is much lower.
Ø Investments carrying a very low rate of income / return.
Ø Infructuous project expenditure/deferred revenue expenditure etc.
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Work approach to Due Diligence
Ø Reviewing & reporting on financials submitted by target Co.
Ø Assessing the business first hand by a site visit
Ø Working through the due diligence process with acquisitioning Co. or investor by defining key
areas
Ø Helping prepare an offer based on completing of due diligence
How to conduct Due Diligence

Ø Start with open mind. Identify trouble spots & ask for expln.
Ø Get best team of people. You may hire DD experts.
Ø Get help in all areas to get 360-degree view of Co.
Ø Talk to customers, suppliers, business partners, and employees are great resources.
Ø Take a risk mgt. approach.
Ø Prepare comprehensive report detailing compliances & substantive risks/issues
Contents of Due Diligence Report
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Ø Executive summary
Ø Intro.
Ø Background of Co.
Ø Objective of DD
Ø Terms of reference & scope of verification
Ø Brief history of Co.
Ø Assessment of Financial Liabilities
Ø Assessment of valuation of assets
Ø Assessment of Net Worth
Ø Comment on future projections.
Ø Sugesstion on ways to improve
INVESTIGATION
Investigation: Systematic & in- depth examination or inquiry to establish a fact or evaluate a specific
situation
Relationship between investigation and Audit:
Basic Investigation Audit
Nature Voluntary Mandatory
Observance of a/c Analytical, involves application of Compliance of GAAP,
principles mind Audit procedures & disclosures
Establish a fact Verify f/s give t&f view of

Objective
SOF of entity
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Periodicity Not limited by rigid time frame Qtrly, half yearly or annually
Reporting To person on whose behalf To owners of business entity
investigation carried out
Scope Governed by statute/non statutory Scope is wide, for statutory audit
governed by law
Steps in Investigation
1.Determination of objectives and establishment of scope of investigation.
2.Formulation of the Investigation programme.
The investigation programme should be drawn up having regard to:
(a)Nature of business
(b)Structure of business organization
(c)Instructions from client embodying objectives and scope of work
(d)Consequent scope and depth of investigation
(e)Necessity to extend investigation into books and records belonging to others.
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(f)Investigator concentrate on areas considered relevant rather than undertaking

wide-range verification.
3.Examination and study of various records by reference to appropriate evidence.
4.Analysis, processing and interpretation of findings.
5.Preparation of report and drawing up of conclusions.
Important issues in mind while preparing Investigation report

Ø Report should not contain anything irrelevant
Ø Every word/expression to be used properly to minimize possibility of diff. interpretation
Ø Facts & conclusions should be linked with evidence
Ø Basis & assumptions to be explicitly stated. Should be reasonable & not in conflict with
the objectives of entity.
Ø The Report should clearly spell out nature & objective of assignment, its scope & limitations
Ø Opinion should appear in final para of report
Special issues in investigation

Ø Whether to adopt cent percent verification approach or adopt selective verification
·It Depends on circumstances, if Doubts is on Cash defalcation examine all cash vouchers in case
of Profitability concern - adopt selective approach
Ø Whether reliance can be places on already audited statement of account
·Doubt on audited statement of a/c then no quesion of reliance
·Value of business/share/Goodwill à rely on audited materials
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Ø Whether neccesarly require Assistance of expert?

·Get written consent of client
Ø Investigation out of disputes & conflicting claims
·Remain above disputes, be Alert of possibilities of info available to be prejudiced. It Requires
maturity & experience
Ø Basis of opinion of an investor
·Refrain from issuing speculative opinion and be Confined on opinion to established facts, nothing
more
Ø Whether an investigator can make futuristic statements
·Should refuse to be futuristic
Ø Whether to Retain working papers or not?
·Take representation letter from appointing authority
·Help in correlating facts & events while drafting report
Factors to consider for studying economic & financial position of business – (Study of overall
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picture):
Ø Adequacy of fixed & working capital
Ø Trend of sales & profits in future?
Ø Whether profit maintained in future would yield adequate return on capital employed?
Ø Whether business operating at 100% capacity or improvements can be made?
Factors in Assesing the future maintenable turnover

Ø Trend: Past sales increase consistent or fluctuating.
Ø Marketability: Is it possible to extend sales to new market?
Ø Political & economic considerations: Are policies of govt likely to extend market of goods to
other countries?
Ø Competition: Is demand for competitor's products increasing?
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Types of Investigation
Statutory Non-Statutory
Investigation into the Investigation of

affairs of a Company ownership of a
Company (Sec 216)
Investigation Investigation Investigation Investigation on Investigation Investigation

on behalf of for valuation of frauds behalf of bank on behalf of in connection
incoming of shares of or financial individual or with review
partner pvt Co. institution firm of profit
proposing to proposing to forecast
advance loan to buy a
a co. business
By inspector By SFIO Other Cases
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through order of (Sec 212)

CG (Sec 210)
Investigations Under Companies Act, 2013

Investigation into the affairs of a company (Sec 210)
Where CG is of opinion, that its necessary to investigate into affairs of a company-
a)on receipt of a report of Registrar or inspector;
b)on intimation of a SR passed by a Co. that affairs of the company ought to be investigated or
c)in public interest,
it may order (discretionary) an investigation into the affairs of the company.
Order passed by court or Tribunal requiring investigation à CG shall order investigation into affairs
of Co.
Investigation into the affairs of a company by SFIO (Serious Fraud Investigation Office) (Sec 212)
Where report states that fraud taken place in Co. à as a result any director, KMP, other officer of Co. or
any other person or entity, has taken undue advantage or benefit (in form of asset, property or cash or
any other manner) à CG may file application before Tribunal for appropriate orders of disgorgement of
such asset, property or cash and holding such director, KMP, other officer or other person personally
liable without any limitation of liability.
Power of Inspector to conduct investigation into affairs of related companies etc (Sec 219)
It provides that an inspector may also investigate, subject to approval of CG, into affairs
of—
a)any other body corporate which is, or has at any relevant time been company's subsidiary or
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holding Co, or a subsidiary of its holding Co;
b)any other body corporate which is, or has at any relevant time been managed by any person as
MD or as manager, who is, or was, at relevant time, MD or manager of company;
c)any other body corporate whose BOD comprises nominees of company or is accustomed to act in
accordance with directions or instructions of company or any of its directors; or
d)any person who is or has at any relevant time been Co's MD or manager or employee.
Evidence from place o/s India: If in course of investigation, application made to competent court in India by
inspector stating that evidence may be available in a country or place o/s India, such court may issue a
letter of request to court or authority in such country or place for seeking such evidence.
Authentication of Report: under Sec 233 The report shall be authenticated either by
·seal of the Co. whose affairs have been investigated, or
·by a certificate of a public officer having custody of report, and
such report shall be admissible in any legal proceeding as evidence in relation to any matter
contained in report.
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General approach for investigation under Cos. Act,2013
1.Clarity of Terms of reference: Obtain clarity on Term of reference in writing.
2.Scope of investigation: Determined on basis of Term of reference
3.Period of investigation: Based on Term of reference & Scope
4.Framing of programme: For investigating in systematic manner.
5.Using the work of experts: Engineers, lawyers etc
6.Legal requirements & investigation report: Report should be fair & unbiased
Investigation of ownership of Co
Section 216 of Companies Act, 2013, CG may appoint one or more inspectors to investigate and
report on matters relating to company, and its membership for purpose of determining true persons,
(a)Who is financially interested in success or failure, whether real or apparent, of the company; or
(b)Who are able to control or to materially influence policy of company; or
(c)Who have beneficial interest in shares of a company or who are or have been beneficial owners
or significant beneficial owner of a company.
Investigation on behalf of Incoming Partner

Steps involved are as follows
a.Ascertain History of inception & growth of firm
b.Study & scrutiny Record of profitability of firm's business
c.Examination of asset & liability position
d.Position Orders in hand and quality of clientele
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e.Composition & quality of key personnel
f.Reasons for offer of admission
g.Record of capital employed & rate of return
h.Computation of goodwill on admission & retirement
Investigation in Valuation of Shares of Pvt Co.

There are 2 main methods of valuation.
1st method: Net worth Basis.
Net worth is divided by no. of shares comprising equity capital to arrive at value for one share.
When this method is followed, goodwill of business, and non-trading assets (like investments) based
on estimated future maintainable profit, included among the assets to arrive at amount of net worth.
2nd method: Yield Basis
Ü Avg profit earned by business during preceding 5 to 7 years is computed.
Ü On the assumption that same would continue to be earned in future, value of business is
calculated by capitalising it at reasonable rate of interest.
Ü If rate assumed is high, value of the business would be smaller.
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Ü Correspondingly, it would be high if rate of interest applied is low. A provision of risk factor and
restriction on transfers in value of shares is made by varying the rate of interest applied.
Ü The rate of return that an investor expects to earn in a business of the type in which the Co. is
engaged, is ascertained from prices of the shares of cos. engaged in a similar business quoted on stock
exchange.
To investigate profitability of business to judge accuracy of schedule of repayment furnished by

borrower & value of security in form of assets of business and those which will be created out
of loan, investigating accountant should take under-mentioned steps:
(a)Prepare condensed income statement from Statement of P&L for previous 5 years, showing items of
income and expenses, amounts of gross and net profits earned and taxes paid annually during each of
5 years. Amount of maintainable profits determined on basis of foregoing statement should be
increased by amount by which these would increase on investment of borrowed funds.
(b)Compute under-mentioned ratios separately to show trend as well as changes that have taken
place in financial position of Co:
(i)Sales to Average Inventories held. (ii)Sales to Fixed Assets.
(iii)Equity to Fixed Assets. (iv)Current Assets to Current Liabilities.
(v)Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
(vi)Equity to Long Term Loans. (vii)Sales to Book Debts.
(c)Return on Capital Employed.Enter in separate part of statement break-up of annual sales
product-wise to show their trend.
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Steps involved in the verification of assets and liabilities included in Balance Sheet of borrower
company which has been furnished to Bank
a.Fixed Assets: Gross value, Depreciation, Charge on asset, Revaluation
b.Inventory : Nature & types, if pledged for loan then disclose amt of loan
c.Trade Receivables:
4 Debts where credit period not expired
4 Debts due within 6 months
4 Debts due but not recovered for over 6 months
d.Investments: Date of purchase, cost, nominal & market value
e.Secured & unsecured loans: Details of assets pledged should be disclosed
f.Provision for tax: PY upto which tax assessed
g.Insurance: Schedule of insurance policies
h.Contingent liabilities: Ensure completeness of disclosure
Types of Frauds: ·Fraudulent Financial Reporting ·Mis-appropriation of Assets:
Payroll Frauds – Data Frauds – Technology related Frauds –
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•Extra number of employees C h a n g e i n Employing hostile Software Prog. or
•Extra hours computer data malware attacks
•Calculation of net pay by Destroy, suppress Phishing mails
transferring rounding off amount to or insert records Vishing – Voice Mail
personal account. Using open fields Smishing - Text messages
•Not deactivating the retired in computerized Whaling – Targeted phishing on high
employees’ Ids accounting network individuals
•Fictitious employees/ workers paid system Card duplications
salary. Stealing confidential data
Banking related Frauds – Others –

Forged Signatures Teaming and Lading
Cheque Frauds - Alteration in amts, Alteration in Process houses mixing inferior quality material to
a/c titles, Kite flying sale good quality material
Cash lending during working hours Pilferage and theft in super markets
Missing notes in bundles Selling classified information,
Use of same notes bundles by two branches Withholding information from customer about
Wrong posting in other accounts free product schemes, discount and concession.
Misuse of sensitive stationery Enhancement of performance
ATM transaction misuse Taking advantage of disaster or natural calamity.
Using PINs of debit card/credit card holder Trust Fds
Advances - inflated stock statements, inflated Fictitious journal entries to inflate expenses or
projections, forged/duplicate land documents, L/Cs income.
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Fraud at operational level employees
(i) Tampering of Cheques/Drafts/On-line payments/receipts: On-line payments generally are
considered a transparent mechanism to prevent the above frauds.
(ii) Off Book Frauds: Fraud perpetrator misappropriates cash before these are recorded in books or
before sale is recorded in books.
(iii) Cash Misappropriation: Cash is misappropriated after accounting entries are already passed in
the books.
(iv) Teeming and Lading: Cash deposits or cheques collected from customers being overlapped with
collections from subsequent customers and amount collected is diverted to personal A/c.
Reconciliation of customer accounts at single point of time and confirmation from customers for
amounts outstanding in their accounts helps in identifying any leakage in collections.
(v) Fraudulent Disbursements: Issuing or submission of false bills, or personal expense bills being
converted into official expenses bills.
(vi) Expense Reimbursement Schemes: Multiple expense claims based on duplicate bills or photostat
copies.
(vii) Payroll Fraud: Payment to non-existent employees or in a contractual arrangement inflating of
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manpower resources than those actually deployed while billing the client.
(viii) Commission Schemes: The salesman exaggerates sales through fictitious billings to earn higher
commission or alter sales prices of products sold from those stipulated by Co. or share sales volumes
achieved with other employees to share higher commission.
Situations in which frauds can occur:

A.Cash Receipts
(i) Issuing a receipt to payee for full amount collected and entering only part of amount on
counterfoil.
(ii) Showing larger cash discount than actually allowed.
(iii) Adjusting cash sale as credit sale, and raising debit in account of customer.
(iv) Writing off good debt as bad and irrecoverable to cover up amount collected which has been
misappropriated.
(v) Short-debiting customer's account in ledger with intention to withdraw difference when full
amount payable by him is collected.
Audit procedures:
üCarbon copies of receipts marked 'duplicate', should be scrutinised to confirm that they are in fact
copies of receipts issued earlier.
üThe record of sales of scrap of waste paper, that of collection of rents from labourers temporarily
accommodated in the company's quarters, that of refunds of amounts deposited with the electric
supply co., or any other Government authorities should be examined for finding out if any of these
amounts have been misappropriated.
üCash sales should be vouched in detail.
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ü Recoveries from customers and sundry parties should be checked with the copies of receipts issued
to them; deductions made on account of cash discounts should be reviewed.
ü All withdrawals from the bank should be checked by reference to corresponding entries in the bank
pass book.
B.Inflating cash payment – Cash payment frauds may be in the form of:
(i)Making double payment of invoice or paying false invoice.
(ii)Paying personal expenses out of business by falsifying details. e.g., showing betting losses as
advertisement charges.
(iii)Withdrawing unclaimed credit balances of customers or amounts falsely credited in accounts of
parties.
(iv)Falsely adjusting refund in account of customer and withdrawing credit balance.
(v)Wrong totalling of wage sheets and misappropriating the excess amount withdrawn from the
bank for payment of wages.
Audit procedures:
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ü All evidence as regards cash payments made, including acknowledgement by parties, should
be carefully scrutinised.
ü In case where a figure appears to have been erased or altered on receipts issued by party, on
reference to party concerned, actual amount paid to him should be confirmed.
ü All payments by bearer cheques should be examined.
ü The system of recording of wages should be reviewed, for possible over-totalling of wage
sheets, and entries in them of dummy workmen.
ü The system of ordering and receiving goods reviewed to confirm that no payment made in
respect of supplies not received.
ü Confirmations should be obtained from partners or Directors in respect of amounts shown to
have been paid to them.
C.Frauds through suppliers' ledger –

(i)Adjusting fictitious or duplicate invoices as purchases in accounts of suppliers and subsequently
misappropriating amounts when payments are made to suppliers in respect of these invoices.
(ii)Suppressing Credit Notes issued by suppliers and withdrawing corresponding amounts not
claimed by them.
(iii)Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that same
have been paid to them.
(iv)Accepting purchase invoices at prices considerably higher than market prices and collecting
excess amount, paid in cash, from suppliers.
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Audit procedures
ü The Purchase Journal should be vouched by reference to entries in Goods Inward Book and suppliers'
invoices to confirm that amounts credited to the accounts of suppliers were in respect of goods, which
were duly received and the suppliers' accounts had been credited correctly.
ü All suppliers should be requested to furnish statements of their accounts to see whether or not any
balance is outstanding or due so as to confirm that allowances and rebates given by them have been
correctly adjusted and were duly authorized by the authorized person/ officer.
ü Examine system of internal control w.r.t purchase orders and possibilities of collusion with suppliers.
D.Customers Ledger
(i)Teeming & lading
(ii)Misappropriating amount collected from customer and subsequently adjusting his account by
crediting amount on account of allowance or a rebate for excess price charged.
(iii)Crediting amount received from a customer to account of another customer and subsequently
withdrawing amount wrongly credited.
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Audit procedures:
ü Spl attention should be paid to allowances adjusted on account of goods returned or difference in price
ü To confirm that accounts of customers have been debited in respect of goods supplied to them, entries in
Order Book should be cross-checked with those in Sales Day Book where the same is kept.
ü The accountant should obtain confirmation of customers in respect of amounts standing in accounts.
ü Those of them who have no balance in accounts should be requested to confirm statement of their
account (which should be sent to them) for ascertaining that the entries shown therein were
genuine.
E.Inventory Fraud
Ÿ Employees remove goods from premises
Ÿ Theft of goods concealed by writing them off
Ÿ Inventory records manipulated by employees
Ÿ Inflating quantities issued for production for defalcating raw material
Verification Procedure for Defalcation of inventory - Such thefts usually are possible through collusion
among no. of persons. Therefore, for their detection, entire system of receipts, storage and despatch of all
goods, etc. should be reviewed to localise the weakness in system.
The determination of factors which have been responsible for theft and establishment of guilt would
be difficult in the absence of:
(a)a system of inventory control, and existence of detailed record of the movement of inventory, or
(b)availability of sufficient data from which such a record can be constructed.
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The step in such an investigation is to establish the different items of inventory defalcated and their
quantities by checking physically the quantities in inventory held and those shown by Inventory Book.
Defalcations of inventory, sometimes, also are committed by mgt, by diverting a part of production and the
consequent shortages in production being adjusted by inflating the wastage in production; similar
defalcations of inventories and stores are covered up by inflating quantities issued for production.
For detecting such shortages, investigating accountant should take assistance of an engineer. For that he
will be more conversant with factors which are responsible for shortage in production and thus will be able
to correctly determine the extent to which the shortage in production has been inflated.
In this regard, guidance can also be taken from past records showing the extent of wastage in production in
the past. Similarly, he would be able to better judge whether the material issued for production was
excessive and, if so to what extent.
The per hour capacity of the machine and the time that it took to complete one cycle of production, also
would show whether the issues have been larger than those required.
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Investigation on behalf of an Individual or Firm Proposing to Buy a Business:
A.Proprietary concerns or partnerships
ü Reasons for sale & effect on turnover & profits
ü Length of lease
ü Unexpired period of patents
ü Age & prospects of employees continuing
ü Valuation of Goodwill
B.Ltd Co.
ü Auth & issued share capital
ü Uncalled liability on shares
ü Capital divided in classes à rights of each class
ü Mortgage or charge on assets à registrar of charges
ü Price at which shares offered
wPublic co -> quoted price
wPvt co -> valuation
Investigation on behalf of a Bank/ FI Proposing to Advance Loan to a Company

üPurpose for which loan is required
ü Schedule of repayment submitted by borrower including assumptions of cash profits & cash
available for repayment
üFinancial standing & reputation of business enjoyed by directors & officers
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üCo. authorised by MOA to borrow money

üHistory of growth & development & performance in past 5 years
üWhether any loan application made to other bank & if so reasons for rejection
Investigation in connection with review of Profit/Financial Forecasts Investigations which involve

examination of future profits like,
(1)Profit reports can be required as part of general investigation into purchase of a business or,
(2)By banks and financial institutions with regard to project cash flow and profitability statements
for appraisal of loan applications submitted by the intending borrowers.
Ü All forecasts depend on nature of business with its numerous and substantial uncertainties.
Ü Therefore, such forecasts are not capable of verification in same way as F.S. which present
results of a completed accounting period.
·Normally, such situations involve special review as these depart from auditor's traditional role of
expressing an opinion in relation to past events.
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CA Ravi Agarwal's
Need for Forensic Audit
Number of fraudulent activities has been increasing all over the world.
Consequently, businesses are exposed to risks of fraudulent activities.
With all of the recent corporate accounting scandals the media has made Forensic Accounting &
Forensic Auditing into a growth industry
Forensic Accounting:
Integration of Accounting, auditing & investigative skills is known as Forensic Accounting. Study &
Interpretation of Accounting evidence.
Application of Accounting Methods
Ÿ to track & collect forensic evidence,
Ÿ usually for investigation & prosecution of criminal acts
Ÿ Such as embezzlement or fraud.
Forensic Accounting can sometimes be referred to as Forensic Auditing.
Forensic Investigation:
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Ÿ Also known as forensic audit is the examination of documents &
Ÿ Interviewing of people to extract evidence.
Ÿ Forensic Accounting
wExamines individual/company financial records
wAs an investigative measure
wThat attempts to derive evidence suitable for use in litigation.
Fraud Auditing:
Ÿ Precise, careful & detailed review
wof financial documents conducted when fraud is suspected.
Ÿ Some entities do this as
wPrecaution to prevent fraud from happening &
wTo catch it before the loss magnifies.
wFraud Audit however is not an investigation.
Ÿ Fraud auditing is used to identify fraudulent transactions,
wNOT to figure out how they were created.
Ÿ Fraud auditors often go outside the books of accounts to find fraudulent transactions
Audit vs forensic audit

Particulars Other Audits Forensic Audit
Objectives Express an opinion as to Whether fraud has actually taken place in books
'True & fair' presentation
Techniques Substantive & compliance Investigative, substantive & in-depth checking
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Period Accounting period No such limitation
Verification of stock, Relies on mgt certificate Verification of suspected/selected

estimation realizable value of items where misappropriation
assets, provisions, liability etc expected
Off balance sheet items (like Vouch arithmetic accuracy Regulatory & propriety of these
contracts etc) transactions & contracts examined
Adverse findings, if any Negative or qualified Legal determination of fraud impact
opinion & identification of perpetrators
A Forensic Auditor often Involved in:

1.Fraud Detection: Investigating and analyzing financial evidence, detecting financial frauds and
tracing misappropriated funds
2.Computer Forensics: Developing computerized applications to assist in recovery, analysis and
presentation of financial evidence.
3.Fraud Prevention: Either reviewing internal controls to verify their adequacy or providing
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consultation in development and implementation of internal control framework aligned to

organization's risk profile.
4.Providing Expert Testimony: Assisting in legal proceedings, including testifying in court as expert
witness and preparing visual aids to support trial evidence.
Importance of Forensic Auditors:

ŸFraud Prevention
ŸFraud Detection
ŸRisk Management
ŸInvestigative Methodologies
ŸInternal Control Implementation & Review
ŸCompliance & Regulatory Functions
ŸEvidence Collection & Analysis
ŸAssignments with Regulatory Agencies like SEBI, RBI etc.
Characteristics of Forensic Auditor

Out of the Box Thinking ,
Creativity,
Curiosity,
Confidence,
Discretion,
Detail oriented,
Objectivity & Credibility
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Skills of Forensic Auditor
Auditing standards,
Accounting & business reporting systems,
Criminology,
Data Analytics,
Evidence Gathering,
IT
Services rendered by Forensic Auditors

ØCrafting questions to be posed
ØResponding to questions posed
ØIdentifying individuals to be most knowledgeable of facts
ØIdentifying documents to be requested and/or subpoenaed
ØEvaluating produced documentation and information for completeness
ØAnalysing produced records and other information for facts
ØIdentifying and preserving key evidence
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ØIdentifying alternative means to obtain key facts and information
Areas where services of Forensic Audit are in great demand in following areas
l Criminal Investigation: Matters relating to financial implications services of forensic accountants are
availed of. Report of accountants is considered in preparing and presentation as evidence.
l Professional Negligence Cases: Professional negligence cases are taken up by forensic

accountants. Non confirmation to Generally Accepted Accounting Standards (GAAS) or
noncompliance to auditing practices or ethical codes of any profession, Forensic Auditors are
needed to measure loss due to such professional negligence or shortage in services
l Arbitration service: Forensic accountants render arbitration and mediation services for business
community. Their expertise in data collection and evidence presentation makes them sought after
in this specialized practice area.
l Fraud Investigation & Risk/Control Reviews: Forensic accountants render such services both when
called upon to investigate specific cases as well for review of or implementation of Internal Controls.
Another area of significance is Risk Assessment and Risk Mitigation.
l Settlement of Insurance claims: Insurance cos engage forensic accountants to have accurate
assessment of claims to be settled. In case policyholders seek help of forensic accountant when they
need to challenge claim settlement as worked out by insurance companies. A forensic accountant
handles claims relating to consequential loss policy, property loss due to various risks, fidelity insurance
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and other types of insurance claims.
l Dispute settlement: Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trademarks cases, liability
arising from breach of contracts and so on.
Process of forensic Accounting

1.Initialization:
Ø Clarify and remove all doubts as to the real motive, purpose and utility of assignment.
Ø It is helpful to meet client to obtain understanding of important facts, players and issues at hand.
Ø A conflict check should be carried out as soon as relevant parties are established.
Ø Carry out a preliminary investigation prior to development of detailed plan of action. This will allow
subsequent planning to be based upon a more complete understanding of issues.
2.Develop Plan: Consider the knowledge gained by meeting with client and carrying out initial investigation
and set out objectives to be achieved and methodology to be utilized to accomplish them.
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3.Obtain relevant evidence: The evidence should be sufficient to ultimately prove identity of fraudster(s),
mechanics of fraud scheme, and amount of financial loss suffered.
4.Perform the analysis:

The actual analysis performed will be dependent upon the nature of the assignment and may involve:
Ÿ calculating economic damages;
Ÿ summarizing a large number of transactions;
Ÿ performing present value calculations utilizing appropriate discount rates;
Ÿ performing a regression or sensitivity analysis;
Ÿ utilizing a computerized application such as a spread sheet, data base or computer model
Ÿ utilizing charts and graphics to explain the analysis.
5.Reporting
Ÿ Issuing report is final step of fraud audit. Auditors will include info detailing fraudulent activity, if any
has been found.
Ÿ The client will expect report containing findings of investigation, including summary of evidence, a
conclusion as to amount of loss suffered as result of fraud and to identify those involved in fraud.
Ÿ The report may include sections on nature of the assignment, scope of investigation, approach utilized,
limitations of scope and findings and/or opinions.
Ÿ The report will include schedules and graphics necessary to properly support and explain findings.
Ÿ The report will also discuss how fraudster set up the fraud scheme, and which controls, if any, were
circumvented.
Ÿ It is also likely that investigative team will recommend improvements to controls within the
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organization to prevent any similar frauds occurring in future.
Ÿ The forensic auditor should have active listening skills which will enable him to summarize facts in
report. It should be kept in mind that report should be based on facts assimilated during the process
and not on the opinion of person writing the report.
6.Court Proceedings: Evidence gathered will be presented in court proceedings & team members may be
called.
Forensic Audit Techniques

(I)General Audit Techniques
•Testing defenses: A good initial forensic audit technique is to attempt to circumvent these defenses
yourself. The weaknesses you find within organizations control will guide you down sea path taken by
suspected perpetrators. This technique requires you to attempt to put yourself in shoes and think like
your suspect.
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(II)Statistical & Mathematical Techniques:
ŸTrend Analysis:
ØBusinesses have cycles and seasons much akin to nature itself.
ØAn expense or event within business that would be analogous to snowy day in middle of summer is
worth investigating.
ŸRatio Analysis:
ØAnother useful fraud detection technique is calculation of data analysis ratios for key numeric fields.
ØLike financial ratios indicate financial health of company, data analysis ratios report on fraud health
by identifying possible symptoms of fraud.
(III)Technology based /Digital Forensics Techniques:

ØEvery transaction leaves digital footprint in today's computer-driven society.
ØClose scrutiny of relevant emails, accounting records, phone logs and target company hard drives is
requisite facet of any modern forensic audit.
ØBefore taking steps such as obtaining data from email etc. take appropriate legal advice so that it
doesn't amount to invasion of privacy.
ØDigital investigations can become quite complex and require support from trained digital investigators.
ØHowever, many open-source digital forensics tools are available to assist in phase of investigation.
(IV)Computer Assisted Auditing Techniques (CAATs):
ØThese are computer programs that auditors uses to process data of audit significance contained in
client's information systems, without depending on him.
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(V)Generalised Audit Software (GAS):

uIt is class of CAATs that allows auditors to undertake data extraction, querying, manipulation,
summarization and analytical tasks.
uIt focuses on fully exploiting the data available in entity's application systems.
uIt support auditors by allowing them to examine entity's data easily, flexibly, independently and
interactively in data-based auditing.
uUsing GAS, auditor can formulate range of alternative hypotheses for particular potential
misstatement in subject matter and then test those hypotheses immediately.
u“What if” scenarios can be developed with results and auditors can examine generated report rapidly.
Currently, latest versions of GAS include Audit Command Language (ACL), Interactive Data
Extraction and Analysis (IDEA) and Panaudit.
(VI)Common Software Tool (CST):

Ø Due to shortcomings of GASs, CSTs have become popular over period. Spreadsheets (like MS Excel,
Lotus, etc.), RDBMS (like MS Access, etc.) and Report writers (like Crystal reports, etc.) are few
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examples of CSTs.
Ø Their widespread acceptability is due to its instant availability and lower costs.
Ø While spreadsheets may be extremely easy to use due to its simplicity and versatility, other CSTs may
need some practice.
(VII)Data Mining Techniques:

Ø It is a set of assisted techniques designed to automatically mine large volumes of data for new, hidden
or unexpected information or patterns.
Ø They are categorized in three ways: Discovery, Predictive modeling and Deviation and Link analysis.
Ø It discovers usual knowledge or patterns in data, without predefined idea or hypothesis about what
pattern may be, i.e. without any prior knowledge of fraud.
Ø It explains various affinities, association, trends and variations in the form of conditional logic.
(VIII)Laboratory Analysis of Physical and Electronic Evidences: Use of Computer Forensics & protection of
evidence.
Sample Table of Contents of a Forensic Audit Report may include following:
1.EXECUTIVE SUMMARY
Background, Origin of Audit, Audit Objective, Proposed Audit Outputs, Audit Implementation Approach
2.RISK ANALYSIS
Internal Environment Risk & External Environment Forces
3.AUDIT PROCESS
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3.1.Preliminary understanding of scope and incident coverage

(i)Identification of all related data elements
(ii)Preparation of a List of "persons of interest" for interview
(iii)Obtain management approval for scope
3.2.Collect Evidence
3.3.Conduct Interviews
3.4.Analyze findings
3.5.Validate Inferences and conclusions
4.EVIDENCE OF RISK EVENTS

Conflicts of interest, Bribery, Extortion, Theft, Fraudulent transactions, Inventory frauds, Misuse of
assets, Financial Statement frauds
5.AUDIT RECOMMENDATIONS
5.1Logical Framework Approach
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5.2Preconditions and Risks
6.GOVERNANCE ON RECOMMENDATION IMPLEMENTATION

6.1 Stakeholders
6.2 Budget Consideratio
PEER REVIEW AND
QUALITY REVIEW
CA Ravi Agarwal's
PEER REVIEW AND

16 QUALITY REVIEW
Definition:
“Peer Review” means
Ø an examination and review of systems and procedures
Ø to determine whether same have been put in place by Practice Unit (PU)
Ø for ensuring quality of assurance services as envisaged by
Ø Technical, Professional and Ethical (TPE) Stds applicable including other regulatory requirements
and
Ø whether same were consistently applied during period under review.”
Peer Review of Auditor:

ŸPeer review of attest function has a special significance.
ŸNature of work is such that it can be easily subjected to peer review.
§It is possible to review work subsequent to its completion which means that one does not get
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disturbed while doing work because of peer review.
§Business environ ment is changing so fast that it is necessary for an auditor to keep improving
his audit techniques & seek a stamp of approval about his competence.
ŸWhether auditor has performed his function satisfactorily or not is arising frequently now.
ŸThere is a considerable gap between what society expects auditors to do & what auditors are
actually required perform by law & terms of their engagement.
ŸTherefore, if work of auditor is questioned, auditor's defense would be that work has happened as
per auditing practices which have been peer reviewed.
ŸPeer review is compulsory for all auditors.
Objectives of Peer Review

The main objective to ensure that in carrying out assurance service assignments, members:
Ÿcomply with technical, Professional & ethical Standards including other regulatory requirements &
Ÿhave in place proper systems including documentation, to amply demonstrate quality of assurance
services.
Thus, primary objective is not to find out deficiencies but to improve quality of services rendered by
members.
Scope of Peer Review

The Reviewer shall cover:
(i)Compliance with Technical, Professional and Ethical Standards.
(ii)Quality of reporting.
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(iii)Systems and procedures for carrying out assurance services.

(iv)Training programmes for staff (including articled and audit assistants) concerned with assurance
functions, including availability of appropriate infrastructure.
(v)Compliance with directions and / or guidelines issued by Council to Members, including Fees to be
charged, Number of audits undertaken, register for Assurance Engagements conducted during year.
(vi)Compliance with directions and / or guidelines issued by Council relating to article assistants and / or
audit assistants, including attendance register, work diaries, stipend payments.
Statement of Peer Review aims to confine scope of review to preceding 3 years since this would establish
the consistency or deviations, if any, in respect of procedures followed by PU.
As per the Statement, Technical, Professional and Ethical Standards – means

(i)Accounting Standards issued by ICAI applicable for entities other than companies under
Companies Act, 2013;
(ii)Accounting Standards prescribed under section 133 of Companies Act; 2013 by CG based on
recommendation of ICAI in consultation with NFRA
(iii)Ind AS prescribed under section 133 of Companies Act 2013 by CG based on recommendation
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of ICAI in consultation with NFRA

(iv)Standards (SA,SQC, Guidence notes, statements)
(v)Framework for preparation and presentation of F.S., Preface to Standards on Quality Control,
Auditing, Review, Other Assurance and Related Services and Framework for Assurance
engagements;
(vi)Provisions of relevant statutes and / or rules or regulations which are applicable in context of
specific engagements being reviewed including instructions, guidelines, notifications, directions
issued by regulatory bodies as covered in scope of assurance engagements.
Assurance Engagement does not include:

(i)Management Consultancy Engagements;
(ii)Representation before various Authorities;
(iii)Engagements to prepare tax returns or advising clients in taxation matters;
(iv)Engagements for the compilation of financial statements;
(v)Engagements solely to assist client in preparing, compiling or collating information other than
financial statements;
(vi)Testifying as an expert witness
(vii)Providing expert opinion on points of principle, such as Accounting Standards or applicability of
certain laws, on basis of facts provided by client; and
(viii)Engagement for Due diligence.
CA Ravi Agarwal's
Applicability
Types of Entities
=SCA of any Banks or Insurance Cos.
Level 1 : (Once in 3 years*)
=CSA of PSU & Central Coop societies with turnover > 250 Cr. Or NW > 5 Cr.
PU which has undertaken
=SA of AMCs/ Mfs
audit of any of the below
=Listed Enterprises (India or o/s India) whether equity/debt
entities:
=Body Corp. including trust covered under public interest entities
=NBFC with deposits >= 100 Cr
=Stat. Audit of Entities preparing the F.S. as per Ind AS
=Entities raised funds from public, banks or financial institutions of over 50 Cr
=Entities raised donations/contributions over 50 Cr
=N.W. > 100 Cr or turnover of 250 cr or above
=Funding by CG/SG of over 50 Cr
Level II: Other than level 1 (i)Statutory / Internal / Concurrent / Systems / Tax audit and / or Departmental Review of Branches /
(Once in 4 years*) Offices of -
*PU which has undertaken (a). Public Sector undertaking (b) Any bank (c). Any Insurance Company
any of under-mentioned (ii) Statutory Audit of Non – Banking Financial Companies (NBFCs) not covered in L-1 above,
assurance services in period (iii) UDIN’s generated by the PU more than the specified number
under review (iv) Any other Practice Unit providing assurance or other services not covered under (I) (ii), and (iii)
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hereinabove
ŸSpecial Review Case: The board based on specific information received from ICAI, or Disciplinary
Directorate, which is in the opinon of board requires Special review of PU. It may Conduct
Special Review of PU
ŸAny Practice Unit not selected for Peer Review, may suo moto apply to Board for conduct of Peer
Review. Board shall act upon same within 30 days from date of receipt of such request.
ŸAn auditee (Client) may request Board for conduct of Peer Review of its auditor (Practice Unit).
Board shall act upon same within 30 days from date of receipt of such request.
Peer Review Board

=Maximum = 12 members; >=50% from Council of ICAI
=Chairman & VC from council (maybe rotated every year)
rd
=Term 2/3 members à 3 years or Council term (earlier)
=Casual Vacancy filled by council
=Member of Disciplinary board/committee not be member of Board
=Quorum:
Ø1/3rd members but not less than 3
ØInclude Chairman (VC in absence)
ØAtleast once in every calendar quarter
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Eligibility of becoming Peer Reviewer
=Member in practice at least 7 yrs of experience.
=Moved from Industry à Practice then 10 yrs Industry + 3 yrs exp. in practice
=Should undergo Requisite training & test
=Furnish declaration as prescribed by Board & should sign the Declaration of Confidentiality
=A member shall Not be eligible if:
Ø Disciplinary Action pending against him
Ø Guilty of misconduct by Council/BOD/DC
Ø Convicted by Comp. court within or o/s India offence involving Moral Turpitude & imprisonment
Ø Partner or personnel has obligation or conflict of intt with PU
Ø He has undergone training/articleship under any of the partner of Practice Unit
=Reviewer shall not accept professional assignment from PU 2 yrs from/before date of appointment
Qualified Assistant
=Should be a CA & No disqualification u/s 8 or 21 of CA Act 1949
=Name intimated to Board & PU before commencement of Peer review
=Should also Sign Declaration of Confidentiality
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=No direct interface with PU or Board

=Should be from firm of reviewer as partner or Paid Asst as per records of ICAI
Approach of Peer Reviewer

a)Gain understanding of Engagement letter that defines scope & nature of assurance engg.
b)No of assurance engagements to be selected requires prof judgment based on replies of questionnaire
& size of PU
c)The PU may have policies and procedures for accepting particular engg. Check compliance with such
P&P.
d)Reviewer may follow combination of compliance & substantive procedures throughout the process.
e)While Evaluating the records consider the following:
ØDetermine Any significant issues, matters, problems, arose during engg have been appropriately
considered, resolved & documented
ØDefine adequacy of Evidence & reasonableness of conclusion
ØDetermine Significant decisions, prof judgment, resolution of significant matters documented
Obligations of Practicing Unit (PU)

A PU shall comply with the following
i)Produce or allow access to record, doc or register maintained by PU
ii)Provide expln or further particulars/info.
iii)All assistance
iv)If info not in legible form à PU will translate to English/hindi à PU shall be responsible and
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accountable for accuracy and truthfulness of translation so provided.
Obligation of Peer Reviewer

=The reviewer shall not take PU's client's file or records examined by him
=The reviewer shall Complete review in prescribed time & submit report to Board
=The Reviewer shall document all his working papers and submit a copy of his working papers to the Board,
if called for by the Board within 18 months of submission of Review Report
Peer Review Process
Selection of Practice
Unit(PU) & Planning Execution Reporting
appointment of Reviewer
Selection of Practice Unit(PU) & appointment of Reviewer (7 Days)

(i)Notification to PU : PU which has been selected for Peer Review shall be notified by Board.
(ii)A detailed declaration cum questionnaire in the form approved by Board shall be submitted by PU
within 7 days from date PU has been notified by Board so that Reviewer to be allotted from Panel of 3
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reviewers can be identified by Board as per declaration cum questionnaire submitted by PU.
(iii)Name of three Reviewers shall be recommended by Board to Practice Unit so selected.
(iv)PU shall select one out of three Reviewers & intimate to Board within 7 days of receipt of
names. (v)The Board shall intimate Reviewer so selected and seek consent within 7 days.
Planning:
i)Questionnaire: On intimation given by Board of Reviewer's consent, PU shall within 2 days furnish
following info to reviewer:
Proceedings against PU or partners or qualified assistants during 3 yrs preceding period of review
i.e. till date of submission of questionnaire
ii)Information to be furnished by Peer Review Board: Board shall call for relevant infor. from the
UDIN Directorate and may share concerned details with Peer Reviewer which shall form part of
Peer Review.
Selection of sample by Reviewer:

(a)The Reviewer shall within 7 days of receiving info. from Practice Unit select sample of assurance
services that he would like to Review and intimate the same to PU & PRB.
(b)The Reviewer may also seek further / additional clarification from PU on info furnished / not
furnished.
(c)The Reviewer shall plan for on–site Review visit or initial meeting in consultation with Practice Unit.
Reviewer shall give PU at least 5 days' time to keep ready necessary records of selected assurance
services.
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(d)Reviewer and PU shall mutually co-operate and ensure that entire Review process is completed within
60 days from date of notifying PU about selection for Review.
Execution
Peer Review Visits: This on-site Review should not extend beyond 7 working days based on size of
PU.
Compliance Review- General Controls
wIndependence
wMaintainence of professional skills & stds
wOutside consultation
wStaff recruitments, Supervision & Developments
wOffice admin
Selection of Assurance Service Engagements for Review:

(a)The no. of assurance service engagements to be reviewed shall depend upon:
¨The SQCs generally prevailing;
¨The size and nature of assurance engagements undertaken by PU.
¨The methodology generally adopted by PU in providing assurance services.
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¨The no. of partners / members involved in assurance service engagements in PU;

¨The no. of locations / branch offices of PU; The Fees charged / received / GST paid by PU.
(b)From initial sample selected at planning stage, Reviewer, in consultation with Peer Review
Board, may reduce or enlarge initial sample size of assurance service engagements for Review.
Review of Records
Compliance Approach: To check controls that audit is performed as per TPE Stds Following areas to
be considered:-
wAssurance services records for administration
wReview & evaluation of system of Internal Controls
wSubstantive tests
wFinancial Statements Presentation & disclosure
wAssurance services conclusion
wAssurance services Reporting
Substantive Approach: Review of workpapers to check work done as per TPE Stds
The Reviewer is required to adopt Combination of the above 2 approach
Reporting
ØBefore making report to Board communicate findings to PU if systems/procedures are deficient or
he needs clarification
ØPU shall reply back within 5 days
ØIf reviewer satisfied - submit P/R Report to Board + initial findings + response of PU (A Copy to
CA Ravi Agarwal's
PU)
ØNot satisfied à Modified report to Board + Initial findings + response of PU (Copy to PU)
ØFollow on Review after 1 year (maybe reduced to 6 months) from date of issue of MR
Peer Review Certificate

On Receipt of Peer Review Report Board shall within 3 months
ØIssue a Peer Review Certificate to PU mentioning validity period.
ØInform PU Certificate can't be issued with reasons + inform due date of follow on review
PU can't continue with expired certificate and all docs will be invalid if signed in intervening period à
so PU should submit docs & get PR completed 1 month before expiry
Inherent Limitations of Peer Review

ØThe reviewer conducts review in accordance with Statement on Peer Review.
ØThe review would not necessarily disclose all weaknesses in compliance of technical standards and
maintenance of quality of assurance services since it would be based on selective tests.
ØAs there are inherent limitations in effectiveness of any system of quality control which happens to be
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subject-matter of review, departure from system may occur and may not be detected.
Difference between Peer Review & Quality Review

Peer review is review of systems and procedures of audit firm. Although sample audit files are inspected by
peer reviewer, it is done for purpose of testing effectiveness of systems and procedures. Intention is not to
find faults but help the firm develop effective systems. It is kind of mentoring process. Peer review is part
of activities of ICAI aimed at improving quality of service.
In contrast, quality review is supposed to act as deterrent. Quality Review Board (QRB) is constituted
by CG and is independent of ICAI. As per Sec 28A of CA's Act, CG has authority to constitute QRB
which carries out supervisory and disciplinary functions. Quality review normally pertains to one
particular audit conducted by audit firm. Main objective is to find errors or inadequacies committed by
auditor. Serious errors lead to disciplinary action against member.
CA Ravi Agarwal's
QUALITY REVIEW
'Quality means doing it right when no one is looking.' Henry Ford
SQC 1 Requires firm's system of quality control should include:
Ÿ Leadership responsibilities for quality within the firm
Ÿ Ethical requirements
Ÿ Acceptance & continuance of client relationships & specific engagements
Ÿ Human resources
Ÿ Engagement performance
Examples of Imp areas as per Quality Review Report 2018-19 in accordance with SQC-1 are:
Ø Whether audit firm establishes and implements policies and procedure on all element of system
of quality control
Ø Whether EQCR review at appropriate time for planning audit, significant audit judgement, and
expressions of audit opinion.
Ø Whether audit firm assigns person responsible for monitoring system of quality control with
appropriate experience & sufficient and appropriate authority.
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Ø Whether audit firm obtain, at least annually, confirmation letter concerning compliance with policies
and procedure for maintenance of independence from all person required to maintain independence.
Ø Whether audit firm perform independence confirmation procedure before acceptance and continuance
of audit engagement, and when issuing auditor's report appropriately confirms there was no change in
status of independence.
Ø Whether audit firm develop and provides education/ training program that fully take into account
knowledge, experience, competence and capabilities of professional staff.
Scope & objective:

The scope & objective of quality review includes
ØExamining whether Stat auditor has ensured compliance with applicable technical stds and other
professional and ethical stds and relevant guidance.
ØExamining whether Statutory Auditor has ensured compliance with relevant laws and regulations
as required under applicable audit std.
ØExamining whether Audit firm under review (AFUR) has implemented system of quality control
with reference to applicable quality control stds.
ØExamining whether there is no MM of assets and liabilities at reporting date in selected entity.
Meaning of Technical Std as per Quality Review Board (QRB)

Ø Preface to Statements of A/C Std;
Ø Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related Services;
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Ø The a/c std notified under sec 133 of Cos Act, 2013;
Ø The A/C Std issued by ICAI;
=The FFPPFS issued by ICAI; (FFPPFSà Framework for Preparation & Presentation of FS)
=The applicable Quality Control and Standards on Auditing issued by ICAI and notified under
statute;
=The Statements on Auditing issued by ICAI;
=The Notifications/Directions/Guidelines issued by ICAI
= Other relevant L&R (Legal & Regulatory) requirements which include Code of Ethics & Guidance
Notes issued by ICAI
Quality Review Board (QRB)

Composition
ØChairperson & 10 other members (CG nominates CP & 5 members, other 5 by Council ICAI)
Functions of QRB
ØMake recommendations to Council w.r.t quality of services of members
ØReview quality of services provided by members
ØTo guide members of ICAI to improve quality of services and adherence to various statutory and
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other regulatory requirements
QRB to review audit of Cos. under NFRA applicability only if referred by NFRA. For others it can do
suo moto.
Powers of QRB
To Facilitate the discharge of its functions it has following Powers:
ØOn its own or through spl arrangement with ICAI, evaluate quality of work of members
ØLay down evaluation criteria for evaluating the services of members
ØCall for info from members, ICAI, Council, Clients etc.
ØInvite experts for expert/technical advice or opinion
ØMake recommendations to council to guide members to improve quality of service
Quality review excludes Internal/Tax/GST & other spl purpose audits. Also excludes employment
services.
Coverage of Services for Quality review
Covered:
ŸQuality of Statutory Audit and reporting by statutory Auditors
ŸQuality of control framework adopted by AFUR conducting Statutory Audit
ŸExcluded:
ŸReview of internal Audit, Tax audit, GST other special purpose Audit
ŸReview of services provided by members in terms of employement
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Selection of Audit Firms (Criteria)

ØOther than those covered by NFRA Rules
ðrisk based selection including regulatory concerns pointing towards stakeholder risk
ðon account of being part of a sector identified as being susceptible to risk on basis of market
intelligence reports.
ðreported fraud or likelihood of fraud.
ðserious a/c irregularities in the f/s highlighted by the media and other reports
ðmajor non-compliances under relevant statutes highlighted in past reviews
§Joint Audits à All joint auditors maybe reviewed
§The board may Also review firms if recommendation by RBI, SEBI, IRDA, MCA, NFRA
§Not consider complaints by others à dealt by CA Act 1949
Quality Review Cycle

The following quality review cycle of Audit firms may be followed generally or as maybe decided by
Board:
Ÿ Once in 3 years for Audit firms having 20 or more Partners
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Ÿ Once in 4 years for Audit firms having 10 or more but less than 20 Partners
Ÿ Once in 5 years for Audit firms having less than 10 Partners.
Upto 3 engagements may be selected by QRB in a cycle. If no adverse findings in past review then
only 1.
If adverse finding in previous review à then >3 also possible.
Criteria for Technical Reviewers

ØMin - 15 yrs of post qualification exp & practicing
ØAtleast signed 3 stat audits as CSA of Bank/public ltd cos/Govt cos/Pvt ltd cos with t/o >= 50
cr (last 10 yrs)
Out of 3 one must be other than pvt
ØNo disciplinary proceedings under CA Act 1949
ØNot member of QRB/ICAI Council/ Regional council/ Branch comm.
Submit 6 annual declarations along with relevant evidences, to QRB regarding participation in training
workshops/programmes.
Stages of QR Assignments
ØQRB selects Audit Firm and audit file for review and identifies TR to conduct Quality Review.
ØQRB sends Offer Letter of Engagement to TR.
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ØTR conveys his acceptance of Letter of Engagement to QRB by sending necessary declarations for
meeting eligibility conditions and furnishing statement of confidentiality by himself and his assistant/s.
ØQRB intimates AFUR about proposed Quality Review. QRB also sends copy of intimation letter to TR and
provides them contact details of each other for further communication.
ØTR sends specified QR Questionnaire to AFUR for filling-up. He also calls for additional info from AFUR, if
reqd.
ØTR & his team carry out Quality Review by starting off-site review by making proper planning for review
and then on-site visiting office of AFUR by fixing date as per mutual consent ensuring that review
exercise gets completed within specified time.
ØOn completion of on-site review, TR to send preliminary report to AFUR. TR shall send a copy of
preliminary report to QRB as well.
ØAFUR to submit representation on preliminary report to TR and TR to immediately send reply of AFUR to
QRB.
ØTR to submit final report along with copy of Annual report of entity for year under review, to QRB in
specified format, on his letterhead, duly signed and dated. In addition, also send copy of final report to
AFUR, requesting them to send final reply thereon to QRB within 7 days of receipt of final report. AFUR
shall also send a copy of their final reply to TR.
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ØAFUR to submit to QRB their reply on final report and feedback regarding experience of quality review.
ØUpon receipt of final reply from AFUR, TR shall submit to QRB within next 7 days a summary of his
findings, containing findings, technical requirements, final reply of AFUR and final comments thereon.
ØQRG to consider report of TR and responses of AFUR and make recommendations to QRB. QRG may also
call for additional details/information, if reqd, from TR/AFUR or issue such directions as it may deem
appropriate, enabling to assess quality of audit and reporting by AFUR.
ØQRB to consider report and recommendations of QRG and decide further course of action.
Composition Of Review Team

QR Team headed by TR + upto 5 assistants, No firm of CA be a member.
Independence & Qualification of Technical Reviewers
ØHe should not have discipl. Proceedings under CA Act 1949
ØHe/ firm/network firm not stat auditor of Co. or rendered other service in last 3 FY or thereafter
ØHe/ firm/network firm no association with AFUR last 3 FY or thereafter
ØComply with condn of Sec 141(3) of Cos Act 2013 w.r.t review of stat audit (not disqualified)
ØNot belong to city/region of HO of AFUR
Independence of Assistant (Qualified Assistance)

ØHe shall be CA;
ØNot disqualified under CA Act 1949;
ØSign statement of confidentiality;
ØNo direct interface either with audit firm under review (AFUR) or Board;
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ØShould be working with them for at least one year as member/ partner in CA firm;
ØNot associated with AFUR and concerned entity, whose audit is being reviewed, last 3 FY/After.
ØNo disciplinary proceeding under CA Act, 1949 pending against him or any disciplinary action under CA
Act, 1949 / penal action under any other law taken/pending against him during last 3 FY/after;
ØNot member of current QRB/ICAI's Central Council/Regional Council/Branch level Mgt Committee; and
ØHe should not himself be empanelled as TR with Quality Review Board.
Situations where Technical Reviewer can Qualify Quality Review Report

A reviewer may qualify report due to one or more of the following:
Ÿ non-compliance with technical standards;
Ÿ non-compliance with relevant laws and regulations;
Ÿ quality control system design deficiency;
Ÿ non-compliance with quality control policies and procedures;
Basic Elements of Quality Review Report

(a)Elements relating to audit quality of companies:
i.A ref. to scope and period of review of audit firm conducted along with limitations on scope.
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ii.A statement indicating instances of lack of compliance with T/P/E stds.

iii.A statement indicating the instances of lack of compliance with relevant laws and regulations.
(b)Elements relating to quality control framework adopted by audit firm in conducting audit:
i.An indication whether AFUR has implemented system of quality control with ref. to quality
control Stds.
ii.A statement indicating that system of quality control is responsibility of AFUR.
iii.An opinion on whether AFUR's system of quality control is designed to meet requirements of quality
control stds for attestation services and whether it was complied with during period reviewed to
provide reasonable assurance w.r.t complying with T/P/E stds, other guidance and laws and
regulations in all material respects.
iv.Where reviewer concludes modification in report is necessary, description of reasons with suggestions.
v.A reference to preliminary report.
vi.An attachment which describes quality review including info on planning and performing the review.
Actions that maybe recommended by QRB

(a)Make recommendations to Council of ICAI u/s 28B(a) of CA Act, 1949 for referring case to Director
(Discipline) of ICAI for consideration and necessary action under CA Act, 1949.
(b)Issue advisory and guidance to the AFUR u/s 28B(c) of CA Act, 1949 for improvement in quality of
services and adherence to various statutory and other regulatory requirements. A copy of such advisory
may also be sent to ICAI for information.
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(c)Inform details of non-compliance to regulatory bod(y)/ies relevant to entity as may be decided by
Board.
(d)Intimate AFUR as to findings of Report as well as action initiated as above.
(e)In case of review arising out of reference received from regulatory body, inform results of review and
details of action taken to the concerned regulatory body.
(f)Consider matter complete and inform AFUR accordingly.
Type of Report to be issued

In deciding on type of report to be issued, reviewer should consider evidence obtained and should document
overall conclusions w.r.t year being reviewed in respect of following matters:
(a)whether AFURs system of quality control has been designed to provide firm with reasonable
assurance of complying with technical standards , other relevant guidance and other relevant laws and
regulations.
(b)whether personnel of AFUR complied with such policies and procedures
(c)whether independence of AFUR is maintained in conducting audit.
(d)whether AFUR has instituted adequate mechanism for training of staff.
(e)whether AFUR ensures availability of expertise and/or experienced individuals for consultation.
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(f)whether skill and competence of assistants are considered before assignment of attestation
engagement.
(g)whether progress of attestation service is monitored and work performed by each assistant is
reviewed by service in-charge and necessary guidance is provided to assistants.
(h)whether AFUR has established procedure to record the audit plan, NTE of auditing procedures
performed and conclusions drawn from evidences obtained.
(i)whether AFUR maintains audit documentation as per relevant standards.
(j)whether AFUR verifies compliance with laws and regulations to the extent it has material effect
on financial statement.
(k)whether internal controls within AFUR contribute towards maintenance of quality of reporting.
Actions that may be recommended by the Quality Review Board:

Ÿ Refer case to Director (Discipline) of Institute for necessary action under CA Act, 1949.
·Ÿ Issue advisory & guidance to AFUR for improvement in quality of services & adherence to various
statutory & other regulatory requirements.
Ÿ Inform details of non-compliance to regulatory bodies relevant to the enterprise.
Ÿ Intimate concerned auditor as to findings of Report as well as action initiated above.
Ÿ Consider the matter complete & inform audit firm/auditor accordingly
Mechanism for follow-up of review findings

Ÿ Quality Review Board shall require Audit Firm Under Review to
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oSubmit a compliance report to the Board within specified period

ofor adopting necessary measures to avoid recurrence/corrective steps
ofor improvement in quality of services &
oAdherence to various statutory & other regulatory requirements.
Ÿ They may follow-up & review effectiveness of corrective actions taken by Audit Firm Under
Review.
oResults of reviews shall be used for off-site monitoring + for next on-site review.
oIf lack of effective corrective actions, next on-site review might be organised earlier.
Ÿ Cases of continued non-compliance may be recommended to Council of ICAI for taking
necessary action.
Horizontal & in-depth analysis of results of individual off-site monitoring & on-site -review will
be conducted to identify industry-wide issues across audit firms
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PROFESSIONAL ETHICS
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17 PROFESSIONAL ETHICS
Introduction
Ÿ “Professional Ethics”- Consist of personal, organizational & corporate standards of Behaviour
expected for professionals.
Ÿ Like other professionals, Chartered Accountants also have some set of code of ethics.
Ÿ A distinguishing feature of the accountancy profession is its acceptance of the responsibility to
act in the public interest.
Definition of Chartered Accountant

Ÿ As per Sec-2(1)(b) Chartered Accountant means a person who is a member of the institute.
Ÿ As per Sec-4 any person who has passed prescribed examination and completed prescribed
training; shall be entitled to have his name in the register of members.
Overview of the Code of Ethics
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The revised Code of Ethics contains the following material-
·PART 1-
Ÿ Complying with the Code, Fundamental Principles & Conceptual Framework,
Ÿ Which includes fundamental principles & the conceptual framework &
Ÿ Is applicable to all professional accountants.
·PART 2-
Ÿ Professional Accountants in Service, Employed, engaged or contracted in an executive or non-executive
capacity in, For example-
Ÿ Commerce, industry or service.
Ÿ The public sector.
Ÿ Education.
Ÿ The not-for-profit sector.
Ÿ Regulatory or professional bodies.
Ÿ Part 2 is also applicable to individuals who are professional accountants in public practice when
performing professional activities pursuant to their relationship with the firm as an employee.
·PART 3–
Ÿ Professional Accountants in Public Practice, which sets out additional material that applies to
professional accountants in public practice when providing professional services.
Ÿ Independence Standards, which sets out additional material that applies to professional accountants in
public practice when providing assurance services, as follows-
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ØPART 4A-
Ÿ Independence for Audit & Review Engagements,
Ÿ which applies when performing audit or review engagements.
ØPART 4B-
Ÿ Independence for Assurance Engagements Other than Audit & Review Engagements,
Ÿ which applies when performing assurance engagements that are not audit or review engagements.
Where laws or regulations preclude an accountant from complying with certain parts of the Code Laws &
regulations prevail, and accountant shall comply with all other parts of the Code.
Fundamental Principles of code of Ethics

a)Integrity:
Üstraightforward and honest in professional & business relationships
Üshall not knowingly be associated with information
(a)Contains a materially false or misleading statement;
(b)Contains statements or information provided negligently; or
(c)Omits required information.
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b)Objectivity: not to compromise professional or business judgment because of bias, conflict of

interest or undue influence of others
c)Professional Competence & Due Care:
Ÿ Attain & maintain professional knowledge & skill
Ÿ Act diligently
Ÿ Exercise sound judgment
Ÿ Continuous awareness & understanding of technical, professional & business developments
Ÿ Reasonable steps to ensure those working in his authority have training & supervision
d)Confidentiality: Not disclose info acquired from client or employer (including prospective). Not
use such info for personal advantage. Continues even after relationship has ended.
Circumstances where professional accountants are or might be required to disclose confidential

information or when such disclosure might be appropriate:
Ÿ Disclosure is required by law
Ÿ Disclosure is permitted by law and is authorized by client or employing org;
Ÿ There is a professional duty or right to disclose, when not prohibited by law:
(i)To comply with requirements of Peer Review or Quality Review of the ICAI;
(ii)To respond to inquiry or investigation by professional or regulatory body
(iii)To protect the professional interests in legal proceedings; or
(iv)To comply with technical and professional standards, including ethics requirements.
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In deciding whether to disclose confidential information, professional accountants should consider the
following points:
(a)Whether interests of any party, including 3rd parties might be affected
(b)Whether all relevant info is known and substantiated, and
(c)The proposed type of communication, and to whom it is addressed;
(d)Whether parties to whom communication is addressed are appropriate recipients.
(e)Professional Behaviour: avoid any conduct that accountant knows or should know might discredit
the profession.
If a professional accountant faces a situation when complying with one fundamental principle
conflicts with others, he should consult:
Ÿ Others within the organization
Ÿ TCWG
Ÿ ICAI
Ÿ Legal counsel
Types of Threats
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Ÿ Self-interest threat –threat that a financial or other interest will inappropriately influence a
professional accountant's judgment or behaviour;
Ÿ Self-review threat –threat that a professional accountant will not appropriately evaluate the
results of a previous judgment made; or an activity performed by the accountant, or by another
individual within the accountant's firm or employing organization, on which the accountant will
rely when forming a judgment as part of performing a current activity;
Ÿ Advocacy threat –threat that a professional accountant will promote a client's or employing
organization's position to the point that the accountant's objectivity is compromised;
Ÿ Familiarity threat –threat that due to a long or close relationship with a client, or employing
organization, professional accountant will be too sympathetic to their interests or too accepting of
their work;
Ÿ Intimidation threat –threat that a professional accountant will be deterred from acting objectively
because of actual or perceived pressures, including attempts to exercise undue influence over the
accountant.
Circumstances that may create self-interest threats

Ÿ Direct financial interest in client
Ÿ Undue dependence on total fees from a client.
Ÿ Concern about the possibility of losing a client.
Ÿ Potential employment with a client.
Ÿ Having a close business relationship with a client.
Ÿ Having access to confidential information of the client that might be used for personal gain.
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Circumstances that may create Self Review Threat
Ÿ Loan to or from assurance client or any of its directors or officers
Ÿ Professional accountant holding financial interest in, or receiving a loan or guarantee from,
employing organization.
Ÿ Professional accountant participating in incentive compensation arrangements offered by
employing organization.
Ÿ Professional accountant having access to corporate assets for personal use.
Ÿ Professional accountant being offered a gift or special treatment from supplier of employing
organization.
Examples of circumstances that may create advocacy threats:

Ÿ Promoting shares in entity when that entity is financial statement audit client.
Ÿ Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.
Ÿ lobbying in favor of legislation on behalf of a client.
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Examples of circumstances that may create familiarity threats

Ÿ A member of engagement team having close or immediate family relationship with director or officer of
the client.
Ÿ A member of engagement team having a close or immediate family relationship with employee of client
who is in position to exert direct and significant influence over subject matter of engagement.
Ÿ A former partner of firm being director or officer of client or employee in position to exert direct and
significant influence over the subject matter of the engagement.
Ÿ Long association of an audit team member with the audit client.
Examples of circumstances that may create intimidation threats

Ÿ Being threatened with dismissal or replacement
Ÿ Being feeling pressured to agree with the judgment of a client because the client has more
expertise on the matter in question.
Ÿ Being informed that a planned promotion will not occur unless the accountant agrees with an
inappropriate accounting treatment.
Examples of actions that in certain circumstances might be safeguards to address threats include:
Ÿ Assigning additional time and qualified personnel to reqd tasks when engagement has been
accepted.
Ÿ Having appropriate reviewer, not member of team, review work performed or advise to address a
self-review threat.
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Ÿ Using different partners and engagement teams with separate reporting lines for provision of non-
assurance services.
Ÿ Involving another firm to perform or re-perform part of engagement .
Ÿ Separating teams when dealing with matters of a confidential nature.
Disabilities for the Purpose of Membership (Sec 8 of the CAs Act, 1949)
Ÿ Under 21 years
Ÿ Unsound mind and stands so adjudged by competent court;
Ÿ Undischarged insolvent;
Ÿ Being a discharged insolvent, has not obtained from court a certificate stating that insolvency
was caused by misfortune without any misconduct on his part;
Ÿ Convicted by competent Court within or without India, of offence involving moral turpitude and
punishable with transportation or imprisonment unless CG by order in writing, removed disability;
Ÿ Removed from membership of ICAI been guilty of professional or other misconduct;
Types of Members
Associate Member: Person, whose name has been entered in Register, & entitled to use the letters
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A.C.A. after his name.
Fellow Member: Following types of members shall be registered as Fellow of ICAI, on payment of
such fees along with the application-
(i)Associate member who has been in continuous practice in India for at least 5 years,
(ii)Member who has been associate for continuous period of not less than 5 years & who
possesses such qualification experience equivalent to continuous practice for period of 5 years as
CA.
Removal of Name from the Register: As per Sec 20 of Act, Council may remove, from Register, the
name of any member in following cases-
i.who is dead;
ii.from whom request received;
iii.not paid prescribed fee required to be paid by him;
iv.Disqualified u/s 8
Effective date of Restoration in case of Membership Removal

Application for restoration and requisite fees are made Restoration shall be with effect from the date on
within same year of removal which it was removed from the Register.
Removal of name under orders of Board of Discipline Restoration shall be in accordance with such
or the Disciplinary Committee or the Appellate orders.
Authority or the High Court
In other cases Restoration shall be with effect from the date on

which the application and fee are received.
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Penalty for Falsely Claiming to be a Member- Sec 24 of the CAs Act, 1949 provides that any person
who-
(i)not being a member of ICAI;
(a)represents that he is member of ICAI; or
(b)uses designation CA;
(ii)being a member of ICAI, but not having certificate of practice, represents that he is in practice
or practice as a CA,
shall be punishable on first conviction with fine which may extend to 1000, and on any subsequent
conviction with imprisonment which may extend to 6 months or with fine which may extend to
5,000, or with both.
Cancellation and Restoration of Certificate of Practice

Certificate of Practice (COP) shall be liable for cancellation, if:
(i)name is removed from the Register; or
(ii)Council is satisfied,that such certificate was issued on the basis of incorrect, misleading or false
information, or by mistake or inadvertence; or
(iii)a member has ceased to practise; or
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(iv)a member has not paid annual fee for COP till 30th day of September of the relevant year.
Where COP is cancelled, the holder shall surrender the same to the Secretary.
Regulation 11 on restoration of COP states that, on an application made in approved Form and
payment of such fee, Council may restore COP w.e.f date on which it was cancelled, to member
whose certificate has been cancelled due to non-payment of the annual fee for the COP and whose
application, complete in all respects, together with fees, is received by the Secretary before expiry of
relevant year.
Members - deemed to be in Practice

As per Sec 2(2): “A member of ICAI shall be deemed “to be in practice” if he:
(i)engages himself in practice of accountancy; or
(ii)offers to perform or performs service involving auditing or preparation, verification or certification
of F.S. or holds himself out as accountant; or
(iii)renders professional services about matters of principle or relating to accounting, presentation
or certification of financial facts/data; or
(iv)such other services in opinion of Council, are rendered by CA in practice;
Explanation –Member who is salaried employee of CA in practice à deemed to be in practice for

limited purpose of training of Articled Assistants”.
Pursuant to Sec 2(2)(iv) above, the Council has passed a resolution permitting a CA in practice to
render entire range of “Management Consultancy and other Services”.
CA Ravi Agarwal's
The expression “Management Consultancy and other Services” shall include the following-
i.Financial management planning and financial policy determination.
ii.Capital structure planning and advice regarding raising finance.
iii.Working capital management.
iv.Preparing project reports and feasibility studies.
v.Preparing cash budget, cash flow statements, profitability statements, statements of sources and
application of funds etc.
vi.Budgeting including capital budgets and revenue budgets.
vii.Inventory management, material handling and storage.
viii.Market research and demand studies.
ix.Price-fixation and other management decision making.
x.Management accounting systems, cost control and value analysis.
xi.Control methods and management information and reporting.
xii.Personnel recruitment and selection.
xiii.Setting up executive incentive plans, wage incentive plans etc.
xiv.Management and operational audits.
xv.Valuation of shares and business and advice regarding amalgamation, merger and acquisition.
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Acting as Registered Valuer under Cos. Act 2013.
xvi.Business Policy, corporate planning, organisation development, growth and diversification.
xvii.Organisation structure and behaviour, training programmes, work study, job-description, job
evaluation
xviii.Systems analysis and design, and computer related services and to carry out other professional
services relating to EDP.
xix.Acting as advisor or consultant to an issue, including such matters as:
a.Drafting of prospectus and memorandum containing salient futures of prospectus. Drafting
and filing of listing agreement and completing formalities with Stock Exchanges, Registrar of
Companies and SEBI.
b.Preparation of publicity budget, advice regarding arrangements for selection of (i) ad - media,
(ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv)
collection centres, (v) brokers to issue, (vi) underwriters and the underwriting arrangement.
c.Advice regarding selection of various agencies connected with issue, namely Registrars to
Issue, printers and advertising agencies.
d.Advice on the post issue activities, e.g., follow up steps which include listing of instruments
and dispatch of certificates and refunds.
Explanation – Portfolio mgt, underwriting & broking (PUB) not permitted.
xx.Investment counselling in respect of securities
xxi.Registrar to an issue and for transfer of shares/other securities.
xxii.Quality Audit.
xxiii.Environment Audit.
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xxiv.Energy Audit.
xxv.Recovery Consultant in the Banking Sector.
xxvi.Insurance Financial Advisory Services under IRDA Act 1999, including Insurance Brokerage.
xxvii.Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016
xxviii.Admin Services: Such services require little to no professional judgment and are clerical in
nature.
Note: Member of ICAI is deemed to be in practice during period he renders 'service with armed
forces'.
Important Note:
A CA whose name has been removed from membership for prof. or other misconduct à during such
period of removal à will not appear before various tax authorities or other bodies before whom he
could have appeared in his capacity as a member of ICAI à Because once a person becomes a
member of ICAI; he is bound by provisions of CA Act, 1949 and its Regulations
Companies not to practice as CAs à If LLP has Co. as partner it can't engage in practice
Member in Practice Prohibited from using a Designation Other Than CA – Sec 7

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Ÿ Merchant Banker / Advisor to an issue: Members may obtain registration as category IV Merchant
Banker & act as Advisor or Consultant to issue. In client Companies' offer documents and ads
regarding capital issue, name and address of CA or firm of CAs acting as Advisor or Consultant to
the Issue could be indicated under the caption “Advisor/Consultant to the Issue”. However, name
& address of such CA/firm of CAs should not appear prominently.
Ÿ The members of ICAI who are also Directors in Companies, members of Political parties or CAs
Cells in political parties, holding different positions in clubs are not permitted to mention these
positions as these would be violative of provisions of Sec 7 of the Act.
Ÿ Member can't designate as Cost Accountant; he can use letters A.C.M.A (Associate) or
F.C.M.A (Fellow) after his name.
Ÿ Permitted to mention membership of foreign Institute of Accountancy, recognized by Council
through MOU / Mutual Recognition Agreement (MRA) with ICAI.
Ÿ Improper for CA to state on professional docs à Income-tax Consultant, Cost Accountant,
Company Secretary, Cost Consultant or a Management Consultant.
Ÿ Designation “Corporate Lawyer” not permitted.
Ÿ Use of initials 'CPA' not permitted on visiting cards.
Branch office (Section 27)

Sec 27 of Act: If a CA in practice or Firm of CAs has more than one office in India, each one of
such offices should be in separate charge of member of ICAI.
Exemption for Hilly Areas
wTemp office in plains allowed for limited period not exceeding 3 months pa
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wNo need to close regular office & correspondence made at reg office
wName board on temp office not displayed when its not functional
wTemp office not mentioned on Visit cards/letter heads as Place Of Business
wBefore winters, member/firm informs ICAI about opening temp office from date & after closure
intimated ICAI via regd post
To comply with requirement of being in charge of office:

ÜMember to reside in place office situated/attends the office >= 182 days
ÜMember can be in-charge of two offices if they are in one and the same
Accommodation Council Decisions:
i)Use of the name-board: nameboard in place of residence allowed of member with
designation of CA, provided it is nameplate of individual member & not of firm.
ii)The exemption may be granted to member or firm of CAs in practice to have a second office
without such second office being under separate charge of member of ICAI, provided-
a.second office is in same premises, in which first office is located or,
b.second office is in same city, in which first office is located or,
c.second office is located within 50 km. from the municipal limits of a city, in which the first
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office is located.
d.KYC Norms
The KYC Norms approved by the Council of ICAI are given below:
1.Where Client is an Individual/ Proprietor
A.General Information
Ÿ Name of the Individual
Ÿ PAN No. or Aadhar Card No. of the Individual
Ÿ Business Description
Ÿ Copy of last Audited Financial Statement
B.Engagement Information
Ÿ Type of Engagement
2.Where Client is a Corporate Entity

Ÿ Name and Address of the Entity
Ÿ Name of the Parent Company in case of Subsidiary
B.Engagement Information
Ÿ Type of Engagement
C.Regulatory Information
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Ÿ Company PAN No.
Ÿ Company Identification No.
Ÿ Directors' Names & Addresses
Ÿ Directors' Identification No.
3.Where Client is a Non-Corporate Entity

Ÿ Name and Address of the Entity
Ÿ Copy of PAN No.
Ÿ Partner's Names & Addresses (with their PAN/Aadhar Card/DIN No.)
B. Engagement Information Type of Engagement
Part Particulars Nature of Misconduct No. of clauses
I Professional Misconduct of members in practice Professional Misconduct 12
II Professional Misconduct of members in service Professional Misconduct 2

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III Professional Misconduct of members generally Professional Misconduct 3
IV Other misconduct of members generally Other Misconduct 2
PART I - Professional Misconduct in relation to CAs in Practice

A CA in practice is deemed to be guilty of professional misconduct if he:
Clause (1):
Ÿ allows any person to
Ÿ practice in his name as a CA unless such person is also
Ÿ a CA in practice and
Ÿ is in partnership with or
Ÿ employed by him.
ØThe above clause is intended to safeguard public against unqualified accountant practicing under the
cover of qualified accountants.
ØIt ensures that work of accountant will be carried out by a CA who may be his partner, or his
employee and would work under his control and supervision.
Clause (2):
Ÿ pays or allows or agrees to pay or allow, directly or indirectly,
Ÿ any share, commission or brokerage in the fees or profits of his professional business, to any person
other than
Ÿ a member of the ICAI or a partner or a retired partner or the legal representative of a deceased partner,
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or a member of any other professional body or with such other persons having such qualification as may
be prescribed,
Ÿ for the purpose of rendering such professional services from time to time in or outside India.
Reg. 53A: Professional bodies:

ICSI (CS), ICWAI (Cost a/c), Bar Council (Advocate), Inst of Architects (Architect), Inst of Actuaries
(Actuary), Engineer, LLB(Lawyer), MBA
Example: CA gave 50% of audit fees received by him to complainant, not a CA, under nomenclature of
office allowance and such arrangement continued for no. of years, held by Council that in substance CA
had shared his profits and was guilty of professional misconduct. It is not nomenclature to a transaction
that is material, but it is substance of transaction, which is to be looked into.
Note: Paying % of profits to article as stipend not allowed even if financial condition weak
Share of Profit/Sale of Goodwill (Death Cases)

Partnership Firm: Legal representative (LR) will continue to receive share if Deed provides for it. Sole
Proprietorship(SP) Firm:
1.No sharing of fees between LR & purchaser of G/W on death of SP + payments in instalments allowed
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if agreement allows
2.Goodwill can be transferred to other CA if:
Ÿ Sale completed within 1 year of death
Ÿ If dispute of legal heir à inform ICAI within 1 year about dispute & name preserved for 1 year from
dispute settlement.
Clause (3):
accepts or agrees to accept any part of profits of professional work of person who is not member of ICAI.
Provided that nothing herein contained shall be construed as prohibiting a member 'from entering intoprofit
sharing or other similar arrangements, including receiving any share commission or brokerage in the fees,
with member of such professional body or other person having qualifications, as is referred to in item (2) of
this part.
Referral fees amongst members: It is not prohibited for a member in practice to charge Referral Fees, being
fees obtained by a member in practice from another member in practice in relation to referring client to him.
Note: Accepting commission from regd valuer for referring valuation assignments à Guilty
Clause (4):
Ÿ enters into partnership, in or o/s India, with person other than
Ÿ CA in practice or such other person who is member of any other professional body having such
qualifications as may be prescribed,
Ÿ including a resident who but for his residence abroad would be entitled to be regd. as member under
CA Ravi Agarwal's
section 4(1)(v) or
Ÿ whose qualifications are recognized by CG or Council for purpose of permitting such partnerships.
Clause (5) :
Secures either through the services of a person who is not an employee of such CA or who is not his partner
or by means which are not open to a CA, any professional business. Provided that nothing herein contained
shall be construed as prohibiting any agreement permitted in terms of item (2), (3) and (4) of this part.
Clause (6) :
Solicits clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting –
(i)Any CA from applying or requesting for or inviting or securing professional work from another CA in
practice; or
(ii)A member from responding to tenders or enquiries issued by various users of professional services or
organizations from time to time and securing professional work as a consequence.
As per Council guidelines, member in practice shall not respond to any tender in areas of services which are
exclusively reserved for CAs, such as audit and attestation services. Such restriction not applicable where
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min. fee of assignment prescribed in tender document or where areas are open to other professionals along
with Cas.
The members should not adopt any indirect methods to adventure their professional practice with a view to
gain publicity and thereby solicit clients or professional work.
Such a restraint must be practiced so that members may maintain their independence of judgment and
may be able to command respect of their prospective clients.
An advertisement of Coaching /teaching activities by member in practice may amount to indirect
solicitation, as well as solicitation by any other means, and may therefore be violative of provisions of
Clause (6) of Part I of First Schedule to CAs Act, 1949.
Ÿ Members may put, o/s Coaching/teaching premises, sign board mentioning the name of Coaching /
teaching Institute, contact details and subjects taught therein only.
Ÿ Advert/notes in press: Not circulate letters to possible clients
Exceptions:
ØMay advertise changes in partnerships or dissolution of firm, or change in address and telephone
numbers. Bare statement of facts allowed and consideration given to appropriateness of area of
distribution of newspaper or magazine and number of insertions.
ØPermitted to issue classified ad in journal/ newsletter of ICAI intended to give info for sharing
professional work on assignment basis or seeking partnership or salaried employment of accountancy
nature, provided it only contains accountant's name, address or telephone number, fax number, e-
mail address and address(es) of social Networking sites of members. However, mere factual position
of experience and area of specialization, relevant to seek response to the advertisement, are
permissible.
CA Ravi Agarwal's
Ÿ Application for empanelment for allotment of audit and other professional work: Free to write to
concerned org. Not proper for CA to make roving enquiries. Permissible to quote fees on enquiries
received from bodies, which maintain such panel.
Ÿ Publication of Books, Articles or Presentation: Not permissible for member to mention in book or article
published, or presentation made by him, any professional attainment(s), whether of member or firm.
He may indicate in book, article or presentation designation “CA” as well as name of firm.
Ÿ Issue of Greeting Cards or Invitations: Designation “CA” as well as name of firm may be used in
greeting cards, invitations for marriages and religious ceremonies and any invitations for opening or
inauguration of office of members, change in office premises and change in telephone numbers,
provided that invitations are sent only to clients, relatives and friends of the members concerned.
Ÿ Advertisement for Silver, Golden, Platinum or Centenary celebrations of CA Firms may be published in
newspaper or newsletter.
Ÿ Sponsoring Activities
(a)A member in practice or Firm of CAs is not permitted to sponsor an event. May sponsor event
conducted by a Programme Organizing Unit (PoU) of ICAI, provided it has prior approval of
Continuing Professional Education (CPE) Directorate of ICAI.
(b)Members sponsoring activities relating to CSR may mention their individual name with the prefix
17
“CA”. However, the mention of Firm name or CA Logo is not permitted.
Ÿ Sharing Firm Profile with prospective Client: Not permitted to share Firm profile with a prospective
Client unless it is in response to a proposed client's specific query, and otherwise not prohibited to be
used by the client.
Ÿ Television or Movie Credits: Exhibition of name is not made differently as compared to other entries in
the credits.
Ÿ Soliciting professional work by making roving enquiries: Not permissible for member to address letters,
emails or circulars to persons who are likely to require services of CA since it would tantamount to
advertisement.
Ÿ Seeking work from Professional Colleagues: Issue of advertisement or a circular by CA, seeking work
from professional colleagues on any basis whatsoever except as provided above would be in violation
Ÿ Scope of representation which an auditor is entitled to make under Section 140(4) of the Companies
Act, 2013: Opportunity not being abused to secure needless publicity. The letter should merely set out
in dignified manner how he has been acting independently and conscientiously through the term of
office and in addition, indicate his willingness to continue as auditor if reappointed by shareholders.
Ÿ Acceptance of original professional work by a member emanating from the client introduced to him by
another member: Member not accept original professional work emanating from client introduced to
him by another member. If any professional work of such client comes directly, it should be his duty to
ask the client that he should come through other member dealing generally with his original work.
Ÿ Giving Public Interviews: Not result in publicity. Details about members or their firms not given in a
manner highlighting professional attainments. Detail given as response to specific question, and factual
CA Ravi Agarwal's
nature only.
Ÿ Members and/or firms who publish advertisements under Box numbers: prohibited from inserting
advertisements under box numbers in newspapers. It is violation of this clause.
Ÿ Educational Videos: No reference made to CAs Firm wherein member is a partner/ proprietor. It should
not contain contact details or website address.
Ÿ CA sent letters to other CAs claimed to be pioneer in liasoning with govt depts as expertise
à held guilty in this clause
Website for CA Firms

Ÿ Should be on Pull model instead of Push model
Ÿ Info on website shouldn't be circulated own own or emails except on specific 'pull' request
Ÿ Not issue material to solicit users to visit their website
Ÿ Info that can be displayed:
Ÿ Member/firm Name
Ÿ Year of establishment
Ÿ Address of firm/member + Tel nos + E mail ids
Ÿ Nature of services rendered (specific pull request)
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Ÿ Partners [Name, Year of qualification, Other qualification, Phone, email, Area of experience (pull
request)]
Ÿ Details of employees (like partners)
Ÿ Job vacancies
Ÿ No of article assistants (pull request)
Ÿ Nature of assignments handled (pull request)
Ÿ Name of clients & fees charged can't be given (Note)
Note: It can be given if required by regulator (whether or not constituted under a statute in India or o/s
India) only to extent reqd & period reqd by regulator.
Where such disclosure of names of clients and/or fees charged is made on the website, the member/ firm
shall ensure that it is mentioned on the website [in italics], below such disclosure itself, that
“This disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in [name of
the country/ area where such regulator has jurisdiction] vide [Rule/ Directive etc. under which the
disclosure is required by the Regulator].
Ÿ Display of Passport size pic permitted
Ÿ May include bulletin boards, articles, prof info, & educational videos
Ÿ Chat rooms can be provided with confidentiality protocol
Ÿ Can provide Document Management Facility
Ÿ Can share link to Social Networking Site but not solicit to visit or like their pages
Ÿ Can provide online advice on specific request for free/payment
CA Ravi Agarwal's
Ÿ Ensure adequate secrecy of matters of clients
Ÿ No ad on website of banner or any nature
Ÿ May provide link to website of ICAI, Regional councils, Branches & website of Govt/depts/Reg
authorities/Professional bodies
Ÿ Website name should be similar to firm name & not amount to solicitation
Ÿ Mention info not at material variance from ICAI's records
Online Third Party Platforms

Ÿ Some websites provide consultancy services of CAs or CA Firms
Ÿ Contact address of CA shouldn't be provided
Ÿ It should not advertise professional achievements or status of CAs just mention they are Cas
Ÿ Name of CA Firm with suffix “Chartered Accountants' not permitted
Publication of Name or Firm Name by CAs in Telephone or other Directories published by Telephone
Authorities or Private Bodies
Ÿ Name under section 'Chartered Accountants’
Ÿ Member/firm should be from town/city of directory publication
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Ÿ Order of entries should be alphabetical
Ÿ Entry shouldn't be made in a differential or prominent manner giving impression of publicity
/advertisement
Ÿ Entries shouldn't be restricted & open to all CAs of that town
Ÿ Members can also include their names in Trade/social directories
Application based Service provider Aggregators (Eg UrbanClap)
Ÿ Not permissible for Cas
Specialised Directories for limited circulation

Ÿ name, description and address of member (or firm) may appear in any directory or list of members of a
particular body in which the names are listed alphabetically.
Ÿ Member shouldn't give name of clients
Ÿ May supply info for spl. directories on own discretion
Exemptions:
Ÿ Advertisement for following purpose allowed:
Ÿ For recruiting staff for own office
Ÿ Inserted on behalf of client for staff for their office or acquisition or disposition of property
Ÿ For sale of business or property by member acting in prof capacity as trustee, liquidator or receiver
(litre)
Ÿ When advertising for staff its desirable to avoid saying “Well known firm”.
CA Ravi Agarwal's
Clause (7)
ÜAdvertises his professional attainments or services, or
Üuses any designation or expressions other than the CA on professional documents, visiting cards, letter
heads or sign boards unless it be a degree of a University established by law in India or recognized by
the Central Government or a title indicating membership of the Institute of CAs or of any other
institution that has been recognized by the Central Government or may be recognized by the Council.
Member in practice may advertise through a write up, setting out service provided by him or firm and
particulars of his firm subject to such guidelines as issued by Council.
Ÿ Use of designation 'Member of Parliament', 'Municipal Councilor' not permitted.
Ÿ A member can mention “Insolvency Professional” or “Registered Valuer” respectively on his visiting
card and letter head.
Ÿ Date of setting-up practice: Should not be mentioned on the letter heads and other professional
documents.
Ÿ Notice in the Press relating to the Success in an Examination: It should not contain any element of
undesirable publicity. Candidate's name and address, school and local background, examination passed
with details of any prize or place gained, name of principal, firm and town in which principal practices
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may be published.
Ÿ Reports and Certificates: Manner of publication limited to what is necessary to enable report or
certificate to serve its proper purpose. Members should use letterhead for issuing reports and
certificates.
Ÿ Appearance of CAs on Electronic Media (including Internet): Members may appear on television, films
and Internet and Radio or give lectures at forums and may give their names and describe themselves as
CAs. Spl. qualifications or specialised knowledge directly relevant to subject matter of prog. may be
given. Firm name may also be mentioned; however, exaggerated claim or comparison is not permissible.
It must not be promotional of him or his firm but must be an objective professional view of topic.
Mention of membership of Institute is desirable in such cases to achieve suitable publicity for ICAI.
Ÿ Members giving talks or lectures or attending conference may describe themselves as CAs only when
they are acting in their capacity as CAs. However, reference to professional firm of the member should
not be given.
Ÿ Organising Training Courses, Seminars etc. for his staff: CAiP may invite staff of other CAs and clients
to attend the same. Undue prominence should not be given to name of CA in any booklet or document.
Ÿ Writing Articles or Letters to the Press: May give their names and use the description Cas.
Ÿ Size of Sign Board: Use of glow signs or lights on large-sized boards not permissible.
Ÿ Public Announcements with details of Directors: Many Cos have CAs as directors. The prospectus or
public announcements shouldn't publish descriptions about CA's expertise, specialisation & knowledge
in any field.
Member should invite attention of mgt to provisions and request that before communication, is issued, it
should be approved by him.
CA Ravi Agarwal's
The use of expression 'CA' is permissible. Directorships held by member in other Companies can be given,
but name of firm in which member is partner, should not be given.
Ÿ Use of logo/monogram of any kind/form/ style/design/colour etc. is prohibited.
Ÿ Printing QR code on visiting card allowed giving name/address/contact details/firm name
Notes:
Ÿ Giving names of all firms in which CA is partner on letterhead is allowed
Ÿ When CA while delivering speech at Conference talks about his expertise & services of firm & requests
audience to approach him à guilty under clause 6 & 7
Ÿ CA after Demonitisation messaged ppl that he offers cash conversion service à guilty of Prof
misconduct under Clause 6 & 7 + Other misconduct under clause 2 of Part IV of First Schedule read
with Sec 22 of CA Act 1949
Advertisements through write up

üHonest & truthful
üNo exaggerated claims
üNo disparaging references or unsubstantiated comparisons
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üNot bring profession to disrepute
üNot contain testimonials
üNot contain info about achievements or awards (except awards by CG/SG/ Regulatory Bodies)
üMonogram of any sort not permissible
üMembership no/firm reg no to be mentioned
üFont size upto 14
Clause (8):
accepts a position as auditor previously held by another chartered accountant or a certified auditor who
has been issued certificate under the Restricted Certificate Rules, 1932 without first communicating with
him in writing.
As a matter of professional courtesy and professional obligation it is necessary for new auditor appointed
to communicate with such earlier auditor.
Objective is to ascertain whether there are any circumstances which warrant him not to accept
appointment.
The professional reasons for not accepting an audit would be:

(a)Non-compliance of Sec 139 and 140 of Companies Act, 2013
(b)Non-payment of undisputed Audit Fees by auditees other than in case of Sick Units
(c)Issuance of qualified report*
CA Ravi Agarwal's
*may accept audit if satisfied that attitude of retiring auditor was not proper and justified. If he feels
that retiring auditor qualified report for good and valid reasons, refuse to accept audit. There is no
rule, written or unwritten, which would prevent auditor from accepting appointment offered to him in
these circumstances. Before accepting audit, ascertain full facts of case.
What should be the correct procedure to adopt when a prospective client tells you that he wants to change
his auditor and wants you to take up his work?
Company should be asked whether retiring auditor had been informed of intention to change. If answer is
'Yes', then communication should be addressed to retiring auditor. If it is learnt that old auditor hasn't been
informed, and client is not willing to inform, it would be necessary to ask reason for proposed change. If no
valid reason for change, it would be healthy practice to not accept audit. If he decides to accept audit he
should address a communication to retiring auditor.
Members should retain positive evidence of delivery of communication to addressee. In opinion of Council,
following would provide such evidence: -
(a)Communication by a letter sent through “Registered Acknowledgement due”, or
(b)By hand against a written acknowledgement, or
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(c)Acknowledgement of communication from retiring auditor's vide email address registered with
Institute or his last known official email address, or
(d)Unique Identification Number (UDIN) generated on UDIN portal
*Letters posted under Certificate of Posting not considered valid (No positive evidence of delivery)
Premises found Locked : Deemed as having been delivered to retiring auditor.
Firm not found at the given Regd address : Address of communication is same as regd with ICAI
on date of dispatch, letter will be deemed to be delivered, unless retiring auditor proves it was not really
served and he was not responsible for such non-service.
Joint audit with earlier auditor: As a matter of professional courtesy and obligation it is necessary for
new auditor appointed to act jointly with earlier auditor to communicate with such earlier auditor.
Special Audit under Income Tax Act, 1961: It would be healthy practice if Tax Auditor conducting spl
audit under Income Tax Act,1961 communicates with member who conducted Statutory Audit.
Council decisions:
Ÿ Requirement for communicating with previous auditor being CAiP would apply to all types of
Audit viz., Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit or any other
kind of audit.
Ÿ Communication in case of Assignments done by other professionals: Communication is
CA Ravi Agarwal's
mandatorily reqd for all types of Audit/Report where previous auditor is a CA.
For assignments done by other professionals not being Cas, it would be a healthy practice to
communicate.
Ÿ Lack of time in acceptance of Government Audits: No time to wait for reply from outgoing
auditor, incoming auditor may give conditional acceptance of appointment and commence work.
In acceptance letter, make clear to client that acceptance of appointment is subject to
professional objections, from previous auditors and that he will decide about final acceptance
after considering information recd from previous auditor.
Clause (9) :
accepts an appointment as auditor of company without first ascertaining from it whether
requirements of Section 225 of the Companies Act, 1956 (1 of 1956), in respect of such appointment
have been duly complied with;
Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
17
Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly
complied with.
It would not be sufficient for incoming auditor to accept certificate from mgt that provisions of above
sections have been complied with. It is necessary to verify relevant records of Co. and ascertain as to
whether Co. has complied with provisions of above sections. If Co. is not willing to allow incoming
auditor to verify relevant records, should not accept audit assignment.
ESB Guidelines in case of removal/resignation by Auditor

A.Auditor willing for reappointment but not reappointed à shall file with ICAI a copy of statement
which is also sent to shareholders by mgt of Co (Obligatory for incoming auditor to obtain such
copy from BOD & consider before accepting audit)
B.Auditor resigns à send communication to BOD + ICAI stating professional reasons (Obligatory for
incoming auditor to obtain such copy from BOD & consider before accepting audit)
C.ESB can ask for add. info if required
D.Also applicable to removal of auditor by govt/other statutory bodies
Clause (10)
Ÿ Charges or offers to charge,
Ÿ accepts or offers to accept
Ÿ in respect of professional employment
CA Ravi Agarwal's
Ÿ fees based on percentage of profits or contingent upon findings, or results of such employment,
except as permitted under any regulations made under this Act.
Exceptions: Regulation 192
(a)Receiver or a liquidator, fees based on percentage of realization or disbursement of assets;
(b)Auditor of co-operative society, fees based on percentage of paid up capital or working capital or
the gross or net income or profits;
(c)Valuer for purposes of direct taxes and duties, fees based on percentage of value of property valued;
(d)management consultancy services, fees contingent upon findings, or results of such work;
(e)fund raising services, fees based on percentage of fund raised;
(f)Debt recovery services, fees based on percentage of debt recovered;
(g)services related to cost optimisation, fees based on percentage of benefit derived; and
(h)any other service or audit as may be decided by Council. [Following activities have been decided
by Council under “h” above :-
(i)Acting as Insolvency Professional (ii) Non-Assurance Services to Non-Audit Clients]
Note: Getting a loan sanctioned from bank is not covered under fund raising service à hence CAiP
can't charge fees basis % of loan raised by client
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Clause (11) :
Engages in business or occupation other than profession of chartered accountant unless permitted by
Council so to engage. Provided that nothing contained herein shall disentitle a chartered accountant from
being a director of a company (Not being managing director or a whole time director*) unless he or any of
his partners is interested in such company as an auditor.
Exception: Ch-XVII of Council General Guidelines to be discussed later.

Subject to control of Council, CAiP may act as liquidator, trustee, executor, administrator, arbitrator,
receiver, adviser or representative for costing, financial or taxation matter, or may take up appointment that
may be made by the CG or a State Government or a court of law or any other legal authority or may act as
Secretary in his professional capacity, provided his employment is not on a salary-cum-full-time basis.
Permission granted generally –

Ÿ Employment under CAiP or firms of such Cas.
ªPrivate tutorship.
ªAuthorship of books and articles.
ªHolding of Life Insurance Agency License for purpose of getting renewal commission.
ªAttending classes and appearing for any examination.
ªHolding of public elective offices such as M.P., M.L.A. and M.L.C.
ªHonorary office leadership of charitable-educational or other non-commercial organisations.
CA Ravi Agarwal's
ªActing as Notary Public, Justice of the Peace, Special Executive Magistrate and the like.
ªPart-time tutorship under coaching organisation of Institute.
ªValuation of papers, acting as paper-setter, head-examiner or a moderator, for any examination.
ªEditorship of professional journals (Eg Company Audit Journal)
ªActing as Surveyor and Loss Assessor under the Insurance Act, 1938
ªActing as recovery consultant in banking sector
ªOwning agricultural land and carrying out agricultural activity
Specific Resolution - Members in practice may engage in the following categories of business or
occupations, after obtaining the specific and prior approval of the Council in each case:
ªEmployment in business concerns provided member and/or his relatives do not hold “substantial
interest” in such concerns. (20% or more)
ªFull-time or part-time employment in non-business concern.
ªOffice of MD or a WTD of body corporate provided member and/or any of his relatives don't hold
substantial interest in such concern
ªInterest in family business concerns (including such interest devolving on the members as a result of
inheritance / succession / partition of family business) or concerns in which interest has been acquired
17
as a result of relationships and in management of which no active part is taken.
ªInterest in an educational institution.
ªPart-time or full-time lectureship for courses other than those relating to Institute's examinations
conducted under the auspices of the Institute or the Regional councils or their branches.
ªPart-time or full-time tutorship under any educational institution other than coaching
organization of Institute.
ªEditorship of journals other than professional journals.
ªAny other business or occupation for which Executive Committee considers that permission may
be granted.
Notes:
Ÿ No bar for member to be promoter / signatory to Memorandum and Articles of Association of Co.
Ÿ No bar for such promoter / signatory to be Director Simplicitor of that Co.
Ÿ Teaching hours should not exceed 25 hrs a week in order to be able to undertake attest functions.
Ÿ Trading in commodity derivates treated as business
Ÿ Need specific permission of Council for becoming director if partner is Auditor of Co.
Clause (12) :
Allows a person not being a member of the institute in practice or a member not being his partner
to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or
financial statements.
Exceptions:
Council has clarified that power to sign routine documents on which professional opinion or authentication
CA Ravi Agarwal's
is not required to be expressed may be delegated in the following instances and such delegation will not
attract provisions of this clause:
(i)Issue of audit queries during course of audit.
(ii)Asking for information or issue of questionnaire.
(iii)Letter forwarding draft observations/financial statements.
(iv)Initiating and stamping of vouchers and of schedules prepared for purpose of audit.
(v)Acknowledging and carrying on routine correspondence with clients.
(vi)Issue of memorandum of cash verification and other physical verification or recording results
thereof in books of clients.
(vii)Issuing acknowledgements for records produced.
(viii)Raising of bills and issuing acknowledgements for money receipts.
(ix)Attending to routine matters in tax practice, subject to provisions of Section 288 of Income Tax
Act.
(x)Any other matter incidental to office administration and routine work involved in practice of
accountancy.
Authority delegated by CA à But Authority not used à not a defence for firm/CAà Prof misconduct
17
Sec-26 - No person other than member of ICAI will sign document on behalf of CAiP Note: Issue of
stock certificate by assistant shall also make CAiP guilty
PART II – Professional misconduct in relation to members of the Institute inservice

A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:
Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the
emoluments of the employment undertaken by him.
Can share with relatives,dependents,friends etc. if it's not consideration for procuring or retaining a
job.
Job must be procured and retained with own professional capabilities and not by any financial deal impairing
professional dignity.
Clause (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered
accountant or broker engaged by such company, firm or person or agent or customer of such company,firm or
person by way of commission or gratification.
A member in foregoing circumstances would be guilty of misconduct regardless of fact that he was in
whole-time or part-time employment or that he was holding COP along with his employment.
(CAiP & Employment refers lawyer to employer à Gets referral fees from lawyer à Guilty in this
clause)
CA Ravi Agarwal's
PART III- Professional misconduct in relation to member of the Institute generally
Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.
Clause (2) does not supply the information called for, or does not comply with the requirements asked for,
by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate Authority.
Where a Chartered Accountant had continued to train an articled clerk though his name was removed
from the membership of the Institute and he had failed to send any reply to the Institute
asking him to send his explanation as to how he was training as his articled clerk when he was not a
member of the Institute. Held that he was guilty under Clause (2) of Part III of the First Schedule.
Clause (3) while inviting professional work from another chartered accountant or while responding to
tenders or enquiries or while advertising through a write up, or anything as provided for in items (6) and
(7) of Part I of this Schedule, gives information knowing it to be false.
PART IV- Other misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if
he –
Clause (1) is held guilty by any civil or criminal court for offence which is punishable with imprisonment
17
for a term not exceeding six months.
Clause (2) in the opinion of the Council, brings disrepute to the profession or the Institute as a result of
his action whether or not related to his professional work.
CA is expected to maintain highest standards of integrity even in his personal affairs and any deviation
from these standards, even in his non-professional work, would expose him to disciplinary action.
Note: Before starting any ans. of this clause ICAI gives this line à Section 21 of the Chartered
Accountants Act, 1949 provides that a member is liable for disciplinary action if he is guilty of any
professional or “Other Misconduct.”
Examples, where a member may be found guilty of “Other Misconduct”:

ŸRetains books of a/c and documents of client and fails to return on request without reasonable cause.
ŸMakes material misrepresentation.
ŸUses the services of his articled or audit assistant for purposes other than professional practice.
ŸConviction by a competent court of law for any offence under Sec 8 (v) of the CAs Act 1949.
ŸMisappropriation of money by office-bearer of Regional Council of ICAI and utilisation for his personal
use.
ŸNot replying within reasonable time and without good cause to letter of public authorities.
ŸAssessment records of IT Dept belonging to client of were found in almirah of bed-room of CA.
ŸWhere CA had adopted coercive methods on a bank for having a loan sanctioned to him.
CA Ravi Agarwal's
THE SECOND SCHEDULE

nd
Director discipline opinion - member guilty of prof/other misconduct in 2 or both schedule
àDisciplinary Committee
Part Particulars Nature of Misconduct No. of

clauses
I Professional Misconduct of members in practice Professional Misconduct 10
II Professional Misconduct of members generally Professional Misconduct 4
III Other misconduct of members generally Other Misconduct 1
Part I - Professional Misconduct in relation to Chartered Accountants in Practice

A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he
17
Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as required by
any law for the time being in force.
Exceptions:
ŸDisclosure allowed only with consent of client or as part of professional duties (Eg submitting info to
Exchange Control Authorities)
ŸNo misconduct in case of legal compulsion as reqd by Evidence Act
ŸSec 143(12) – Reporting of fraud
Clause (2) :
Certifies or submits in his name or in the name of his firm, a report of an examination of financial
statements unless the examination of such statements and the related records has been made by him or
by a partner or an employee in his firm or by another chartered accountant in practice.
Clause (3) :
Permits his name or the name of his firm to be used in connection with an estimate of earnings
contingent upon future transactions in manner which may lead to the belief that he vouches for the
accuracy of the forecast.
He can prepare profit forecast provided he indicates clearly in his report the
Ÿsources of information,
Ÿthe basis of forecasts and
CA Ravi Agarwal's
Ÿmajor assumptions made in arriving at the forecasts, so long as he does not vouch for the accuracy of
the forecasts.
Clause (4) :
Expresses his opinion on financial statements of any business or enterprise in which he, his firm, or a
partner in his firm has a substantial interest.
ŸCA can't certify f/s of concern where he's employed
ŸNot audit a/c of college where he is part time lecturer
ŸNot audit trust if partner is either trustee or employee of trust
ŸApplicable to all types of Audit
ŸThe client shouldn't be relative of member
ŸNot permitted to prepare books of a/cs for auditee clients
ŸStat auditor can't be internal auditor
ŸInternal auditor can't be appointed as Tax/GST Auditor
ŸCooling off period: Not accept Audit of Co for 2 years from date of completion of tenure/resignation as Director.
Note: Evaluating costs or other assignments of such nature à not covered in this clause
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Clause (5) :
Fails to disclose a material fact known to him which is not disclosed in a financial statement, but
disclosure of which is necessary in making such financial statement not misleading where he is concerned
with that financial statement in a professional capacity.
Note: If CA appears before tax authorities on behalf of client à submits info or expln that's found false
misleading à not guilty as data provided by mgt + acting on instructions of client
Clause (6) :
Fails to report a material misstatement known to him to appear in a financial statement with which he is
concerned in a professional capacity.
Clause (7) :
does not exercise due diligence, or is grossly negligent in the conduct of his professional duties.
Ÿ It is a vital clause which gets attracted whenever it is necessary to judge whether accountant has
honestly and reasonably discharged his duties.
Ÿ The expression negligence covers a wide field and extends from frontiers of fraud to collateral minor
negligence.
Examples:
ŸCA fails to indicate mode of valuation of investments in shares reqd by Cos. Act 2013
ŸConducted Stock audit without visiting the site, relied on mgt reports
CA Ravi Agarwal's
ŸWrongly certified increase in Paid up share capital of Pvt ltd Co in Balance Sheet (Clause 7/8/9 of Part
1 of Second Schedule to CA Act 1949)
ŸIssued turnover certificate of betel nuts to firm for import license w/o checking books & docs but
relying on article clerk à Guilty
ŸIssued certificate of consumption of Raw material based on minutes of BODà guilty clause 2 & 7
of this schedule
ŸIssued incorrect certificate of export of Onions
ŸIssued report subject to separate notes (No audit report is issued with Notes)
ŸFailure to examine cash balance & passbook i.e. basic audit procedure
ŸNot submitted his report in due time to enable Co to comply with Statutory requirement
ŸWrong audit report issued to School, claimed correction slip sent but couldn't prove
ŸIssued 2 certificates of circulation for 1 daily newspaper àclause 7 & 8 (Should have issued only 1)
ŸA material prior period adjustment made to accounts àauditor didn't consider materiality à didn't
exercise due diligence + wrong opinion insufficient info + didn't follow SA à Clause 7,8 & 9
ŸFailed to check a forged signature which he could have checked
ŸShared password of his digital signature certificate with client àGuilty
Clause (8):
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Fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are
sufficiently material to negate the expression of an opinion.
Examples:
Ÿ Transaction took place between ABC Firm & R developers but reported in books of ABC Construction.
Loan amount was material. Guilty under clause 6, 7 & 8 of Part I of Second Schedule to CA Act 1949
Ÿ CA issued false certificates to several parties for past exports for monetary consideration without
verifying any supporting records or documents which helped parties to make imports free of duty.
Held that he was guilty of professional misconduct within the meaning of clauses (2), (7) & (8) of
Part I of the second schedule of CA Act, 1949 in terms of section 21 & 22 of the said Act
Ÿ CA audited books of A ltd that had investment of Rs 10L, later it was found real value was 25k à CA
guilty under clause 2, 7, 8 of Part I of Second Schedule of CA Act,1949
Ÿ Certificate of circulation of Periodical w/o verifying undelying record bank statements, printer bills,
sales records etc à Guilty under clause 7 & 8
Clause (9) :
Fails to invite attention to any material departure from the generally accepted procedure of audit
applicable to the circumstances
Generally accepted audit procedure = Engagement and Quality Control Standards, Statements, General
Clarifications, Guidance Notes Technical Guides, Practice Manuals, Studies and Other Papers.
Special Points:
ŸAudit of listed cos : Done by Auditor subject to Peer Review process of ICAI & hold valid certificate
issued by Peer Review Board of ICAI
CA Ravi Agarwal's
ŸFirm Reg No & Membership No to be mentioned on reports pursuant to attestation engagements
ŸUDIN is mandatory to be generated for all kinds of certifications
Examples:
Ÿ CA didn't conduct sample checking of bank a/c of Co & didn't do vouching & depended on work of
Article Assistant à guilty under clause 7,8,9
Ÿ CA didn't check bank column totals, didn't verify contra entries, test checked when no internal check
present,didn't check Bank recos à guilty under clause 7,8,9
Clause 10 :
fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a
separate banking account or to use such moneys for purposes for which they are intended within a
reasonable time.
Spl points:
ŸAdvance received against services excluded from scope
ŸMoney recd for expenses to be incurred in reasonably short time not to be deposited in bank a/c
ŸMoney recd in capacity of trustee, executor liquidator, etc keep in separate bank a/c
ŸRefund voucher issued by Income Tax dept in name of client credited to his a/c à Guilty under clause
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7 & 10
ŸCA acting as financial advisor to client converted his own a/c to joint a/c with client withouthis
consent & fraudulently discharged 3 FDRs in client's name. Gulity à Clause 10 of Part I of Second
Schedule + Other Misconduct u/s 22 read with sec 21
PART II - Professional misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he –
Clause (1) :
contravenes any of the provisions of this Act or the regulations made there under or any guidelines issued
by the Council.
Examples:
ŸCA certified in Form K-2 audit clerk in service with him, the article employed elsewhere 11-5 pm &
then come to office work till 8 pm.
ŸTook article intern under him even when no vacancy was there, intern got to know that Articleship
deed not regd.
ŸIssued certificate as a CA even if no COP there with him. Guilty as violation of Section 6
ŸIn pvt circular to clients in addition to CA described himself as Investment Consultant Public
Accountant
ŸTook loan from firm where article & his father were interested
ŸDidn't pay stipend as per Reg 48 to article, only paid when article left. Said he had agreement to pay
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fees annually à held guilty

ŸAccepted audit even when UNDISPUTED audit fees wasn't paid to earlier auditor à Guilty under Clause
1 of Part II of Second Schedule of CA Act 1949
ŸConducted more TAX audits than prescribed limit
Clause (2) :
being an employee of any company, firm or person, discloses confidential information acquired in the
course of his employment except as and when required by any law for the time being in force or except as
permitted by the employer.
Clause (3) :
Includes in any information, statement, return or form (SIRF) to be submitted to the Institute, Council
or any of its Committees, Director (Discipline), Board of Discipline.
Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing them to
be false.
Examples:
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ŸA CA manager in firm applied for admission as fellow to ICAI saying he's partner in firmà made a
statement that's false à Guilty
ŸIn a hearing before Disciplinary Committee made a false statement on oath
ŸCA in full time employment in a Co while filling bank empanelment form gave declaration that he was
not in any occupation/business/vocation et c
ŸCA being manager of Co devoting 30 hrs. per week showed himself as CA in full time practice for
employment for Bank branch Audits
Clause (4) :
Defalcates or embezzles money received in his professional capacity.
SA 240 - Defalcation & embezzlement of money recd in prof capacity - Fraud
Part III - Other misconduct in relation to members of the Institute generally

A member of Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
is held guilty by any civil or criminal court for an offence which is punishable with imprisonment for a
term exceeding 6 months
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Council General Guidelines (Final Stage of Chapter)
Chapter I: Applicable to all the Members of the Institute whether in practice or not
Chapter II: A member of the ICAI who is an employee shall exercise due diligence and shall not be grossly
negligent in the conduct of his duties.
Chapter V: Maintenance of books of account

Member or firm in practice shall maintain following books of a/c:
Ÿ Cash Book
Ÿ Ledger
Chapter VI: Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961
A member of the Institute in practice shall not accept, in a financial year, more than the “specified number
of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
ŸAs per clarification on Tax Audit Assignments, if there are 10 partners in a firm of CAs in practice, then all
Ÿpartners of the firm can collectively sign 600 tax audit reports. This max. limit of 600 tax audit
assignments may be distributed between partners in any manner. For instance, 1 partner can
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individually sign 600 tax audit reports & remaining 9 partners are not signing any tax audit report.
ŸIn computing “specified no. of tax audit assignments” each year's audit would be taken as separate
assignment.
ŸMr A partner in ABC as well as ADE, then also only 60 allowed for A
ŸMr A partner in ABC & also in A proprietorship, then also 60 allowed to A
ŸAudits u/s 44AD, 44ADA, & 44AE of IT Act 1961 not counted
ŸAudit of H.O. & Branch office counted as 1 assignment
ŸAudit of More than 1 branch of same concern = 1 assignment
Mr
Ÿ Badal is part time practicing partner then will he be considered for limit? No
Chapter VII: Appointment of an Auditor in case of non-payment of undisputed fees

ŸA member of the Institute in practice shall not accept the appointment as auditor of an entity in case
the undisputed audit fee of another Chartered Accountant for carrying out the statutory audit under
the Companies Act, 2013 or various other statutes has not been paid:
ŸProvided that in the case of sick unit, the above prohibition of acceptance shall not apply.
ŸUndisputed audit fees include expense incurred by Auditor
ŸSick unit means unit regd for 5 years or more & has accumulated loss >= Net worth
Chapter VIII: Specified no of Audit assignments

ŸA member of the Institute in practice shall not hold at any time appointment of more than the
“specified number of audit assignments” of Companies under Section 141 of the Companies Act 2013.
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Ÿ30 audits per CA in full time practice allowed
ŸOne Person Co & Dormant Co excluded from limit
ŸNo of partners on date of acceptance to be considered
Chapter IX Appointment as Statutory auditor

ŸA member of Institute in practice shall not accept appointment as statutory auditor of PSU(s)/ Govt
Company(s)/Listed Company(s) and
Ÿother Public Company(s) having turnover of 50 Cr or more in a year
Ÿwhere he accepts any other work(s) or assignment(s) or service(s) in regard to the same
Undertaking(s)/ Company(s) on a
Ÿremuneration which in total exceeds fee payable for carrying out stat audit of same Undertaking /Co.
Other work excludes:

Ÿaudit under any other statute.
Ÿcertification work required to be done by statutory auditors; and
Ÿany representation before an authority
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Chapter X Appointment of an auditor when he is indebted to a concern

Member in practice or partner of firm in practice or firm or relative of such member or partner shall not
accept appointment as auditor of concern while indebted to concern or given any guarantee or provided
any security in connection with indebtedness of any 3rd person to concern, for limits fixed in statute and in
other cases for amount exceeding 100,000/-.
Notes:
Ÿ Recovery of fees on progressive basis doesn't mean indebtness.
Ÿ Limit as per Cos. Act for indebtness is 5L & for guarantee or security is 1L
Chapter XI Directions in case of unjustified removal of auditors
Ÿ Incoming auditor(s) not to accept the appointment as auditor(s), in case of unjustified removal of
earlier auditor(s).
Chapter XIII Guidelines on Tenders
Ÿ Member in practice shall not respond to any tender issued by any organization or user of professional
services
Ÿ in areas of services which are exclusively reserved for CAs, such as audit and attestation services.
Not applicable
Ÿ where minimum fee of the assignment is prescribed in tender document itself or
Ÿ where areas are open to other professionals along with Cas.
Chapter XV: Networking

Where larger structure is aimed at co-operation and entities within structure share significant part of
professional resources, it is deemed to be a network.
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Professional resources include:

Ÿ Common systems that enable firms to exchange info such as client data, billing and time records;
Ÿ Partners and staff;
Ÿ Technical departments that consult on technical or industry specific issues, transactions or events for
assurance engagements;
Ÿ Audit methodology or audit manuals; and
Ÿ Training courses and facilities
The different forms of Network can be as under:-

ŸNetwork can be constituted as a mutual entity which will act as a facilitator for constituents of
Network. In such case Network itself will not carry out any professional practice.
ŸNetwork can be constituted as a partnership firm subject to condition that total number of partners
does not exceed 20.
ŸNetwork can be constituted as a LLP subject to provision of Chartered Accountant Act and
ŸRules and such other laws as may be applicable.
ŸNetwork can be constituted as company subject to the guidelines prescribed by Institute for corporate
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form of practice and formation of management consultancy services company. (Chap xvii)
ŸNetwork Firms shall consist of sole Practitioner/proprietor, partnership or any such entity of
professional accountants as may be permitted by the Act.
ŸFirm is allowed to join only one network.
ŸFirms having common partners shall join only one Network.
Naming of Network
1.The Network may have distinct name which should be approved by ICAI. To distinguish a “Network”
from a “firm” of CAs, the words “& Affiliates” shall be used after the name of network and words “&
Co.” /“& Associates” shall not be used. The prescribed format of application for approval of Name for
Network is at Form 'A' (enclosed). The names of the network may be as mentioned in Appendix II.
2.ICAI shall approve or reject name of Network and intimate to Network at its address mentioned in
Form 'A' within 30 days from date of receipt of said Form.
3.Mere approval of name of Network shall not entitle Network to carry on practice in its own name.
Registration of Network with entities in India
1.After name of Network approved, Institute same shall reserve name for period of three (3) months
from date of approval.
2.Network shall get itself registered with Institute by applying in Form B within period of 3 months,
failing which name assigned shall stand cancelled on expiry of said period.
3.Registration of Network with Institute is mandatory.
4.If different Indian firms are networked with a common Multinational Accounting Firm, they shall be
considered as part of network.
CA Ravi Agarwal's
Listing of Network with entities outside India
1.Authorized representative of Indian Member firm (s)/Member constituting Network with entities
outside India shall file declaration with ICAI in Form `D' for Listing such Network within 30 days from
date of entering into Network arrangement.
2.Proprietary/individual members, partnership firms as well as members in LLP or any such other entity,
shall be permitted to join such network with entities outside India provided that they can join only
one network and firms having common partners shall join only one such network.
Framework of Internal Byelaws of Network:

Bye-laws may contain following clauses on which the affiliates of the network may enter into a written
agreement among themselves:
(i)Appointment of a Managing Committee
(ii)Administration of network
(iii)Contribution of membership fees to meet the cost of the administration of the network.
(iv)Identifying a partner of any of member firms of network to be responsible for the assignment
(engagement partner)
(v)Dispute settlement procedures through arbitration and conciliation
(vi)Development of training materials for members of the network
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(vii)Issue of News-letters for staff and clients

(viii)D e v e l o p m e n t of software for different types of assignments
(Manage/Administer/EP/Fees/Dispute settle/Train/Newsletters/Softwares)
Ethical Compliance: It will be necessary for such network to comply with applicable ethical requirements
prescribed by ICAI and following requirements in particular: -
1.If one firm of network is statutory auditor of entity then associate [including networked firm(s)] or
said firm directly/indirectly not accept internal audit or book-keeping or other assignments
prohibited for stat auditor firm.
2.Guidelines of ceiling on Non-audit fees is applicable in relation to Network as follows:
-i) For a Network firm who is doing statutory audit (including its associate concern and/or firm(s)
having common partnership), it shall be same as mentioned in said notification; and
ii) For other firms of same Network collectively, it shall be 3 times of fee payable for carrying out
statutory audit of same undertaking/ company.
3.In cases where rotation of firms prescribed by regulatory authority, no member firm of network can
accept appointment as auditor in place of any member firm of network which is retiring.
4.Network may advertise to extent permitted by Advertisement Guidelines issued by ICAI. Firms
constituting network are permitted to use words “Network Firms” on their professional stationery.
5.Constituent member firms of Network and Network shall comply with all Ethical Standards prescribed
by Council from time to time.
CA Ravi Agarwal's
Change in constitution of registered Network:
In case of change in constitution of regd Network on account of any entry into or exit from Network,
network shall communicate to ICAI by filing Form 'C' within 30 days from date of change in the
constitution.
Chapter XIV Unique Document Identification Number (UDIN) Guidelines

Ÿ To curb malpractice of false certification/ attestation by unauthorised persons & reduce bogus
certificates.
Ÿ Mandatory for all certificates, GST & Tax audit reports & other audit/assurance attest functions
Chapter XVI Logo Guidelines

The logo consists of letter 'CA' with a tick mark inside a rounded rectangle with white background.
Chapter XVII Guidelines for Corporate form of Practice

ü Council has allowed members in practice to be MD/WTD/Manager of a Body Corporate that is
exclusively engaged in providing Management Consultancy & Other Services permitted u/s 2(2)(iv) of
CA Act 1949
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ü No restriction on equity holding in such Company
ü Entitled to do attest functions & train article assistants
ü Name of Mgt Consulting Co to be approved by ICAI & registered with it
ü Compliances for Mgt Consulting Co:
ü Not to accept Internal audit or bookkeeping service or other assignments from entity where
practitioner or firm is auditor
ü Ceiling of non-audit fees applicable to it
ü Mgt consulting co shall comply with clause 6 & 7 of Part 1 of First Schedule of CA Act 1949
ü Recommended Self-Regulatory Measures
ü Branch Audits
ü Branch audit of Co shouldn't be conducted by Stat Auditors consisting 10 or more members
ü But by local firms of auditors less than 10 members
ü Restriction not apply in following cases:
ü A/c records of branch at HO
ü Significant operations carried out at Branch
Ÿ Joint Audit
ü Large Cos should have practice of having firms with < 5 members as Joint Auditors
ü Senior firms shouldn't object to such practice
Ÿ Ratio b/w Qualified & Unqualified Staff
üAtleast 1 member for every 5 non-members excluding articled/audit assistants, typists, peons, &
others not engaged in professional work
Ÿ Disclosure of Interest by Auditors
CA Ravi Agarwal's
üDisclose the payments received for other services through medium of different firm or firms where
he maybe a partner or proprietor
Ÿ Recommended minimum scale of fees
Recommended Min. fees for professional services is to be charged
Recent Decisions of Ethical Standards Board

=CA may be Equity research adviser but can't publish retail report as it'd be business or occupation
=Member of trust can't be its auditor
=May engage himself as Registration Authority for obtaining Digital Signature Certificate for clients
=Can hold credit card of bank even if auditor of same bank but o/s balance shouldn't exceed 1L from limit
(If limit 2L, o/s balance can't be > 3L)
=CA can act as mediator in Court
=Can't accept audit of bank if taken loan against FD
=CA in practice can't become Financial Advisors & receive fees/commission from Financial Institutions
such as Mutual Funds, Insurance cos, NBFCs
= Can't exercise lien over client docs for non-payment of fees
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= Not permissible to print vision or values behind visiting cards as it'd result in solicitation & thus
violative of Clause 6 of First Schedule of CA Act 1949
= Not permissible to take agencies of UTI, GIC & NSDL
= Permissible to be settlor of a trust (provides property to beneficiary)
= Can't hold customs broker license
= CA in employment can appear as Tax representative before tax authorities on behalf of employer but
not for other employees of that employer
=Stat auditor of bank can't do stock audit of such bank
=Internal auditor of PF trust of Govt co can't be stat auditor
=Concurrent auditor of bank X can't be stat auditor of bank Y which is sponsored by X
=CA/ CA firm can act as internal auditor of Co & stat auditor of its EPF
=Internal auditor not to undertake Tax Audit
CA Ravi Agarwal's
Disciplinary Proceedings
Receipt of complaint + Fees by Disciplinary directorate (DD)
GUILTY NON-GUILTY
First Schedule Second Schedule or both Board of Discipline
Board of Disciplinary Accept Reject

Discipline (BOD) Committee
(DC)
Close matter · Advise DD to
investigate further
GUILTY* GUILTY* · May proceed if
matter of 1st
· Reprimand · Reprimand Schedule
· Remove name · Remove name · Refer to DC if 2
nd
upto 3 months permanently or any Schedule

Fine upto 1L duration
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Fine upto 5L
If not found guilty

Matter closed Appeal:
Can be made by member or Director (Discipline) within 90 days à Appellate Authority
Orders possible:
ŸConfirm, modify or set aside order
ŸImpose, set aside, reduce or enhance penalty
ŸRemit case to BOD/DC to reconsider
ŸSuch order it thinks fit
Non-Compliance with Laws and Regulations (NOCLAR)

Non-compliance with laws and regulations comprises of acts of omission or commission, intentional
or unintentional, which are contrary to prevailing laws or regulations committed by:
Ÿ a client/professional accountant's employing organisation;
Ÿ or TCWG or Mgt or other individuals
Ÿ working for or under direction of a client/ employing organisation.
Some important facts about NOCLAR are given below:

Ÿ During Course of Providing a Service: NOCLAR will be applicable if a professional accountant
CA Ravi Agarwal's
encounters, or is made aware of, non-compliance or suspected non-compliance while providing a
professional service to a client. He is not required to investigate, nor responsible for ensuring compete
compliance.
Ÿ Expertise of Laws not Required: A professional accountant is expected to apply knowledge and
expertise, and exercise professional judgment. However, he is not expected to have a level of
knowledge of laws and regulations greater than that which is required to undertake the engagement.
Whether an act constitutes non-compliance is ultimately a matter to be determined by a court or
other appropriate adjudicative body.
Ÿ Certain Matters Expressly out of Purview: Matters that are clearly inconsequential, or relating to
personal misconduct pertaining to business activities of client not covered.
Ÿ Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the matter to an
appropriate authority would be precluded if doing so would be contrary to law or regulation.
Applicability of NOCLAR in India:

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Ÿ The IESBA Code of Ethics makes NOCLAR applicable to all assignments (members in practice),
and to all employers (members in service).
Ÿ ICAI Code has restricted applicability of NOCLAR to Audits assignment of listed entities
(members in practice) and for members in service applicability has been restricted to employees
of listed entities.
Documentation Requirements in NOCLAR: Revised Code over and above require professional
accountant to follow additional documents requirements as under:
Ÿ How management / TCWG have responded to the matter.
Ÿ The course of action accountant considered, judgments made and decisions that were taken,
having regard to reasonable and informed third party test.
Ÿ How accountant is satisfied that responsibility of public interest has been fulfilled.
NOCLAR vs. SA 250

Applicability
1.SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is
applicable on professional accountants in service, and in practice. Among those in practice, it applies
to Auditors, as well as professional services other than Audit. However, degree of responsibility of the
professional accountant varies as per the role.
CA Ravi Agarwal's
Coverage of Laws
2.SA 250 talks of auditor's responsibilities for laws having direct effect on the determination of material
amounts and disclosures in the financial statements (such as tax and labour laws); and other laws
and regulations that do not have a direct effect on the determination of the amounts and disclosures
in the financial statements, but compliance with which may be fundamental to the operating aspects
of the business. NOCLAR, while being alike to SA 250 till this point, is further ahead of it in that it
takes into account non-compliance that causes substantial harm resulting in serious consequences in
financial or non-financial terms.
Definition of Stakeholders
3.SA 250 doesn't define stakeholders. NOCLAR is related to effect of non-compliance on investors,
creditors, employees as also the general public.
Disclosure of Imminent Breach

4.As per NOCLAR, in exceptional circumstances, professional accountant might become aware of an
imminent breach of a law or regulation that would cause substantial harm to investors, creditors,
employees or the general public. Having first considered whether it would be appropriate to discuss
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matter with mgt or TCWG, accountant shall exercise professional judgment and determine whether to
disclose the matter immediately to an appropriate authority in order to prevent or mitigate
consequences of such imminent breach. If disclosure is made, disclosure is permitted. This provision is
not existent in SA 250.
SQC 1 “QUALiTY CONTROL FOR FiRMS THAT
PERFORM AUDiTS & REViEWS OF HiSTORiCAL
FiNANCiAL INFORMATiON, AND OTHER
ASSURANCE & RELATED SERViCES
ENGAGEMENTS”
CA Ravi Agarwal's
SQC 1 “QUALiTY CONTROL FOR FiRMS THAT PERFORM AUDiTS &
01 REViEWS OF HiSTORiCAL FiNANCiAL INFORMATiON, AND OTHER

ASSURANCE & RELATED SERViCES ENGAGEMENTS”
01
All firms to have system of quality control that provides reasonable assurance that:
a.Firm & personnel comply with professional standards, regulatory & legal requirements, &
b.Reports issued by firm or partners are appropriate in circumstances.
Definitions:-
Ÿ Engagement partner –partner or other person in the firm who is member of ICAI and is in full time
practice and responsible for engagement and its performance, and for report that is issued on behalf
of firm, and who has appropriate authority from professional, legal or regulatory body.
Ÿ Engagement quality control review –process designed to provide objective evaluation, before report is
issued, of significant judgments that engagement team made and conclusions they reached in
formulating the report.
Ÿ Engagement quality control reviewer –partner, person in firm, qualified external person, or team of
individuals, with experience and authority to objectively evaluate, before report is issued, significant
judgments the engagement team made and conclusions they reached in formulating report. However,
in case the review is done by a team of individuals, such team should be headed by a member of ICAI.
Elements of a System of Quality Control

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

The actions of EP and appropriate msgs to the other members of engagement team, in taking
responsibility for overall quality on each audit engagement, emphasise:
a.The importance to audit quality of:
a.Performing work that complies with Professional stds and Regulatory and Legal requirements;
b.Complying with the firm's quality control policies and procedures as applicable;
c.Issuing auditor's reports that are appropriate in the circumstances; and
d.The engagement team's ability to raise concerns without fear of reprisals; and
b.The fact that quality is essential in performing audit engagements.
CA Ravi Agarwal's
Independence
Policies & procedures should enable firm to:
ÜCommunicate independence requirements to personnel & others.
01
ÜIdentify & evaluate circumstances creating threat to independence.
ÜTake appropriate action to eliminate threats/withdrawal from engagement.
Policies & Procedures in case of breach of Independence requirements

The policies and procedures should include requirements for:
a.All who are subject to independence requirements to promptly notify firm of independence
b.breaches;
a.Firm to promptly communicate identified breaches to:
b.Engagement partner who, with the firm, needs to address the breach; and
c.Other relevant personnel in firm and those subject to independence requirements who need to take
appropriate action; and
c.Prompt communication to the firm, if necessary, by engagement partner and other individuals of
actions taken to resolve the matter, so that firm can determine whether it should take further action.
Notes:
Ÿ At least annually, firm should obtain written confirmation of compliance with policies and procedures
on independence from all firm personnel in terms of requirements of Code.
Ÿ The familiarity threat is particularly relevant in context of F.S. audits of listed entities. For these
audits, engagement partner should be rotated after a pre-defined period, normally not more than 7
years.
Evaluating the Integrity of Client

With regard to integrity of a client, matters that firm considers include, for example:
Ü The identity and business reputation of client's principal owners, key mgt, related parties and TCWG.
Ü The nature of client's operations, including business practices.
Ü Info concerning attitude of client's principal owners, key mgt and TCWG towards such matters as
aggressive interpretation of A/C stds and internal control environment.
Ü Whether client is aggressively concerned with maintaining firm's fees as low as possible.
Ü Indications of inappropriate limitation in scope of work.
Ü Indications that client might be involved in money laundering or other criminal activities.
Ü Reasons for proposed appointment of firm and non-reappointment of previous firm.
Information on integrity of client that the firm obtains may come from, for example:
Ÿ Communications with existing or previous providers of professional accountancy services to client in
accordance with the Code, and discussions with other third parties.
Ÿ Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers.
Ÿ Background searches of relevant databases.
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Matters to be considered in determining if firm has capabilities, competence, time and resources to
undertake new engagement:
Ü Firm personnel have knowledge of relevant industries or subject matters;
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Ü Firm personnel have experience with regulatory or reporting requirements, or ability to gain necessary
skills and knowledge effectively;
Ü The firm has sufficient personnel with the necessary capabilities and competence;
Ü Experts are available, if needed;
Ü Individuals meeting criteria and eligibility requirements to perform EQCR are available and
Ü The firm be able to complete engagement within reporting deadline.
Withdrawal from Engagement

Policies and procedures on withdrawal from engagement include following:
ÜDiscussing with client's mgt and TCWG regarding action that firm might take based on
Ürelevant facts and circumstances.
ÜIf firm determines that it is appropriate to withdraw, discussing with appropriate level of client's mgt and
TCWG withdrawal and reasons for the withdrawal from engagement.
ÜConsidering professional, regulatory or legal requirement for firm to remain in place, or for firm to report
withdrawal, together with reasons for withdrawal, to regulatory authorities.
ÜDocumenting significant issues, consultations, conclusions and basis for conclusions.
Human Resources
Establish policies/procedures to reasonable assure that:
ÜFirm has sufficient personnel with capabilities, competence & commitment (CCC) to ethical
Üprinciples; &
ÜEngg partner to issue appropriate report.
ÜThe firm's performance evaluation, compensation and promotion procedures give due recognition and
reward to development and maintenance of competence and commitment to ethical principles.
In particular, the firm:

ÜMakes personnel aware of firm's expectations regarding performance and ethical principles;
ÜProvides personnel with evaluation, and counseling on, performance, progress and career development;&
ÜHelps personnel understand promotion depends on performance quality and adherence to ethical
principles, and failure to comply with firm's policies and procedures may result in disciplinary action.
Assignment of Engagement Teams

The firm establishes procedures to assess its staff's capabilities and competence.
Capabilities and competence considered when assigning engagement teams, and determining level of
supervision reqd, include following:
ÜUnderstanding, and practical experience with, engagements of similar nature and complexity through
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appropriate training and participation.

ÜAn understanding of professional stds and regulatory and legal requirements.
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ÜAppropriate technical knowledge, including knowledge of relevant information technology.
ÜKnowledge of relevant industries in which clients operate.
ÜAbility to apply professional judgment.
ÜUnderstanding of firm's quality control policies and procedures.
Engagement Performance
Review responsibilities are determined on basis that more experienced engagement team members,
including engagement partner, review work performed by less experienced team members.
Reviewers consider whether:
a)Work has been performed in accordance with professional stds and regulatory and legal requirements;
b)Significant matters have been raised for further consideration;
c)Appropriate consultations have taken place and resulting conclusions have been documented and
implemented;
d)There is a need to revise the nature, timing and extent of work performed;
e)The work performed supports conclusions reached and is appropriately documented;
f)The evidence obtained sufficient and appropriate to support report; and
g)The objectives of engagement procedures have been achieved.
Supervision includes following:

ÜTracking progress of engagement
ÜConsidering capabilities and competence of individual members of engg team, whether they have
sufficient time to carry out work, understand their instructions and work is being carried out in
accordance with planned approach to engagement.
ÜAddressing significant issues arising during engagement, considering their significance and appropriately
modifying planned approach appropriately.
ÜIdentifying matters for consultation or consideration by more experienced engagement team members.
Consultation
The firm should establish policies and procedures designed to provide it with reasonable assurance that:
a)Appropriate consultation takes place on difficult or contentious matters;
b)Sufficient resources are available to enable appropriate consultation to take place;
c)The nature and scope of such consultations are documented; and
d)Conclusions resulting from consultations are documented and implemented.
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Engagement Quality Control Review (EQCR)
Review Responsibility:
EP shall take responsibility for reviews being performed in accordance with firm's review policies and
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procedures.
For audits of F.S. of listed entities, engagement partner shall:
Ÿ Determine that an engagement quality control reviewer (EQCR) has been appointed;
Ÿ Discuss significant matters arising during audit engagement, with EQCR; and
Ÿ Not date auditor's report until the completion of EQCR i.e. EQCR should be completed before Audit
Report is issued.
An EQCR for audits of F.S. of listed entities includes considering the following:
ÜEngagement team's evaluation of firm's independence in relation to specific engagement.
ÜSignificant risks identified during the engagement and the responses to those risks.
ÜJudgments made, particularly with respect to materiality and significant risks.
ÜWhether appropriate consultation has taken place on matters involving differences of opinion or other
difficult or contentious matters, and conclusions arising from them.
ÜThe significance and disposition of corrected and uncorrected misstatements identified during the
engagement.
ÜThe matters to be communicated to management and TCWG and regulatory bodies. (SA 260)
ÜWhether working papers selected for review reflect the work performed in relation to the significant
judgments and support the conclusions reached.
ÜThe appropriateness of report to be issued.
The firm's policies and procedures are designed to maintain objectivity of EQCR. For example, engagement
quality control reviewer:
a)Is not selected by engagement partner;
b)Does not participate in engagement during period of review;
c)Does not make decisions for engagement team; and
d)Is not subject to other considerations that would threaten reviewer's objectivity.
Can EP consult EQCR during engagement? Yes as long as it doesn't affect quality of engagement.
Reviewer's objectivity should be maintained.
Engagement Documentation (ED)

Assembly of final engagement files on a timely basis. In the case of audit, such a time limit is ordinarily not
more than 60 days after date of auditor's report.
Retention period ordinarily is no shorter than 7 years from date of the auditor's report, or, if later, the date
of the group auditor's report.
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Ownership of Engagement Documentation (ED)
ED is property of firm. Firm may, at its discretion, make portions of, or extracts from ED available to
clients, provided such disclosure does not undermine validity of work performed, or, in case of assurance
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engagements, independence of the firm or its personnel.
Complaints and Allegations

a. Firm should establish policies and procedures designed to provide it with reasonable assurance that it
deals appropriately with: (types of complaints)
a.Complaints and allegations that work performed by firm fails to comply with professional standards
and regulatory & legal requirements; and
b.Allegations of non-compliance with the firm's system of quality control.
b.Complaints and allegations may originate from within or outside the firm. They may be made by firm
personnel, clients or other 3rd parties. (within or outside?)
c.Firm establishes clearly defined channels for firm personnel to raise any concerns in manner that
enables them to come forward without fear of reprisals. (how we receive them?)
d.Firm investigates such complaints and allegations in accordance with established policies and
procedures. Investigation is supervised by partner with sufficient authority & experience within firm
but not involved in engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use qualified external person or another firm to carry out investigation. Complaints,
allegations and responses to them are documented. (Investigate & document)
e.Where results of investigations indicate deficiencies in design or operation of the firm's quality control
policies and procedures, or non-compliance with firm's SQC by individual or individuals, firm takes
appropriate action. (Action)
SA 200 OVERALL OBJECTiVES OF INDEPENDENT
AUDiTOR & CONDUCT OF AN AUDiT iN
ACCORDANCE WiTH STANDARDS ON AUDiTiNG
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SA 200 OVERALL OBJECTiVES OF INDEPENDENT

02 AUDiTOR & CONDUCT OF AN AUDiT iN ACCORDANCE
WiTH STANDARDS ON AUDiTiNG
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In conducting an audit of F.S., overall objectives of the auditor are:

a.To obtain reasonable assurance about whether F.S. as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling auditor to express an opinion on whether F.S. are
prepared, in all material respects, in accordance with applicable FRF; &
b.To report on F.S., and communicate as required by SAs, in accordance with auditor's findings.
In all cases when reasonable assurance cannot be obtained and qualified opinion is insufficient for purposes
of reporting to intended users of F.S., SAs require that auditor disclaim an opinion or withdraw from
engagement, where withdrawal is legally permitted.
Definitions
Ÿ Applicable financial reporting framework (FRF) – The financial reporting framework adopted by mgt
and, where appropriate, TCWG in preparation and presentation of F.S. that is acceptable in view of
nature of entity and objective of F.S., or that is required by law or regulation.
“fair presentation framework” refer to FRF that requires compliance with requirements of framework
and:
Acknowledges, to achieve fair presentation of F.S., it may be necessary for mgt to provide disclosures
beyond those specifically required by the framework; or
Acknowledges explicitly that it may be necessary for mgt to depart from a requirement of framework
to achieve fair presentation of F.S. Such departures are expected to be necessary only in extremely
rare circumstances.
The term “compliance framework” is used to refer to a FRF that requires compliance with
requirements of framework, but does not contain acknowledgements in (i) or (ii) above.
Ÿ Financial statements – A structured representation of historical financial information, including

related notes, intended to communicate an entity's economic resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial reporting framework.
Ÿ Misstatement – A difference between the amount, classification, presentation, or disclosure(a/c/p/d)

of a reported financial statement item & the amount, classification, presentation, or
disclosure(a/c/p/d) that is required for the item to be in accordance with the applicable FRF.
Misstatements can arise from error or fraud.
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Ÿ Those charged with governance – The person(s) or organisation(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. (Executive Members-CEO/CFO/MD)
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Ethical Requirements Relating to Audit of Financial Statements
Ÿ The auditor shall comply with relevant ethical requirements, including those pertaining to
independence.
Ÿ Independence comprises both independence of mind and independence of appearance.
Ÿ Independence enhances auditor's ability to act with integrity, be objective and maintain attitude of
professional skepticism.
Professional Skepticism
An attitude that includes a questioning mind (?), being alert to conditions (!) which may indicate possible
misstatement due to error or fraud, and a critical assessment of audit evidence.
Professional skepticism includes being alert to, for example:

Ÿ Audit evidence that contradicts other audit evidence obtained. (Bank Statement vs Confirmation)
Ÿ Information that brings into question reliability of documents and responses to inquiries to be used as
audit evidence. (Got to know management is unethical)
Ÿ Conditions that may indicate possible fraud. (Internal control weak)
Ÿ Circumstances that suggest need for audit procedures in addition to those required by Sas.
Maintaining professional skepticism throughout audit is necessary if auditor wants to reduce risks of:
Ÿ Overlooking unusual circumstances.
Ÿ Over generalising when drawing conclusions from audit observations.
Ÿ Using inappropriate assumptions in determining the nature, timing, and extent(NTE) of the audit
procedures and evaluating the results thereof.
Professional judgment
Ÿ The application of relevant training, knowledge and experience,
Ÿ within the context provided by auditing, accounting and ethical standards,
Ÿ in making informed decisions about the courses of action
Ÿ that are appropriate in circumstances of audit engagement.
Professional judgment is necessary in particular regarding decisions about:

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

To obtain reasonable assurance, auditor shall obtain SAAE to reduce audit risk to an acceptably low level
and draw reasonable conclusions on which to base auditor's opinion
Ÿ Reasonable assurance – In context of audit of F.S, a high, but not absolute, level of assurance.
Ÿ Audit evidence – Info. used by auditor in arriving at conclusions on which auditor's opinion is based.
wSufficiency is measure of quantity of audit evidence. Quantity is affected by auditor's assessment
of risks of material misstatement (ROMM) and also by quality of such audit evidence.
wAppropriateness is measure of quality of audit evidence; that is, its relevance and its reliability in
providing support for conclusions on which auditor's opinion is based.
Audit Risk
The risk that auditor expresses inappropriate audit opinion when F.S. are materially misstated. Audit risk is
function of the risks of material misstatement and detection risk.
Risk of material misstatement (ROMM) - The risk that F.S. are materially misstated prior to audit. This
consists of two components, described as follows at assertion level:
Inherent Risk Control Risk

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

The overall F.S. level i.e. relate to F.S. as a The assertion level for classes of transactions,
whole potentially affecting many assertions account balances, and disclosures.
ROMM at assertion level are assessed in order to determine NTE of further audit procedures necessary to
obtain SAAE. This evidence enables auditor to express an opinion on F.S. at an acceptably low level of audit
risk.
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Detection risk – The risk that procedures performed by auditor to reduce audit risk to acceptably low level
will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements i.e. Risk of not detecting a material misstatement.
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Scope of Audit
The auditor's opinion on F.S. deals with whether the F.S. are prepared, in all material respects, in
accordance with the applicable FRF.
Ÿ Such an opinion is common to all audits of F.S.
Ÿ The auditor's opinion therefore does not assure, future viability of entity nor the efficiency or
effectiveness with which mgt has conducted affairs of entity.
Ÿ In some cases, however, applicable laws and regulations may require auditors to provide opinions on
other specific matters, such as effectiveness of internal control, or consistency of a separate
management report with the F.S.
Ÿ While SAs include requirements and guidance in relation to such matters to the extent they are
relevant to forming an opinion on F.S., auditor would be required to undertake further work if auditor
had additional responsibilities to provide such opinions.
The Premise (Responsibilities of Mgt & TCWG)

a.For preparation and presentation of financial statements (PPFS) in accordance with applicable FRF;
this includes design, implementation and maintenance(DIM) of internal control(IC) relevant to
preparation and presentation of financial statements(PPFS) that are free from material
misstatement, whether due to fraud or error; &
b.To provide the auditor with:
(a)All information, such as records and documentation, and other matters that are relevant to
PPFS;
(b)Any additional info that auditor may request from mgt and, where appropriate, TCWG; and
(c)Unrestricted access to those within entity from whom auditor determines necessary to obtain
audit evidence.
As part of their responsibility for PPFS, mgt and, TCWG are responsible for:
Ÿ The identification of applicable FRF , in context of any relevant laws or regulations.
Ÿ The PPFS (Preparation & Presentation of F.S.) in accordance with that framework.
Ÿ An adequate description of that framework in F.S.
The preparation of F.S. requires mgt to exercise judgment in making accounting estimates that are
reasonable in circumstances, as well as to select and apply appropriate accounting policies. These
judgments are made in the context of applicable FRF.
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The F.S. may be prepared in accordance with a FRF designed to meet:
Ÿ The common financial information needs of a wide range of users (i.e., “general purpose F.S.”); or
Ÿ The financial information needs of specific users (i.e., “special purpose F.S.”).
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Inherent Limitations of Audit

The auditor is not expected to, and can't, reduce audit risk to zero and cannot therefore obtain absolute
assurance that F.S. are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of audit evidence on which
auditor draws conclusions and bases auditor's opinion being persuasive rather than conclusive.
a.The nature of financial reporting:
The preparation of F.S. involves judgment by managementt in applying requirements of applicable FRF to
facts and circumstances of entity. For eg: Accounting estimates
b.The nature of audit procedures:

a.Possibility that Management & others do not provide complete info relevant to Preparation &
Presentation of Financial Statements (PPFS)
b.Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
c.Audit is not an official investigation into alleged wrongdoings. He doesn't have spl legal powers eg.
search.
c.Timeliness of Reporting & Balance between Benefit and Cost:

Relevance of information, and thereby its value, tends to diminish over time, and there is a balance to
be struck between the reliability of information and its cost.
Because of inherent limitations of audit, there is unavoidable risk that some material misstatements
of F.S. may not be detected, even though audit is properly planned and performed in accordance with
SAs.
d.In case of certain assertions or subject matters, potential effects of inherent limitations on auditor's
ability to detect material misstatements are particularly significant. Such assertions or subject
matters include:
a.Fraud, particularly fraud involving senior management or collusion.
b.The existence and completeness of related party relationships and transactions.
c.The occurrence of non-compliance with laws and regulations.
d.Future events or conditions that may cause an entity to cease to continue as a going concern.
Conduct of an Audit in accordance with Sas
Complying with SAs Relevant to the Audit:

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

ÜAchieve overall objective à using objectives of relevant Sas
ÜHaving regard to interrelationships among Sas:
ÜDetermine if any audit procedure in addition to that required by SAs is necessary.
ÜEvaluate whether SAAE has been obtained
Ÿ Complying with Relevant Requirements

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

ÜEvaluate if it prevents auditor from achieving overall objective &
ÜRequires to modify opinion or withdraw from engagement
ÜIt's a significant matter requiring documentation as per SA 230
SA 210: AGREEiNG THE TERMS OF
AUDiT ENGAGEMENT
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03 SA 210: AGREEiNG THE TERMS OF AUDiT ENGAGEMENT
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Objective
Objective of auditor is to accept or continue audit engagement only when basis upon which it is to be
performed has been agreed, through:
a.Establishing whether preconditions for audit are present; and
b.Confirming that there is common understanding b/w auditor and mgt and, where appropriate, TCWG of
terms of audit engagement.
Preconditions of Audit
The auditor shall:-
(a)determine whether FRF is acceptable
(b)Obtain agreement of mgt that it acknowledges and understands its responsibility:
(i)For preparation of F.S. in accordance with applicable FRF
(ii)For such Internal Control (IC) as mgt determines necessary to enable preparation of F/S free
from material misstatement, whether due to fraud or error; and
(iii)To provide the auditor with: (AAU)
a.Access to all information of which management is aware that is relevant to preparation of
F/S such as records, documentation and other matters;
b.Additional information that auditor may request from mgt for purpose of audit; and
c.Unrestricted access to persons within entity from whom auditor determines necessary to
obtain audit evidence.
If preconditions not present, auditor shall discuss matter with management:

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

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

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

The auditor may decide not to send new audit engagement letter or other written agreement each period.
However, following factors make it appropriate to revise terms of audit engagement or to remind entity of
existing terms:
ÜAny indication that entity misunderstands objective and scope of audit.
ÜAny revised or special terms of audit engagement.
ÜA recent change of senior management.
ÜA significant change in ownership.
ÜA significant change in nature or size of the entity's business.
ÜA change in legal or regulatory requirements.
ÜA change in the FRF adopted in the preparation of F.S.
ÜA change in other reporting requirements.
Acceptance of a Change in Terms of Audit Engagement

The auditor shall not agree to change in terms of audit engagement where there is no reasonable
justification for doing so. If, prior to completing audit engagement, auditor is requested to change audit
engagement to an engagement that conveys lower level of assurance, determine whether there is
reasonable justification for doing so.
If terms are changed, auditor and management agree on and record new terms of engagement in
engagement letter or other suitable form of written agreement.
If auditor unable to agree to change of terms and not permitted by mgt to continue, the auditor shall:
(a)Withdraw from audit engagement where possible under law or regulation; and
(b)Determine whether there is obligation, either contractual or otherwise, to report circumstances to
other parties, such as TCWG, owners or regulators
FRF Prescribed by Law or Regulation—Other Matters Affecting Acceptance

If auditor has determined à FRF prescribed by law or regulation would be unacceptable but for the fact that
it is prescribed by law or regulation, auditor shall accept the audit engagement only if following conditions
are present:
(a)Management agrees to provide additional disclosures in F.S. and
(b)It is recognised in terms of audit engagement that:
(i)The auditor's report on F/S will incorporate an Emphasis of Matter paragraph, drawing users'
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attention to the additional disclosures, in accordance with SA 706 &

(ii)Unless auditor is required by law or regulation to express auditor's opinion on the F/S by using the
phrases “present fairly, in all material respects”, or “give a true and fair view” in accordance with
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applicable FRF , auditor's opinion on F.S. will not include such phrases.
If above conditions not present and auditor required by law or regulation to undertake audit engagement,
he shall:
(a)Evaluate effect of misleading nature of F.S. on auditor's report; and
(b)Include appropriate reference to this matter in terms of audit engagement.
Factors that are relevant to auditor's determination of acceptability of financial reporting framework to be
applied in preparation of financial statements include:
ÜThe nature of entity (for example, whether it is a business enterprise, or a not for profit organization);
ÜThe purpose of F.S. (for example, whether they are prepared to meet the common financial information
needs of a wide range of users or the financial information needs of specific users);
ÜThe nature of F.S. (for example, whether the financial statements are a complete set of financial
statements or a single financial statement); and
ÜWhether law or regulation prescribes applicable FRF.
Audit of Components
When auditor of parent entity also auditor of component, factors that may influence decision whether to
send separate audit engagement letter to the component include the following:
ÜWho appoints component auditor;
ÜWhether a separate auditor's report is to be issued on the component;
ÜLegal requirements in relation to audit appointments;
ÜDegree of ownership by parent; and
ÜDegree of independence of the component management from the parent entity.
SA 220 QUALiTY CONTROL FOR AN
AUDiT OF F.S.
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04 SA 220 QUALiTY CONTROL FOR AN AUDiT OF F.S.
Following info assists engagement partner in determining whether conclusions reached regarding
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acceptance and continuance of client relationships and audit engagements are appropriate:
Ÿ The integrity of principal owners, key management and TCWG of entity;
Ÿ Whether engagement team is competent to perform audit engagement and has necessary capabilities,
including time and resources;
Ÿ Whether firm and engagement team can comply with relevant ethical requirements; and
Ÿ Significant matters that have arisen during current or previous audit engagement, and their implications
for continuing relationship.
Differences of Opinion:
It may arise:
Ÿ Within the Engagement Team,
Ÿ With those consulted, or
Ÿ Between the EP and EQC Reviewer.
Engagement Team shall follow the firm's policies and procedures for dealing with and resolving differences
of opinion.
SA 230 “AUDiT DOCUMENTATiON”
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05 SA 230 “AUDiT DOCUMENTATiON”
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SA 240 (REViSED): AUDiTOR'S RESPONSiBiLiTiES
RELATiNG TO FRAUD iN AN AUDiT OF FiNANCiAL
STATEMENTS
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SA 240 (REViSED): AUDiTOR'S RESPONSiBiLiTiES

06 RELATiNG TO FRAUD iN AN AUDiT OF FiNANCiAL STATEMENTS
Responsibility for Prevention and Detection of Fraud

Ÿ The primary responsibility à TCWG and management.
Ÿ Management, with TCWG, place strong emphasis on fraud prevention, and fraud deterrence
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Ÿ This involves commitment to creating culture of honesty and ethical behaviour.
Objectives of Auditor
a.To identify and assess the ROMM in F.S. due to fraud;
b.To obtain SAAE about assessed ROMM due to fraud, through designing and implementing appropriate
responses; and
c.To respond appropriately to identified or suspected fraud.
Techniques: Fraudulent Financial Reporting (FFR), Management Override of Controls & Misappropriation of
Assets
Fraudulent financial reporting may be accomplished by following:

a.Manipulation, falsification (including forgery), or alteration of a/c records or supporting documentation
from which F.S. are prepared.
b.Misrepresentation in or intentional omission from, F.S. of events, transactions or other significant info.
c.Intentional misapplication of a/c principles relating to amts, classification, manner of presentation, or
disclosure.
It often involves management override of controls, misappropriation of assets etc that otherwise may
appear to be operating effectively.
Fraud can be committed by management overriding controls using such techniques as:
a.Recording fictitious journal entries, close to end of accounting period, to manipulate operating results or
achieve other objectives.
b.Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
c.Omitting, advancing or delaying recognition in F.S. of events and transactions that have occurred
during reporting period.
d.Concealing, or not disclosing, facts that could affect amounts recorded in F.S.
e.Engaging in complex transactions structured to misrepresent financial position or financial performance
of entity.
f.Altering records and terms related to significant and unusual transactions.
g.Embezzling receipts (misappropriating collections from debtors)
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h.Stealing physical assets or intellectual property
i.Causing entity to pay for goods and services not received (for eg, payments to fictitious vendors,
payments to fictitious employees).
j.Using entity's assets for personal use (for example, using the entity's assets as collateral for a personal
loan or a loan to a related party).
Risk Factors Relating to Misstatements Arising from Misappropriation of Assets:
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1.Incentives/Pressures: Personal financial obligations may create pressure on mgt or employees with access
to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between entity and employees with access to cash or other assets susceptible to
theft may motivate employees to misappropriate those assets.
For eg, adverse relationships may be created by following:
Ø Known or anticipated future employee layoffs.
Ø Recent or anticipated changes to employee compensation or benefit plans.
Ø Promotions, compensation or other rewards inconsistent with expectations.
2.Opportunities: Certain circumstances increase susceptibility of assets to misappropriation. For example,
opportunities to misappropriate assets increase in case of following:
Ø Inventory items that are small in size, of high value, or in high demand.
Ø Fixed assets which are small in size, marketable, or lacking observable identification of ownership.
Ø Inadequate internal control over assets may increase susceptibility of misappropriation of assets.
Ø Inadequate segregation of duties or independent checks.
3.Attitudes/Rationalizations
Ø Disregard for need for monitoring or reducing risks related to misappropriations of assets.
Ø Disregard for internal control over misappropriation of assets by overriding existing controls or failing
to take remedial action on known deficiencies.
Ø Behavior indicating displeasure or dissatisfaction with entity or its treatment of employee.
Ø Changes in behavior or lifestyle that may indicate assets have been misappropriated.
Responsibilities of the Auditor

Auditor is responsible for obtaining reasonable assurance that F.S. taken as a whole are free from material
misstatement, whether caused by fraud or error.
Ÿ Owing to inherent limitations of audit as per SA 200à unavoidable risk some material misstatements of
F.S may not be detected, even though audit is planned and performed as per SAs.
Ÿ Risk of not detecting material misstatement resulting from fraud > error. Because fraud may involve
sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure
to record transactions, or intentional misrepresentations being made to auditor.
Ÿ The risk of auditor not detecting material misstatement resulting from management fraud > employee
fraud as mgt is in position to directly or indirectly manipulate a/c records or present fraudulent financial
information.
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Auditor's duties for prevention and detection of fraud
Ÿ Auditor is responsible for maintaining attitude of professional scepticism throughout audit.
Ÿ Auditor should recognize possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of honesty and integrity of entity's mgt and TCWG
Ÿ Unless doubtful situations present, auditor may accept records and documents as genuine.
Ÿ If conditions cause auditor to believe that document may not be authentic or terms have been modified,
he shall investigate further.
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Ÿ Where responses to inquiries of mgt or TCWG are inconsistent, he shall investigate inconsistencies.
Considering Whether an Identified Misstatement may be Indicative of Fraud

If there is indication à consider implications of misstatement in relation to other aspects of audit,
particularly reliability of management representations (SA 580).
Communication
Ÿ If auditor identified a fraud or has indication of fraud, communicate à Mgt, TCWG &,
Ÿ In some circumstances, if required by laws and regulations à regulatory and enforcement authorities
also.
Auditor Unable to Complete Engagement

If auditor concludes à not possible to continue performing audit as result of misstatement resulting from
fraud or suspected fraud, auditor should:
a.consider professional and legal responsibilities, including requirement for to report to person(s) who
made audit appointment or regulatory authorities;
b.consider possibility of withdrawing from engagement; and
c.If auditor withdraws:
Ÿ discuss with mgt and TCWG, withdrawal from engagement and reasons; &
Ÿ consider professional or legal requirement to report to person(s) who made audit appointment or
regulatory authorities, withdrawal and reasons for withdrawal.
Management Representation
1.Acknowledges responsibility for design, implementation and maintenance(DIM) of internal control to
prevent and detect fraud.
2.Have disclosed results of mgt's fraud risk assessment w.r.t. F.S.
3.Have disclosed knowledge of fraud or suspected fraud affecting entity involving:
Ÿ Management;
Ÿ Employees who have significant roles in internal control; or
Ÿ Others where fraud could have a material effect on the FS.
4. Have disclosed knowledge of any allegations of fraud, or suspected fraud, affecting entity's FS.
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Documentation
Ÿ Understanding of Entity and environment as per SA 315.
Ÿ Responses to Assessed Risks.
Ÿ Communications with mgt. and TCWG.
Ÿ Reasons for non-applicability of presumption of ROMM relating to revenue recognition.
Enquiring about Management Assessment of Fraud Risk
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The auditor shall make inquiries of management regarding:
a.Management's assessment of ROMM due to fraud;
b.Management's process for identifying & responding to risks of fraud in entity
c.Management's communication to TCWG; and
d.Management's communication to employees regarding its views on business practices and ethical
behaviour.
e.For entities having internal audit function, make inquiries of internal auditor.
Appropriateness of making inquiries of management

Ø Mgt is responsible for entity's internal control and preparation of F.S. à appropriate for auditor to make
inquiries of management regarding management's own assessment of risk of fraud and controls in
place to prevent and detect it.
Ø The nature, extent and frequency of mgt's assessment are relevant to auditor's understanding of
entity's control environment. For example, fact management has not made assessment of risk of fraud
may be indicative of lack of importance that mgt places on internal control.
Ø
Ø Identification and Assessment of Risks of Material Misstatement Due to Fraud
Ø In accordance with SA 315, auditor shall identify and assess ROMM due to fraud at F.S. level, and at
assertion level for classes of transactions, account balances and disclosures.
Ø Auditor based on presumption that there are risks of fraud in revenue recognition, evaluate which types
of revenue, revenue transactions or assertions give rise to such risks.
Ø Auditor shall obtain understanding of entity's related controls, including control activities, relevant to
such risks.
Audit Procedures Responsive to Risks Related to Management Override of Controls

Mgt is in unique position to perpetrate fraud because of its ability to manipulate A/c records and prepare
fraudulent F.S. by overriding controls that otherwise appear to be operating effectively. Due to
unpredictable way in which such override could occur, it is a ROMM due to fraud and thus a significant risk.
Irrespective of auditor's assessment of risks of management override of controls, auditor shall design
and perform audit procedures to:
(a)Test appropriateness of journal entries recorded in general ledger and other adjustments in F.S. In
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designing and performing audit procedures for such tests, auditor shall:
(i)Make inquiries of individuals involved in financial reporting process about inappropriate or unusual
activity relating to processing of journal entries and other adjustments;
(ii)Select journal entries and other adjustments made at end of a reporting period; and
(iii)Consider need to test journal entries and other adjustments throughout period.
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(b)Review accounting estimates for biases and evaluate whether circumstances producing bias represent
ROMM due to fraud.
In performing this review, auditor shall:
(i)Evaluate whether judgments and decisions made by mgt in making accounting estimates included
in F.S, indicate possible bias on part of entity's mgt that may represent a ROMM due to fraud. If
so, auditor shall re-evaluate a/c estimates taken as a whole; and
(ii)Perform retrospective review of mgt judgments and assumptions related to significant a/c
estimates reflected in F.S. of prior year.
(c)For significant transactions o/s normal course of business or appear to be unusual given auditor's
understanding of entity and its environment, evaluate whether business rationale (or lack thereof) of
transactions suggests they have been entered to engage in fraudulent financial reporting or conceal
misappropriation of assets.
SA 250 (REViSED) “CONSiDERATiON OF LAWS AND
REGULATiONS iN AN AUDiT OF FiNANCiAL
STATEMENTS”
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SA 250 (REViSED) “CONSiDERATiON OF LAWS AND

07 REGULATiONS iN AN AUDiT OF FiNANCiAL STATEMENTS”
Management Responsibility for compliance with laws and regulation

The following are procedures entity implement to assist in prevention and detection of non- compliance
with laws and regulations:
a.Monitoring legal requirements and ensuring that operating procedures are designed to meet these
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requirements.
b.Instituting and operating appropriate systems of internal control.
c.Developing, publicising and following a code of conduct.
d.Ensuring employees are properly trained and understand code of conduct.
e.Monitoring compliance with code of conduct and acting appropriately to discipline employees who fail
to comply with it.
f.Engaging legal advisors to assist in monitoring legal requirements.
g.Maintaining register of significant laws and regulations with which entity has to comply within its
particular industry and a record of complaints
Auditor's responsibility in relation to Compliance with Laws & Regulations (L&Rs)

This SA distinguishes auditor's responsibilities in relation to compliance with 2 different categories of laws
and regulations as follows:
(a)Provisions of those L&R having a direct effect on determination of material amounts and disclosures
in F.S. such as tax and labour laws; and
(b)Other laws and regulations that don't have direct effect on determination of amounts and disclosures
in F.S., but compliance with which may be fundamental to operating aspects of business.
Ÿ For 1st category referred, auditor's responsibility is to obtain SAAE about compliance with Laws &
Regulations.
Ÿ For second category, auditor's responsibility is limited to undertake specified audit procedures to
help identify non-compliance with those L&Rs that may have material effect on F.S.
Auditor's Consideration of Compliance with Laws and Regulations
Understanding SAAE Non-Compliance Remain Alert WR
1.The auditor shall obtain a general understanding of:

(a)legal and regulatory framework applicable to entity and industry in which entity operates; and
(b)How entity is complying with that framework.
2.The auditor shall obtain SAAE regarding compliance with those laws and regulations generally recognized
to have a direct effect on determination of material amounts and disclosures in F.S.
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3.The auditor shall perform following audit procedures to identify instances of noncompliance with other
laws and regulations that may have a material effect on the F.S:
(a)Inquiring of management; and
(b)Inspecting correspondence, if any, with relevant licensing or regulatory authorities.
4.During audit, auditor shall remain alert to possibility that other audit procedures applied may bring
instances of non-compliance or suspected non-compliance with laws and regulations to auditor's attention.
5.Obtain written representation that known instances of non-compliance with L&Rs have been disclosed
to auditor
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Audit Procedures When Non-compliance is Identified or Suspected
If auditor becomes aware of info concerning instance of non-compliance with L&Rs, auditor shall obtain:
(a)Understanding of nature of act & circumstances in which it has occurred; and
(b)Further information to evaluate possible effect on F.S.
Ÿ If auditor suspects there may be non-compliance, auditor shall discuss matter with mgt and
TCWG.
Ÿ If management or TCWG don't provide sufficient info. auditor shall consider need to obtain legal
advice.
Ÿ If sufficient info about suspected non-compliance cannot be obtained, auditor shall evaluate
effect of lack of SAAE on auditor's opinion.
Reporting of Identified or Suspected Non-Compliance

Reporting Non Compliance to TCWG:
Ÿ If, non-compliance is intentional and material, communicate matter to TCWG as soon as practicable.
Ÿ If auditor suspects mgt or TCWG involved in noncompliance, communicate matter to next higher level
of authority at entity, such as audit committee or supervisory board. Where no higher authority exists,
or if auditor believes communication may not be acted upon, obtain legal advice.
Reporting Non-Compliance in the Auditor's Report on Financial Statements

Ÿ If auditor concludes that non-compliance has a material effect on F.S. and has not been adequately
reflected in F.S. , auditor shall, express a qualified or adverse opinion on F.S.
Ÿ If auditor is precluded by MGT or TCWG from obtaining SAAE, auditor shall express a qualified opinion
or disclaim an opinion.
Ÿ If auditor is unable to determine whether non-compliance has occurred because of limitations imposed
by circumstances rather than by mgt or TCWG, auditor shall evaluate effect on auditor's opinion.
Reporting Non-Compliance to Regulatory and Enforcement Authorities

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

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

Ÿ Unusual transactions with companies registered in Tax Haven.
Ÿ Adverse Media comment
SA 260 (REViSED)
“COMMUNiCATiON WiTH THOSE CHARGED
WiTH GOVERNANCE”
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SA 260 (REViSED)
08 “COMMUNiCATiON WiTH THOSE CHARGED WiTH GOVERNANCE”
Scope of SA
ŸSA 260 deals with auditor's responsibility to communicate with TCWG in audit of F.S.
ŸNothing in this SA preclude auditor from communicating any other matters to TCWG.
Role of communication
Effective two-way communication is important in assisting:
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a)Auditor and TCWG in understanding matters related to audit in context, and in developing a
constructive working relationship.
b)Auditor in obtaining from TCWG info relevant to audit. For eg, TCWG may assist auditor in
understanding entity and its environment, in identifying appropriate sources of audit evidence, and
providing info about specific transactions or events; and
c)TCWG in fulfilling their responsibility to oversee financial reporting process, thereby reducing ROMM of
F.S
Auditor's Objective
Ÿ To communicate clearly with TCWG responsibilities of auditor and planned scope and timing of audit.
Ÿ To obtain from TCWG info relevant to audit.
Ÿ To provide TCWG with timely observations significant and relevant in overseeing final reporting process.
Ÿ To promote effective two-way communication between auditor and TCWG
When All of TCWG are involved in Managing the Entity

Ÿ In some cases, all of TCWG are involved in managing entity, for eg, small business where single owner
manages entity and no one else has governance role.
Ÿ In these cases, matters already communicated need not be communicated again with those same
person(s) in their governance role.
Matters to be communicated
Ÿ The Auditor's responsibilities in relation to F.S. Audit
(a)The auditor is responsible for forming and expressing an opinion on F.S.; and
(b)The audit of F.S. does not relieve mgt or TCWG of their responsibilities
Ÿ Planned Scope & Timing of Audit It may include:

(a)How auditor plans to address the significant ROMM, whether due to fraud or error. (b)How auditor
plans to address areas of higher assessed ROMM.
(c)Auditor's approach to internal control. (d)Application of concept of materiality
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Ÿ Significant Findings from the Audit : The auditor shall communicate with TCWG:
(a)The auditor's views about significant qualitative aspects of entity's a/c practices, including a/c
policies, a/c estimates and F.S. disclosures.
(b)Significant difficulties, if any, encountered during the audit;Examples of Significant difficulties:
Ÿ Significant delays by mgt to provide required info
Ÿ An unnecessarily brief time to complete audit
Ÿ Extensive unexpected effort required to obtain SAAE
Ÿ Unavailability of expected info
Ÿ Restrictions imposed on auditor by mgt
Ÿ Mgt's unwillingness to make or extend assessment of entity's ability to continue as going
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concern when requested.
(c)Unless all of TCWG are involved in managing the entity:

Ÿ Significant matters, arising from audit that were discussed, or subject to correspondence with
mgt; &
Ÿ Written representations auditor is requesting; and
(d)Circumstances that affect form and content of auditor's report, if any (Audit Report)
(e)Any other significant matters that in the auditor's professional judgment, are significant to the
oversight of the financial reporting process
Auditor Independence
In case of listed entities, the auditor shall communicate with TCWG:
(a)A statement that engagement team and others in firm has complied with relevant ethical
requirements regarding independence; and
(b)All relationships and other matters between firm, network firms, and entity that bear on
independence.; and
(c)Related safeguards applied to eliminate identified threats to independence or reduce them to
acceptable level.
Factors affecting mode of communication

Ÿ Whether discussion of the matter will be included in auditor's report, e,g, KAM.
Ÿ Whether the matter has been satisfactorily resolved.
Ÿ Whether mgt has previously communicated the matter.
Ÿ In case of an audit of special purpose F.S, whether auditor also audits entity's general purpose F.S.
Ÿ Legal requirements.
Ÿ Expectations of TCWG, including arrangements made for periodic meetings or communications with
auditor.
SA 265 “COMMUNiCATiNG DEFiCiENCiES iN
INTERNAL CONTROL TO THOSE CHARGED WiTH
GOVERNANCE & MANAGEMENT”
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SA 265 “COMMUNiCATiNG DEFiCiENCiES iN INTERNAL

09 CONTROL TO THOSE CHARGED WiTH GOVERNANCE & MANAGEMENT”
Scope of SA
Ÿ Communicate deficiencies in Internal control (IC) which significant
Ÿ Auditor is required to obtain understanding of internal control relevant to audit when identifying and
assessing ROMM.
In making those risk assessments, auditor considers internal control in order to design audit procedures,
but not for purpose of expressing an opinion on effectiveness of IC.
Auditor may identify deficiencies in IC not only during risk assessment process(RAP) but also at other
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stages.
This SA specifies which identified deficiencies auditor is required to communicate to TCWG & mgt.
Auditor's Objective
To communicate appropriately to TCWG and mgt, deficiencies in internal control that auditor has identified
during audit and in auditor's professional judgment are of sufficient importance to merit their respective
attentions.
Requirements
Ÿ Auditor shall determine whether, on basis of audit work performed, he has identified one or more
deficiencies in IC.
Ÿ If identified one or more deficiencies in IC, determine, on basis of work performed, whether, individually
or in combination, they constitute significant deficiencies.
Ÿ The auditor shall communicate in writing significant deficiencies in IC identified during audit to TCWG
on a timely basis.
Ÿ The auditor shall also communicate to mgt at an appropriate level of responsibility on a timely basis:
a.In writing, significant deficiencies in IC that auditor has communicated or intends to communicate
to TCWG, unless it would be inappropriate to communicate directly to mgt in circumstances; and
b.Other deficiencies in internal control identified during audit that have not been communicated to
mgt by other parties and that, in auditor's professional judgment, are of sufficient importance to
merit mgt's attention.
Written communication to TCWG

Auditor shall include in written communication of significant deficiencies in internal control:
(a)A description of deficiencies and an explanation of their potential effects; and
(b)Sufficient information to enable TCWG and mgt to understand context of communication. In
particular, auditor shall explain that:
(i)Purpose of audit was to express an opinion on F.S;
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(ii)Audit included consideration of IC relevant to preparation of F.S. in order to design audit
procedures that are appropriate in circumstances, but not for purpose of expressing opinion on
effectiveness of IC; &
(iii)Matters reported are limited to deficiencies that auditor identified during audit and has
concluded are of sufficient importance to merit being reported to TCWG.
How to decide if Deficiency is Significant or Not?

Examples of matters that auditor may consider in determining whether a deficiency or combination of
deficiencies in internal control constitutes a significant deficiency include:
Ÿ The likelihood of deficiencies leading to MM in F.S. in future.
Ÿ The susceptibility to loss or fraud of related asset or liability.
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Ÿ The F.S. amounts exposed to deficiencies.

Ÿ The volume of activity that has occurred or could occur in account balance or class of transactions
exposed to deficiency or deficiencies.
Ÿ The importance of controls to financial reporting process; for example:
Ø General monitoring controls (such as oversight of management).
Ø Controls over the prevention and detection of fraud.
Ø Controls over the selection and application of significant accounting policies.
Ø Controls over significant transactions with related parties.
Ø Controls over significant transactions o/s entity's normal course of business.
Ø Controls over the period-end financial reporting process (such as controls over non- recurring
journal entries).
Ÿ The interaction of deficiency with other deficiencies in internal control.
How to determine if there are significant deficiencies in Internal Control?

Indicators of significant deficiencies in internal control include, for eg:
Ø Evidence of ineffective aspects of control environment, such as:
a)Identification of mgt fraud, whether or not material, not prevented by entity's IC.
b)Management's failure to implement appropriate remedial action on significant deficiencies
previously communicated.
c)Absence of a risk assessment process (RAP) within entity where such process would ordinarily be
expected to have been established.
Ø Evidence of ineffective entity risk assessment process (RAP), such as management's failure to
identify a ROMM that auditor would expect entity's risk assessment process to have identified.
Ø Evidence of ineffective response to identified significant risks (e.g., absence of controls over such a
risk).
Ø Misstatements detected by auditor's procedures that were not prevented, or detected and
corrected(P/D/C), by entity's IC.
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Ø Disclosure of material misstatement due to error or fraud as prior period items in current year's P&L.
Ø Evidence of mgt's inability to oversee the preparation of F.S.How Detailed should be our
Communication of Significant Deficiencies?
The level of detail at which to communicate significant deficiencies is matter of auditor's professional
judgment in circumstances.
Factors that the auditor may consider in determining an appropriate level of detail for the communication
include, for eg:
Ÿ The nature of entity. For instance, the communication required for a public interest entity may be
different from that for a non-public interest entity.
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Ÿ The size and complexity of the entity. For instance, the communication required for a complex entity
may be different from that for an entity operating a simple business.
Ÿ The nature of significant deficiencies that the auditor has identified.
Ÿ The entity's governance composition. For instance, more detail may be needed if TCWG include
members who do not have significant experience in the entity's industry or in the affected areas.
Ÿ Legal or regulatory requirements regarding the communication of specific types of deficiency in
internal control.
When to communicate?
Ÿ Listed Entities: Before date of approval of F.S.
Ÿ Other Entities: Before assembly of audit file (60 days from date of audit report)
Notes:
ØIf previously communicated significant deficiency remains, current year's communication may repeat
description from previous communication, or simply reference previous communication.
ØMay communicate orally before writing.
SA 299 (REViSED) “JOiNT AUDiT OF
FiNANCiAL STATEMENTS”
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10 SA 299 (REViSED) “JOiNT AUDiT OF FiNANCiAL STATEMENTS”
‘Joint Audit' and 'Joint Auditors’

A joint audit is audit of F.S. of entity by 2 or more auditors appointed with objective of issuing audit report.
Such auditors are described as joint auditors.
Audit Planning, Risk Assessment and Allocation of Work
Ÿ The EP and other key members of team from each of joint auditors involved in planning.
Ÿ The joint auditors jointly establish overall audit strategy that sets scope, timing and direction (STD)
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of audit, and guides development of audit plan.
Ÿ Prior to commencement of audit, joint auditors shall discuss and develop a joint audit plan.
In developing joint audit plan, joint auditors shall:

a.Identify division of audit areas and common audit areas amongst joint auditors that define scope of
work of each joint auditor;
b.Ascertain reporting objectives of engagement to plan timing of audit and nature of communications
reqd;
c.Communicate among all joint auditors factors significant in directing engagement team's efforts;
d.Consider results of preliminary engagement activities and, knowledge gained on other engagements
performed earlier by respective EP(s) for relevant entity(s).
e.Ascertain NTE of resources necessary to perform engagement.
Ÿ At this stage, RoMM need to be considered and assessed by each of joint auditors and
communicated to other joint auditors, and documented, whether pertaining to overall F.S. level or
to area of allocation among other joint auditors.
Ÿ Joint auditors discuss and document NTE of audit procedures for common and specific allotted
areas of audit to be performed by each of them and communicate to TCWG.
Ÿ Joint auditors shall obtain common Engg Letter (EL) and common mgt representation letter
(WR).
Ÿ After identification and allocation of work among joint auditors, work allocation document shall be
signed by all joint auditors and communicated to TCWG.
Responsibility and Co-ordination among Joint Auditors

Ÿ In respect of audit work divided, each joint auditor shall be responsible only for work allocated.
Ÿ All the joint auditors shall be jointly and severally responsible for:
a.audit work not divided among joint auditors and is carried out by all joint auditors;
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b.decisions taken by all joint auditors under audit planning
c.in respect of common audit areas concerning the NTE of audit procedures to be performed by each
of them.
d.matters which are brought to notice of joint auditors by any one of them and on which there is
agreement among them;
e.examining that F.S. of entity comply with requirements of relevant statutes;
f.presentation and disclosure of F.S. as required by applicable FRF;
g.ensuring that A/R complies with requirements of relevant statutes, SAs and pronouncements issued
by ICAI.
Ÿ Where a joint auditor comes across matters relevant to areas of responsibility of others and deserve
their attention, or require disclosure or discussion with, or application of judgment by other joint
auditors, he shall communicate same to all other joint auditors in writing prior to completion of audit.
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Ÿ It shall be responsibility of each joint auditor to determine NTE of audit procedures to be applied in
relation to areas of work allocated to said joint auditor. It is individual responsibility of each joint
auditor to study and evaluate system of internal control and assessment of risk relating to areas of
work allocated to said joint auditor.
Audit Conclusion and Reporting

The joint auditors are required to issue common audit report, however, where joint auditors are in
disagreement with regard to opinion or any matters to be covered by audit report, they shall express their
opinion in a separate audit report.
A joint auditor is not bound by the views of majority of joint auditors regarding opinion or matters to be
covered in audit report and shall express opinion formed by the said joint auditor in separate audit report in
case of disagreement.
In such circumstances, audit report(s) issued by joint auditor(s) shall make a reference to separate audit
report(s) issued by other joint auditor(s).
Further, separate audit report shall also make reference to audit report issued by other joint auditors.
Such reference shall be made under heading “Other Matter Paragraph” as per Revised SA 706, “Emphasis
of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report”.
Each joint auditor is entitled to assume that:

a.Other joint auditors have carried out their part of audit work in accordance with SAs. It is not necessary
for joint auditor to review work performed by other joint auditors or perform any tests in order to
ascertain whether work has actually been performed in such a manner.
b.The other joint auditors have brought to said joint auditor's notice any departure from applicable FRF or
significant observations noticed in course of audit.
Where F.S. of a division/branch are audited by one of joint auditors, other joint auditors are entitled to
proceed on basis that such F.S. comply with all legal and regulatory requirements and present a true
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and fair view of state of affairs and of results of operations of division/branch concerned.
Before finalizing their audit report, joint auditors shall discuss and communicate with each other their
respective conclusions that would form the content of the audit report.
Communication with TCWG

When the joint auditors expect to modify opinion, communicate with TCWG circumstances that led
modification and proposed wording of modification to ensure compliance with Revised SA 705,
“Modifications to the Opinion in the Independent Auditor's Report”.
If JAs expect to include an EOM or OM para, communicate with TCWG to ensure compliance with Revised
SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's
Report”.
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SA 315: IDENTiFYiNG AND ASSESSiNG THE RiSK
OF MATERiAL MiSSTATEMENT (ROMM)
THROUGH UNDERSTANDiNG THE ENTiTY AND
iTS ENViRONMENT
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SA 315: IDENTiFYiNG AND ASSESSiNG THE RiSK OF MATERiAL

11 MiSSTATEMENT (ROMM) THROUGH UNDERSTANDiNG THE ENTiTY
AND iTS ENViRONMENT
Objective of Auditor is to:

Ÿ identify and assess RMM, whether due to fraud or error,
Ÿ at F.S. and assertion levels,
Ÿ through understanding entity and its environment, including entity's internal control,
Ÿ thereby providing basis for designing and implementing responses to assessed ROMM. This will help
auditor to reduce ROMM to an acceptably low level.
Meanings:
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Assertions – Representations by mgt, embodied in F.S, used by auditor to consider different types of
potential misstatements that may occur.
Assertions about classes of transactions and events for the period under audit: (OCACC)
a.Occurrence—transactions and events recorded have occurred and pertain to entity.
b.Completeness—all transactions and events that should have been recorded à recorded.
c.Accuracy—amounts and recorded transactions and events à recorded appropriately.
d.Cut-off—transactions and events recorded à correct accounting period.
e.Classification—transactions and events recorded à proper accounts
(b)Assertions about account balances at the period end: (ERCV)

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

(i)Occurrence and rights and obligations—disclosed events, transactions, and other matters have
occurred and pertain to entity.
(ii)Completeness—all disclosures that should have been included in F.S. have been included.
(iii)Classification and understandability—financial information is appropriately presented and
described, and disclosures are clearly expressed.
(iv)Accuracy and valuation—financial and other information are disclosed fairly and at appropriate
amounts.
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Internal control –
The process designed, implemented and maintained (DIM) by TCWG, management and other personnel to
provide reasonable assurance about achievement of an entity's objectives with regard to
Ø reliability of financial reporting (FR),
Ø effectiveness and efficiency of operations,
Ø safeguarding of assets, and
Ø compliance with applicable laws and regulations
What methods included in Auditor's Risk assessment procedures (RAP)

The audit procedures performed to obtain understanding of entity and its environment, including internal
control, to identify and assess ROMM, whether due to fraud or error, at F.S. and assertion levels.
The risk assessment procedures shall include following:
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a.Inquiries of mgt and others within entity who in auditor's judgment may have info that is likely to
assist in identifying ROMM due to fraud or error.
b.Analytical procedures.
c.Observation and inspection.
The auditor shall obtain an understanding of following:

(a)Relevant industry, regulatory, and other external factors including applicable FRF.
(b)The nature of entity, including:
(i)its operations;
(ii)its ownership and governance structures;
(iii)types of investments that entity is making and plans to make, investments in special- purpose
entities; and
(iv)way that entity is structured and how it is financed; to enable auditor to understand classes of
transactions (COT), account balances(AB), and disclosures (D) to be expected in F.S.
(c)The entity's selection and application of accounting policies, including reasons for changes thereto.
(d)The entity's objectives and strategies, and those related business risks that may result in ROMM.
(e)The measurement and review of entity's financial performance.
Auditor is required to obtain an understanding of Entity's Risk Assessment Process (RAP)

a)Identifying business risks relevant to financial reporting objectives;
b)Estimating significance of risks;
c)Assessing likelihood of their occurrence; and
d)Deciding about actions to address those risks.
Auditor's Process of Assessing the Risk of Material Misstatement:

a.Identify risks throughout process of obtaining understanding of entity and its environment, including
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controls that relate to risks, and considering classes of transactions, account balances, and
disclosures in F.S;
b.Assess identified risks, and evaluate whether they relate more pervasively to the financial statements
as a whole and potentially affect many assertions;
c.Relate identified risks to what can go wrong at assertion level, taking account of relevant controls that
auditor intends to test; and
d.Consider likelihood of misstatement, including possibility of multiple misstatements, and whether
potential misstatement is of magnitude that could result in material misstatement.
Understanding of Entity's Info System Relevant to Financial Reporting
The auditor shall obtain an understanding of information system, including related business processes,
relevant to financial reporting, including following areas:
a.SCoTs: The classes of transactions in entity's operations that are significant to financial statements;
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b.Procedures: The procedures, within both information technology (IT) and manual systems, by which
those transactions are initiated, recorded, processed, corrected as necessary, trfd to general ledger and
reported in financial statements;
c.Records: The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions; this includes correction
of incorrect information and how information is trfd to the general ledger. The records may be in
either manual or electronic form;
d.Info system: How information system captures events and conditions, other than transactions, that
are significant to F.S.;
e.FRP: The financial reporting process used to prepare the entity's financial statements, including
significant accounting estimates and disclosures;
f.Unusual Transactions: Controls surrounding journal entries, including non-standard JEs used to record
non-recurring, unusual transactions or adjustments.
IT Benefits
IT benefits an entity's internal control by enabling an entity to:
Ÿ Consistently apply predefined business rules and perform complex calculations in processing large
volumes of transactions or data;
Ÿ Enhance timeliness, availability, and accuracy of information;
Ÿ Facilitate the additional analysis of information;
Ÿ Enhance ability to monitor performance of the entity's activities and its policies and procedures;
Ÿ Reduce risk that controls will be circumvented; and
IT Risks
Specific Risks related to IT an entity's internal control, including, for example:
Ÿ Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or
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both.
Ÿ Unauthorised access to data that may result in destruction of data or improper changes to data
Ÿ The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties.
Ÿ Unauthorised changes to data in master files.
Ÿ Unauthorised changes to systems or programs.
Ÿ Failure to make necessary changes to systems or programs.
Ÿ Inappropriate manual intervention.
Ÿ Potential loss of data or inability to access data as required.
Significant Risks
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An identified and assessed RMM that, in auditor's judgment, requires special audit consideration.
Examples of Significant Risk?

a.Whether the risk is a risk of fraud;
b.Whether the risk is related to recent significant economic, accounting, or other developments like
changes in regulatory environment, etc., and, therefore, requires specific attention;
c.The complexity of transactions;
d.Whether the risk involves significant transactions with related parties;
e.The degree of subjectivity in the measurement of financial information related to the risk, especially
those measurements involving a wide range of measurement uncertainty; and
f.Whether the risk involves significant transactions that are outside normal course of business for the
entity, or that otherwise appear to be unusual.
SA 330: THE AUDiTOR'S RESPONSES TO
ASSESSED RiSKS
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SA 330: THE AUDiTOR'S RESPONSES TO ASSESSED RiSKS

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Audit Procedures:
Substantive procedure –Audit procedure designed to detect material misstatements at assertion level.
Substantive procedures comprise:
(i)Tests of details (of classes of transactions, account balances, and disclosures), and
(ii)Substantive analytical procedures.
Test of controls – Audit procedure designed to evaluate operating effectiveness of controls in preventing, or
detecting and correcting (P/D/C), material misstatements at assertion level.
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Further Audit Procedures in Response to assessed ROMM at assertion level

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

Factors that warrant retest of controls:
Ÿ A deficient control environment.
Ÿ Deficient monitoring of controls.
Ÿ A significant manual element to the relevant controls.
Ÿ Personnel changes that significantly affect the application of the control.
Ÿ Changing circumstances that indicate the need for changes in the control.
Ÿ Deficient general IT-controls.
What will auditor consider while determining whether evidence of previous audits can be used for Test of
Controls?
a.The effectiveness of other elements of internal control, including the control environment, the entity's
monitoring of controls, and the entity's risk assessment process;
b.The risks arising from characteristics of control, including whether it is manual or automated;
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c.The effectiveness of general IT-controls;
d.The effectiveness of control and its application by entity, including nature and extent of deviations in
application of control noted in previous audits, and whether there have been personnel changes that
significantly affect application of control;
e.Whether lack of a change in a particular control poses a risk due to changing circumstances; and
f.The ROMM and extent of reliance on the control.
If auditor plans to use audit evidence from previous audit, establish continuing relevance by obtaining audit
evidence about whether significant changes in controls have occurred subsequent to previous audit.
Obtain this evidence by performing inquiry combined with observation or inspection, confirm understanding
of those specific controls, and:
a.If there have been changes that affect continuing relevance of audit evidence from previous audit, shall
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test controls in current audit.
b.If there have not been such changes, auditor shall test controls at least once in every third audit.
Controls over Significant Risks to be tested in current period.
How to know, how much testing is to be done?

Matters auditor may consider in determining extent of tests of controls include following:
Ÿ The frequency of performance of control by entity during period.
Ÿ The length of time during the audit period that the auditor is relying on the operating effectiveness of
the control.
Ÿ The expected rate of deviation from a control.
Ÿ The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
Ÿ The extent to which audit evidence is obtained from tests of other controls related to the assertion.
Using audit evidence obtained during an interim period
When auditor obtains audit evidence about operating effectiveness of controls during interim period, auditor
shall:
a.Obtain audit evidence about significant changes to those controls subsequent to interim period; and
b.Determine the additional audit evidence to be obtained for the remaining period.
Relevant factors in determining what additional audit evidence to obtain about controls that were
operating during period remaining after Interim period, include:
Ÿ The significance of assessed ROMM at assertion level.
Ÿ The specific controls that were tested during interim period, and significant changes to them.
Ÿ The degree to which audit evidence about operating effectiveness of controls was obtained.
Ÿ The length of remaining period.
Ÿ The extent to which auditor intends to reduce further substantive procedures based on reliance of
controls.
Ÿ The control environment.
SA 320: MATERiALiTY iN PLANNiNG &
PERFORMiNG AN AUDiT
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13 SA 320: MATERiALiTY iN PLANNiNG & PERFORMiNG AN AUDiT
Performance Materiality (PM) means

Ø amount or amounts set by auditor
Ø at less than materiality for F.S. as whole
Ø to reduce to appropriately low level probability that
Ø aggregate of uncorrected and undetected misstatements
Ø exceeds materiality for F.S. as a whole.
If applicable, PM also refers to amt or amounts set by auditor at less than materiality level or
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levels for particular classes of transactions, account balances or disclosures.
Determining Materiality & Performance Materiality when planning Audit
When establishing overall audit strategy, auditor shall determine materiality for F.S. as whole.
If, there is one or more particular classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for FS as a whole could reasonably be expected to
influence economic decisions of users taken on the basis of F.S., auditor shall also determine
materiality level or levels to be applied to those particular classes of transactions, account balances or
disclosures.
The auditor shall determine performance materiality for purposes of assessing ROMM and determining
nature, timing and extent of further audit procedures.
Revision of Materiality
The auditor shall revise materiality for F.S. as a whole (& if applicable, materiality level for particular
classes of transactions, account balances or disclosures) in event of becoming aware of info during audit
that would have caused auditor to have determined different amount initially.
If auditor concludes lower materiality for F.S. as a whole (and, if applicable, materiality level or levels for
particular classes of transactions, account balances or disclosures) than initially determined, auditor shall
determine whether it is necessary to revise PM, and whether NTE of further audit procedures remain
appropriate.
Benchmark
Determining materiality involves exercise of professional judgment. A percentage is often applied to a
chosen benchmark as starting point in determining materiality for F.S. as a whole.
Factors that affect identification of an appropriate benchmark include following:

Ÿ The elements of F.S. (for eg, assets, liabilities, equity, revenue, expenses);
Ÿ Whether there are items on which attention of users of particular entity's F.S. tends to be focused
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(for eg, for purpose of evaluating financial performance users may tend to focus on profit, revenue or
net assets);
Ÿ The nature of entity, where entity is in its life cycle, and industry and economic environment in which
entity operates;
Ÿ The entity's ownership structure and way it is financed (for eg, if entity is financed solely by debt
rather than equity, users may put more emphasis on assets, and claims on them, than on entity's
earnings); &
Ÿ The relative volatility of benchmark.
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SA 402: AUDiT CONSiDERATiONS RELATiNG TO AN
ENTiTY USiNG A SERViCE ORGANiSATiON
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SA 402: AUDiT CONSiDERATiONS RELATiNG TO AN

14 ENTiTY USiNG A SERViCE ORGANiSATiON
Ø Deals with user auditor's responsibility to obtain SAAE when user entity uses services of one or more
service organisations.
Ø Many entities outsource aspects of business to organisations that provide services ranging from
performing a specific task under direction of entity to replacing entity's entire business units or
functions, such as tax compliance function.
Ø Many of services provided by such organisations are integral to entity's business operations; however,
not all those services are relevant to the audit.
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Ø Services provided by service organisation are relevant to audit of a user entity's F.S. when those
services, and controls over them, are part of user entity's information system, including related
business processes, relevant to financial reporting.
How to know if SO's services are relevant to user entity's Financial Reporting?
A service organisation's services are part of user entity's information system, including related business
processes, relevant to financial reporting if these services affect any of the following:
a.The classes of transactions in the user entity's operations that are significant to the user entity's
financial statements;
b.The procedures, within both information technology (IT) and manual systems, by which the user
entity's transactions are initiated, recorded, processed, corrected as necessary, transferred to the
general ledger and reported in the financial statements;
c.The related accounting records, either in electronic or manual form, supporting information and specific
accounts in the user entity's financial statements that are used to initiate, record, process and report
the user entity's transactions; this includes the correction of incorrect information and how
information is transferred to the general ledger;
d.How the user entity's information system captures events and conditions, other than transactions,
that are significant to the financial statements;
e.The financial reporting process used to prepare the user entity's financial statements, including
significant accounting estimates and disclosures; and
f.Controls surrounding journal entries, including non-standard journal entries used to record nonrecurring,
unusual transactions or adjustments. [Already studied in SA 315]
Auditor's Objective
a.To obtain understanding of nature and significance of services provided by service organisation and
effect on user entity's internal control relevant to audit, sufficient to identify and assess ROMM; and
b.To design and perform audit procedures responsive to those risks.
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Types of Reports
Type 1 Report: Description & design of Internal control
Type 2 Report: Description, design & Operating effectiveness of Internal Controls
Obtaining understanding of services provided by Service Organisation

a.Nature of services provided by service organisation and significance of those services to user entity,
including effect thereof on user entity's internal control;
b.Nature and materiality of transactions processed or accounts or financial reporting processes affected
by service organisation;
c.Degree of interaction between activities of service organisation and those of user entity; and
d.Nature of relationship between user entity and service organisation, including relevant contractual
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terms for activities undertaken by service organisation.
Auditor's Considerations
User auditor shall evaluate design and implementation of controls at user entity that relate to services
provided by service organisation.
User auditor shall determine whether sufficient understanding of nature and significance of services
provided by service organisation and their effect on user entity's internal control relevant to audit has been
obtained to provide basis for identification and assessment of ROMM.
If user auditor is unable to obtain sufficient understanding from user entity, perform following procedures:
a.Obtaining a Type 1 or Type 2 report, if available;
b.Contacting service organisation, through user entity, to obtain specific info;
c.Visiting service organisation and performing procedures that will provide info about controls at service
org;
d.Using another auditor to perform procedures that will provide necessary info about controls at service
org.
Information w.r.t controls at Sub-Service Organisation (SSO)
If service organisation uses SSO, service auditor's report may either include or exclude SSO's relevant control
objectives and related controls in service organisation's description of its system and in scope of service
auditor's engagement.
These 2 methods of reporting are known as inclusive method and carve-out method, respectively.
If Type 1 or Type 2 report excludes controls at SSO, and services are relevant to audit of user entity's F.S.,
apply this SA in respect of SSO. (i.e. Type 1/2 report or visit or another auditor or contact SSO)
Nature and extent of work to be performed by user auditor regarding services provided by SSO depend on
nature and significance of those services to user entity and relevance of those services to audit.
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Reporting by User Auditor
i The user auditor shall modify opinion in user auditor's report in accordance with SA 705 if user auditor
is unable to obtain SAAE regarding services provided by service organisation relevant to audit of user
entity's F.S.
i The user auditor shall not refer to work of service auditor in user auditor's report containing unmodified
opinion unless required by law or regulation. If such reference required by law or regulation, indicate
reference does not diminish user auditor's responsibility for audit opinion.
i If reference to work of service auditor relevant to understand modification of opinion, user auditor's
report shall indicate that such reference does not diminish user auditor's responsibility for that
opinion.
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SA 450: EVALUATiON OF MiSSTATEMENTS
IDENTiFiED DURiNG THE AUDiT
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A 450: EVALUATiON OF MiSSTATEMENTS IDENTiFiED

15 DURiNG THE AUDiT
Objective
The objective of the auditor is to evaluate:
a.Effect of identified misstatements on audit; and
b.Effect of uncorrected misstatements, if any, on F.S.
Uncorrected misstatements – Misstatements that auditor has accumulated during audit and not corrected.
Sources of Misstatements
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a.An inaccuracy in gathering or processing data from which F.S. are prepared;
b.An omission of amount or disclosure;
c.An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts; and
d.Judgments of management concerning accounting estimates that the auditor considers unreasonable
or the selection and application of accounting policies that the auditor considers inappropriate.
Consideration of Identified Misstatements as Audit Progresses

The auditor shall determine whether overall audit strategy and audit plan need to be revised if:
a.The nature of identified misstatements and circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with accumulated ones, could be material; or
b.The aggregate of misstatements accumulated approaches materiality determined as per SA 320.
If, at auditor's request, mgt has examined and corrected misstatements that were detected, auditor shall
perform additional audit procedures to determine whether misstatements remain.
Communication and Correction of Misstatements

ü The auditor shall communicate all misstatements accumulated during audit with appropriate level of
mgt.
ü Request mgt to correct those misstatements.
ü If mgt refuses, obtain understanding of reasons for not making corrections and evaluate whether F.S.
as whole are free from material misstatement.Discuss impact of uncorrected misstatements
identified during audit and auditor's response to same
Prior to evaluating effect of uncorrected misstatements, auditor shall reassess materiality determined in
accordance with SA 320, to confirm whether it remains appropriate in context of entity's actual financial
results.
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In accordance with SA 450 “Evaluation of Misstatements identified during Audit”, auditor shall
determine whether uncorrected misstatements are material, individually or in aggregate. In making this
determination, the auditor shall consider- (size & effect)
(i)The size and nature of misstatements, both in relation to particular classes of transactions, account
balances or disclosures and F.S. as whole, and particular circumstances of their occurrence; &
(ii)The effect of uncorrected misstatements related to prior periods on relevant classes of
transactions, account balances or disclosures, and F.S. as a whole.
The auditor shall communicate with TCWG uncorrected misstatements and effect on opinion in auditor's
report, unless prohibited by law or regulation.
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Auditor's communication shall identify material uncorrected misstatements individually. Auditor shall
request that uncorrected misstatements be corrected.
As per mgt, if effect is immaterial then auditor shall request for WR from mgt and TCWG that they
believe effects are immaterial to F.S. as a whole. A summary of such items shall be included in or
attached to the written representation.
If management refuses to adjust financial info and results of extended audit procedures do not enable
auditor to conclude that aggregate of uncorrected misstatements is not material, auditor should report
accordingly.
SA 500: AUDiT EViDENCE
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16 SA 500: AUDiT EViDENCE
Objective
The objective of auditor is to design and perform audit procedures in a way as to enable him to obtain
sufficient appropriate audit evidence(SAAE) to be able to draw reasonable conclusions on which to base
auditor's opinion.
Management's expert –Individual or organisation possessing expertise in a field other than accounting or
auditing, whose work in that field is used by entity to assist entity in preparing F.S.
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Information to Be Used as Audit Evidence
Auditor shall consider relevance and reliability of information to be used as audit evidence.
Auditor's responsibility when relying on Audit evidence prepared using Mgt Expert's work:
a.Evaluate competence, capabilities and objectivity of that expert;
Information regarding the competence, capabilities and objectivity of a management's expert may come
from a variety of sources, such as:
Ÿ Personal experience with previous work of expert.
Ÿ Discussions with expert.
Ÿ Discussions with others who are familiar with expert's work.
Ÿ Knowledge of expert's qualifications, membership of professional body or industry association,
license to practice, or other forms of external recognition.
Ÿ Published papers or books written by that expert.
Ÿ Auditor's expert, if any, who assists auditor in obtaining SAAE wrt info produced by mgt's expert.
(a)Obtain understanding of work of expert; and

Aspects of mgt's expert's field relevant to auditor's understanding may include:
Ÿ Whether that expert's field has areas of specialty within it that are relevant to audit.
Ÿ Whether any professional or other standards, and regulatory or legal requirements apply.
Ÿ What assumptions and methods are used by the management's expert, and whether they are
generally accepted within that expert's field and appropriate for financial reporting purposes.
Ÿ The nature of internal and external data or information the auditor's expert uses.
(b)Evaluate appropriateness of that expert's work as audit evidence for relevant assertion.
Considerations when evaluating the appropriateness of the management's expert's work as audit evidence
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for the relevant assertion may include:
Ÿ The relevance and reasonableness of expert's findings or conclusions, their consistency with other
audit evidence, and whether they have been appropriately reflected in F.S;
Ÿ If expert's work involves use of significant assumptions and methods, relevance and reasonableness
of those assumptions and methods; and
Ÿ If expert's work involves significant use of source data, relevance, completeness, and accuracy of
that source data.
Matters affecting NTE of Audit Procedures in case of info. produced using work of mgt expert
Ÿ The nature and complexity of matter to which mgt's expert relates.
Ÿ The ROMM in the matter.
Ÿ The availability of alternative sources of audit evidence.
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Ÿ The nature, scope and objectives of mgt's expert's work.

Ÿ Whether mgt's expert is employed by entity, or is party engaged by it to provide relevant services.
Ÿ The extent to which management can exercise control or influence over work of mgt's expert.
Ÿ Whether mgt's expert is subject to technical performance standards or other professional or
industry requirements.
Ÿ The nature and extent of controls within entity over mgt's expert's work.
Ÿ The auditor's knowledge and experience of mgt's expert's field of expertise.
Ÿ The auditor's previous experience of work of that expert.
Audit Procedures for Obtaining Audit Evidence

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

Ÿ Observation: Looking at a process or procedure being performed by others, for example, the auditor's
observation of inventory counting by the entity's personnel, or of the performance of control
activities.
Ÿ Inspection: Examining records or documents, whether internal or external, in paper form, electronic
form, or other media, or a physical examination of an asset.
Ÿ External Confirmation: Audit evidence obtained by the auditor as a direct written response to the
auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
Ÿ Recalculation: Checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
Ÿ Reperformance: auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
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Ÿ Analytical Procedures: evaluations of financial information made by a study of plausible

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

Ÿ Reliability of audit evidence increased when obtained from independent sources outside entity.
Ÿ Reliability of audit evidence generated internally increased when related controls are effective.
Ÿ Audit evidence obtained directly by auditor (for example, observation of application of control)
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about
application of control).
Ÿ Audit evidence in documentary form more reliable than obtained orally
Ÿ Audit evidence provided by original documents more reliable than audit evidence provided by
photocopies or facsimiles, or documents filmed, digitised or otherwise transformed into electronic
form
SA 501: AUDiT EViDENCE -
SPECiFiC CONSiDERATiONS
FOR SELECTED ITEMS
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SA 501: AUDiT EViDENCE - SPECiFiC CONSiDERATiONS

17 FOR SELECTED ITEMS
The objective of auditor is to obtain SAAE regarding:

a.Existence and condition of inventory;
b.Completeness of litigation and claims involving entity; and
c.Presentation and disclosure of segment information in accordance with applicable FRF.
Inventory
When inventory is material to F.S, auditor shall obtain SAAE regarding existence and condition of
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inventory by:
(a)Attendance at physical inventory counting, unless impracticable, to:
i)Evaluate mgt's instructions and procedures for recording results of entity's physical inventory
counting;
ii)Observe performance of mgt's count procedures;
iii)Inspect the inventory; and
iv)Perform test counts; and
(b)Performing audit procedures over entity's final inventory records to determine whether they
accurately reflect actual inventory count results.
Procedures in Special Circumstances

Physical inventory count at date other than date of F.S:
Ÿ Yes, it can be done for practical reasons.
Ÿ Mgt can determine inventory qty by annual physical inventory counting or maintains perpetual
inventory system.
Ÿ In either case, effectiveness of controls over changes in inventory determines whether conduct of
physical inventory counting at date other than date of F.S. is appropriate for audit purposes.
Ÿ Auditor shall perform audit procedures to obtain audit evidence about whether changes in inventory
between count date and date of F.S. are properly recorded.
Matters that Auditor shall consider when designing audit procedures to obtain audit evidence about
whether changes in inventory amounts are properly recorded include:
1.Whether perpetual inventory records are properly adjusted.
2.Reliability of entity's perpetual inventory records.
3.Reasons for significant differences between info obtained during physical count and perpetual records.
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Auditor unable to attend inventory count:
Ÿ If auditor is unable to attend physical inventory counting due to unforeseen circumstances, auditor
shall make or observe some physical counts on an alternative date.
Ÿ Perform audit procedures to assess whether changes in inventory between date of physical count and
period end date are correctly recorded.
Ÿ The auditor would also verify procedure adopted, treatment given for discrepancies noticed during the
physical count.
Ÿ The auditor would also ensure that appropriate cut off procedures were followed by mgt.
Ÿ He should also get management's written representation on
Ÿ completeness of info provided regarding inventory, and
Ÿ assurance with regard to adherence to laid down procedures for physical inventory count.
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If attendance is impracticable:
Ÿ This may be due to location & nature of inventory. Eg. Location pose threat to Auditor
Ÿ As per SA 200 à matter of difficulty, time, or cost involved is not a valid basis for auditor to omit an
audit procedure or settle for less than persuasive Audit Evidence.
Ÿ Perform alternative audit procedures to obtain SAAE regarding existence and condition of inventory.
Ÿ For eg, inspection of documentation of subsequent sale of specific inventory items acquired or
purchased prior to inventory counting, may provide SAAE
Ÿ If not possible, modify opinion in auditor's report in accordance with SA 705.
Inventory in custody of 3rd Party:

When inventory under custody of 3rd party is material to F.S, obtain SAAE regarding existence and condition
of inventory by performing one or both of following:
a.Request confirmation from 3rd party as to quantities and condition of inventory held on behalf of entity.
b.Perform inspection or other audit procedures appropriate in circumstances.
If doubt over integrity & objectivity of 3rd party:
Ÿ Attending, or arranging another auditor to attend, 3rd party's physical counting of inventory, if
practicable.
Ÿ Obtaining another auditor's report, or service auditor's report, on adequacy of 3rd party's internal control
that inventory is properly counted and adequately safeguarded.
Ÿ Inspecting documentation regarding inventory held by 3rd parties, for eg, warehouse receipts.
Ÿ Requesting confirmation from other parties when inventory has been pledged as collateral.
How to Evaluate Management Instructions & Procedure?

Matters relevant in evaluating management's instructions and procedures for recording and controlling
physical inventory counting include whether they address, for eg:
Ÿ Application of appropriate control activities, for example, collection of used physical inventory count
records, accounting for unused physical inventory count records, and count and re-count procedures.
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Ÿ Accurate identification of stage of completion of WIP, of slow moving, obsolete or damaged items and
of inventory owned by a third party, for example, on consignment.
Ÿ Procedures used to estimate physical quantities.
Ÿ Control over movement of inventory between areas and shipping and receipt of inventory before and
after cut-off date.
Litigation & Claims

The auditor shall identify litigation and claims through following procedures:
a.Inquiry of mgt and, where applicable, others within entity, including in-house legal counsel;
b.Reviewing minutes of meetings of TCWG and correspondence between entity and external legal
counsel; and
c.Reviewing legal expense accounts.
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Direct Communication with Entity's external legal counsel If auditor assesses
ØROMM regarding litigation or claims identified, or
Øaudit procedures performed indicate other material litigation or claims may exist à seek direct
communication with entity's external legal counsel.
The auditor shall do so through letter of inquiry, prepared by mgt and sent by auditor, requesting entity's
external legal counsel to communicate directly with auditor. If law, regulation or respective legal
professional body prohibits entity's external legal counsel from communicating directly with auditor,
perform alternative audit procedures.
If: (a) Mgt refuses to give permission to communicate with entity's external legal counsel, or legal counsel
refuses to respond appropriately to letter of inquiry, or is prohibited from responding; and
(b) auditor is unable to obtain SAAE by performing alternative audit procedures, auditor shall modify
opinion in auditor's report in accordance with SA 705.
Written Representation from mgt & TCWG that all litigation and claims whose effects should be considered
when preparing the financial statements
Ÿ have been disclosed to auditor and
Ÿ appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework
Segment Information
Auditor shall obtain SAAE regarding presentation and disclosure of segment information in accordance
with applicable FRF by:
(a)Obtaining understanding of methods used by Mgt in determining segment information, and:
i)Evaluating whether such methods are likely to result in disclosure as per applicable FRF; and
ii)Where appropriate, testing application of such methods; and
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(b)Performing analytical procedures or other audit procedures appropriate in circumstances.
'Example of matters' relevant when obtaining understanding of methods used by mgt in determining
segment information include:
i)Sales, transfers and charges between segments, and elimination of inter-segment amounts.
ii)Comparisons with budgets and other expected results, for eg, operating profits as a % of sales.
iii)Allocation of assets and costs among segments.
iv)Consistency with prior periods, and adequacy of disclosures w.r.t inconsistencies.
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SA 505: EXTERNAL CONFiRMATiONS
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18 SA 505: EXTERNAL CONFiRMATiONS
External confirmation –
Audit evidence obtained as a direct written response to auditor from a 3rd party (the confirming
party), in paper form, or by electronic or other medium.
Exception – A response that indicates a difference between information requested to be confirmed, or

contained in the entity's records, and information provided by the confirming party.
External Confirmation Procedures

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

Ÿ The assertions being addressed.
Ÿ Specific identified ROMM, including fraud risks.
Ÿ The layout and presentation of the confirmation request.
Ÿ Prior experience on the audit or similar engagements.
Ÿ The method of communication (for example, in paper form, or by electronic or other medium).
Ÿ Management's authorisation or encouragement to the confirming parties to respond to the auditor.
Confirming parties may only be willing to respond to a confirmation request containing management's
authorisation.
Ÿ The ability of intended confirming party to confirm or provide the requested information (for example,
individual invoice amount versus total balance)
Management's Refusal to Allow the Auditor to Send a Confirmation Request

If management refuses to allow auditor to send a confirmation request, auditor shall:
a.Inquire mgt's reasons for refusal, and seek audit evidence of their validity and reasonableness;
b.Evaluate implications of mgt's refusal on auditor's assessment of ROMM, including risk of fraud, and on
NTE of other audit procedures; and
c.Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
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If auditor concludes that mgt's refusal is unreasonable, or unable to obtain relevant and reliable audit
evidence from alternative audit procedures, communicate with TCWG in accordance with SA 260.
The auditor shall determine implications for audit and auditor's opinion as per SA 705.
Positive Confirmation Requests
Ÿ A positive external confirmation request asks confirming party to reply in all cases, either by indicating
agreement with given info, or providing information.
Ÿ A response to positive confirmation request is expected to provide reliable audit evidence.
Ÿ There is risk that confirming party may reply without verifying if information is correct.
Ÿ The auditor may reduce this risk by not stating amt (or other info) on confirmation request, and ask
confirming party to fill amount or furnish other info.
Ÿ On other hand, use of this type of “blank” confirmation request may result in lower response rates
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because additional effort is required by confirming parties.
Negative Confirmations
Negative confirmation request – A request that confirming party respond directly to auditor only if
confirming party disagrees with the information provided in the request.
Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, auditor shall not use negative confirmation requests as sole substantive audit procedure to
address assessed ROMM at assertion level unless all of following are present:
a.The auditor has assessed ROMM as low and obtained SAAE regarding operating effectiveness of
controls;
b.Population comprises large number of small, homogeneous, account balances, transactions or
conditions;
c.A very low exception rate is expected; and
d.Auditor is not aware of circumstances that would cause recipients to disregard such requests.
No response in case of Negative confirmation:

Ÿ The failure to receive response does not indicate receipt by intended confirming party of confirmation
request or verification of accuracy of info contained in request.
Ÿ Accordingly, failure of confirming party to respond provides significantly less persuasive audit evidence
than positive confirmation request.
Ÿ Confirming parties also may be more likely to respond indicating their disagreement with confirmation
request when information in requested is not in their favour, and less likely to respond otherwise.
Alternate Audit Procedures: Non-Responses

Examples of alternative audit procedures auditor may perform include:
Ÿ For accounts receivable balances – examining specific subsequent cash receipts, shipping
documentation, and sales near the period-end.
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Ÿ For accounts payable balances – examining subsequent cash disbursements or correspondence from
third parties, and other records, such as goods received notes.
Topics related to External Confirmation given in SA 330

Areas where external confirmation procedures may be used:
Ÿ Bank balances and other information relevant to banking relationships.
Ÿ Accounts receivable balances and terms.
Ÿ Inventories held by third parties at bonded warehouses for processing or on consignment.
Ÿ Property title deeds held by lawyers or financiers for safe custody or as security.
Ÿ Investments held for safekeeping by third parties, or purchased from stockbrokers but not delivered at
the balance sheet date.
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Ÿ Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
Ÿ Accounts payable balances and terms.
How to know if we can use External Confirmations as Audit Procedures?

Factors that may assist auditor in determining whether external confirmation procedures are to be
performed as substantive audit procedures include:
ŸThe confirming party's knowledge of subject matter
ŸThe ability or willingness of the intended confirming party to respond – for example, the confirming
party:
ØMay not accept responsibility for responding to confirmation request;
ØMay consider responding too costly or time consuming;
ØMay have concerns about the potential legal liability resulting from responding;
ØMay account for transactions in different currencies; or
ØMay operate in environment where responding to confirmation requests is not a significant aspect
of day-to-day operations.
ŸThe objectivity of intended confirming party – if confirming party is related party of entity, responses to
confirmation requests may be less reliable.
SA 510: Initial Audit Engagements - Opening Balances
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19 SA 510: Initial Audit Engagements - Opening Balances
Initial audit engagement – An engagement in which either:

i)The F.S. for prior period à not audited; or
ii)The F.S. for prior period audited by a predecessor auditor.
Objective
In conducting initial audit engagement, objective of auditor with respect to opening balances is to obtain
SAAE about whether:
a)Opening balances contain misstatements that materially affect the current period's F.S;
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b)Appropriate accounting policies reflected in opening balances have been consistently applied in current
period's F.S, or changes properly accounted for and adequately presented and disclosed in accordance
with FRF.
Opening balances –
Ÿ Those account balances that exist at beginning of period.
Ÿ Opening balances are based upon closing balances of prior period and reflect effects of transactions and
events of prior periods and accounting policies applied in the prior period.
Ÿ Opening balances also include matters requiring disclosure that existed at beginning of period, such as
contingencies and commitments.
Audit Procedures: Opening Balances

The auditor shall read most recent financial statements (MRFS), if any, and predecessor auditor's report
thereon, if any, for info. relevant to opening balances, including disclosures.
The auditor shall obtain SAAE about whether opening balances contain misstatements that materially
affect current period's F.S. by:
a.Determining whether prior period's closing balances correctly brought forward to current period or,
when appropriate, any adjustments have been disclosed as prior period items in current year's P&L
b.Determining whether opening balances reflect application of appropriate accounting policies; and
c.Performing one or more of following:
i)Where prior year FS were audited, perusing copies of audited FS including other relevant documents
relating to prior period F.S;
ii)Evaluating whether audit procedures performed in current period provide evidence relevant to
opening balances; or
iii)Performing specific audit procedures to obtain evidence regarding opening balances.
iv)If auditor obtains audit evidence that opening balances contain misstatements that could
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materially affect current period's F.S. à perform additional audit procedures appropriate in
circumstances to determine effect on current period's F.S.
v)If auditor concludes that misstatements exist in current period's FS, communicate misstatements
with mgt and TCWG in accordance with SA 450.
Consistency of Accounting Policies

Auditor shall obtain SAAE that:
Ÿ Accounting policies have been consistently applied in current period F.S. &
Ÿ whether any changes have been properly accounted for & adequately presented & disclosed as per FRF.
Conclusion & Reporting
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Ÿ Unable to obtain SAAE regarding opening balances à Qualify/Disclaimer of opinion as per SA 705
Ÿ Opening balance contain misstatement à materially affects current period FS & not properly accounted
for & disclosed à Qualified/Adverse Opinion as per SA 705
A/c policy not applied consistently or change not properly accounted à Qualified /Adverse opinion as
per SA 705
SA 520: ANALYTiCAL PROCEDURES
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20 SA 520: ANALYTiCAL PROCEDURES
a.Obtaining relevant and reliable audit evidence when using substantive analytical procedures; and
b.To design and perform analytical procedures near end of audit that assist auditor when forming an
overall conclusion as to whether FS are consistent with auditor's understanding of entity.
Substantive Analytical Procedures (SAP)

When designing and performing SAP, either alone or in combination with TOD auditor shall:
a)Determine suitability of particular SAP for given assertions, taking account of assessed ROMM and
tests of details for these assertions;
b)Evaluate reliability of data from which auditor's expectation of recorded amounts or ratios is developed,
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taking account of source, comparability, and nature and relevance of information available, and
controls over preparation;
c)Develop expectation of recorded amounts or ratios and evaluate whether expectation is sufficiently
precise to identify misstatement that may cause F.S. to be materially misstated; and
d)Determine amount of difference of recorded amounts from expected values that is acceptable without
further investigation.
Suitability of Particular Analytical Procedures for Given Assertions

1.Substantive analytical procedures are generally more applicable to large volumes of transactions that
tend to be predictable over time.
2.In some cases, even unsophisticated predictive model may be effective as analytical procedure.
3.Different types of analytical procedures provide different levels of assurance.
4.The determination of suitability of particular SAP is influenced by nature of assertion and auditor's
assessment of RMM.
5.Particular SAP may be considered suitable when TOD are performed on same assertion.
Analytical Procedures that Assist When Forming an Overall Conclusion

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

If auditor identifies fluctuations or relationships that are inconsistent with other relevant info or that differ
from expected values by significant amt, auditor shall investigate such differences by:
a.Inquiring of management and obtaining appropriate audit evidence relevant to mgt's responses; and
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b.Performing other audit procedures as necessary in circumstances.

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

Trends: Analysing account fluctuations by comparing current year to prior year information and, also, to
information derived over several years.
Reasonableness: Tests are made by reviewing relationship of certain account balances to other balances for
reasonableness of amounts. Examples of accounts that may be reasonably tested are:
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Ÿ Interest expense against interest bearing obligations

Ÿ Raw Material Consumption to Production (quantity)
Ÿ Wastage & Scrap % against production & raw material consumption (quantity)
Ÿ Work-in-Progress based on issued of materials & Sales (quantity)
Ÿ Sales discounts and commissions against sales volume
Ÿ Rental revenues based on occupancy of premises
Ratios: Analysis by computation of ratios includes study of relationships between FS amounts. Commonly
used ratios include:
Ÿ Elements of income or loss as a percentage of sales
Ÿ Gross profit turnover
Ÿ Accounts receivable turnover
Ÿ Inventory turnover
Ÿ Profitability, leverage, and liquidity
Structural Modelling: Modelling tool constructs a statistical model from financial and/or non- financial data
of prior-accounting periods to predict current account balances (e.g. linear regression).
SA 530-AUDiT SAMPLiNG
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21 SA 530-AUDiT SAMPLiNG
Objective:
The objective is to provide reasonable basis for auditor to draw conclusions about population from which
sample is selected.
Audit sampling (sampling) – The application of audit procedures to less than 100% of items within a
population such that all sampling units have a chance of selection in order to provide auditor with a
reasonable basis on which to draw conclusions about entire population.
Sampling risk – The risk that auditor's conclusion based on sample may be different from conclusion if
entire population were subjected to same audit procedure.
Types of Sampling Risks?

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Sampling risk can lead to 2 types of erroneous conclusions:

(i)In case of TOCs à controls are more effective than they actually are, or in case of TODs à
material misstatement does not exist when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii)In case of TOCs à controls are less effective than they actually are, or in case of TODs, that material
misstatement exists when in fact it does not.
This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
Statistical sampling – An approach to sampling that has following characteristics:

(i)Random selection of sample items; and
(ii)The use of probability theory to evaluate sample results, including measurement of sampling risk.
Sampling approach that doesn't have characteristics (i) & (ii) is considered non-statistical sampling.
Tolerable misstatement
Ÿ A monetary amount set by auditor in respect of which auditor seeks to obtain appropriate level of
assurance that the amount set by auditor isn't exceeded by actual misstatement in population.
Ÿ Further, while designing a sample, auditor determines tolerable misstatement in order to address risk
that aggregate of individually immaterial misstatements may cause F.S. to be materially misstated
and provide a margin for possible undetected misstatements.
Ÿ Tolerable misstatement is application of performance materiality, to a sampling procedure. Tolerable
misstatement may be same amount or amount lower than performance materiality.
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Sample Design, Size and Selection of Items for Testing
i)When designing audit sample, consider purpose of audit and characteristics of population from which
sample will be drawn.
ii)The auditor shall determine sample size sufficient to reduce sampling risk to acceptably low level.
iii)The auditor shall select items for sample in a way that each sampling unit in population has chance of
selection.
Performing audit procedures

Ÿ The auditor shall perform audit procedures, appropriate to purpose, on each item selected.
Ÿ If audit procedure is not applicable to selected item, auditor shall perform procedure on replacement
item.
Ÿ If auditor is unable to apply designed audit procedures, or alternative procedures, to selected item,
auditor shall treat that item as deviation from prescribed control, in case of TOCs, or misstatement,
in case of TODs.
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Nature and Cause of Deviations and Misstatements
Ÿ The auditor shall investigate nature and cause of any deviations or misstatements identified, and
evaluate possible effect on audit procedures and other areas of audit.
Ÿ In extremely rare circumstances when auditor considers a misstatement or deviation to be an anomaly,
auditor shall obtain high degree of certainty that such misstatement or deviation is not
representative of population. The auditor shall obtain this degree of certainty by performing additional
audit procedures to obtain SAAE that misstatement or deviation does not affect remainder of
population.
Sample Selection Methods

There are many methods of selecting samples. The principal methods are as follows:
(a)Random selection (applied through random number generators, for example, random number tables).
Ÿ Simple Random Sampling: Whole population has equal chance of selection
Ÿ Stratified Sampling: Dividing the population in few separate groups called strata & taking samples
from each of them.
(b)Systematic selection, in which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
Although the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerised random number generator or random number
tables.
(c)Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and
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evaluation results in a conclusion in monetary amounts.

(d)Haphazard selection, in which auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first
or last entries on a page) and thus attempt to ensure that all items in the population have a chance
of selection. Haphazard selection is not appropriate when using statistical sampling.
(e)Block selection involves selection of a block(s) of contiguous items from within the population. Block
selection cannot ordinarily be used in audit sampling because most populations are structured such
that items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
Factors affecting sample size

TOCs
1.An increase in extent to which auditor's risk assessment takes into account relevant controls: Increase
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2.An increase in tolerable rate of deviation: Decrease

3.An increase in expected rate of deviation of population to be tested: Increase
4.Increase in auditor's desired level of assurance that tolerable rate of deviation is not exceeded by actual
rate of deviation in population: Increase
5.An increase in number of sampling units in population: Negligible effect
TODs
1.An increase in auditor's assessment of risk of material misstatement: Increase
2.An increase in use of other substantive procedures directed at same assertion: Decrease
3.An increase in auditor's desired level of assurance that tolerable misstatement is not exceeded by
actual misstatement in population: Increase
4.An increase in tolerable misstatement: Decrease
5.An increase in amount of misstatement the auditor expects to find in the population: Increase
6.Stratification of the population when appropriate: Decrease
Factors determining extent of checking on a Sampling Plan

i)Size of organisation
ii)State of Internal Control
iii)Adequacy & reliability of books & records
iv)Tolerable error range
v)Degree of desired Confidence
SA 540: AUDiTiNG ACCOUNTiNG ESTiMATES,
iNCLUDiNG FAiR VALUE ACCOUNTiNG ESTiMATES
& RELATED DiSCLOSURES
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SA 540: AUDiTiNG ACCOUNTiNG ESTiMATES, iNCLUDiNG FAiR

22 VALUE ACCOUNTiNG ESTiMATES & RELATED DiSCLOSURES
Nature of Accounting Estimates:

Some F.S. items cannot be measured precisely, can only be estimated. For purposes of this SA, such items
referred to as accounting estimates.
Information available to mgt à accounting estimate varies widely à affects degree of estimation
uncertainty.
Degree of estimation uncertainty affects à ROMM of accounting estimates.
Some A/C estimates involve relatively low estimation uncertainty and give rise to lower ROMM:
Ÿ Accounting estimates arising in entities that engage in business activities that are not complex.
Ÿ Accounting estimates that are frequently made and updated because they relate to routine
transactions.
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Ÿ Accounting estimates derived from data that is readily available, such as published interest rate data
or exchange-traded prices of securities. Such data may be referred to as “observable” in context of fair
value accounting estimate.
Ÿ Fair value (FV) accounting estimates where method of measurement prescribed by FRF is simple and
applied easily to asset or liability requiring measurement at fair value.
Ÿ FV accounting estimates where model used is well-known or generally accepted, provided that
assumptions or inputs to model are observable.
Accounting estimates with relatively high estimation uncertainty, based on significant assumptions, for eg:
Ÿ Accounting estimates relating to outcome of litigation.
Ÿ FV accounting estimates for derivative financial instruments not publicly traded.
Ÿ FV accounting estimates for which a highly specialised entity-developed model is used or for which,
there are assumptions or inputs that cannot be observed in marketplace. Accounting estimates in cases
of Wage Revision Agreements wherein negotiations with Trade Unions is on the way or Government's
sanction is awaited leading to uncertainty.
Examples of situations where accounting estimates, other than fair value accounting estimates, may be
required include:
Ÿ Allowance for doubtful accounts.
Ÿ Inventory obsolescence.
Ÿ Warranty obligations.
Ÿ Depreciation method or asset useful life.
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Ÿ Provision against the carrying amount of an investment where there is uncertainty regarding its
recoverability.
Ÿ Outcome of long term contracts.
Ÿ Financial Obligations / Costs arising from litigation settlements and judgments.
Examples of situations where fair value accounting estimates may be required include:
Ÿ Complex financial instruments, which are not traded in an active and open market.
Ÿ Share-based payments.
Ÿ Property or equipment held for disposal.
Ÿ Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
Ÿ Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration, for eg. non-monetary exchange of plant facilities in different lines of
business.
Risk Assessment Procedures & Related Activities
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How auditor minimizes Risk of Material Misstatement?
ØObtain understanding of
Ørequirements of FRF
ØHow mgt identifies those transactions, events or conditions that may give rise to accounting estimates
by making inquiries
ØThe estimation making process of mgt:

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

Inquiries of management about changes in circumstances may include, for example, inquiries about
whether:
Ÿ The entity has engaged in new types of transactions that may give rise to accounting estimates.
Ÿ Terms of transactions that gave rise to accounting estimates that have changed.
Ÿ Accounting policies relating to accounting estimates have changed, as a result of changes to the
requirements of applicable FRF or otherwise.
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Ÿ Regulatory or other changes outside control of management occurred that may require management to
revise, or make new, accounting estimates.
Ÿ New conditions or events have occurred that give rise to need for new or revised accounting estimates.
During audit, auditor may identify transactions, events and conditions that give rise to need for accounting
estimates that mgt failed to identify. SA 315 deals with circumstances where auditor identifies RMM that
mgt failed to identify, including determining whether there is significant deficiency in internal control with
regard to entity's RAP.
Evaluation of Accounting Estimate with Significant Risk

For accounting estimates that give rise to significant risks, in addition to other substantive procedures
performed to meet requirements of SA 330, auditor shall evaluate following:
i)How mgt has considered alternative assumptions or outcomes, and why rejected them, or how mgt
otherwise addressed estimation uncertainty in making accounting estimate.
ii)Whether significant assumptions used by management are reasonable.
iii)Where relevant to reasonableness of significant assumptions used by mgt or appropriate application of
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applicable financial reporting framework, management's intent to carry out specific courses of action
and ability to do so.
iv)If, in auditor's judgment, mgt has not adequately addressed effects of estimation uncertainty on
accounting estimates that give rise to significant risks, auditor shall develop a range to evaluate
reasonableness of accounting estimate.
What factors influence degree of Estimation Uncertainty?

But what is Estimation Uncertainty?
The susceptibility of accounting estimate and related disclosures to an inherent lack of precision in its
measurement.
The degree of estimation uncertainty associated with accounting estimate may be influenced by factors
such as:
Ÿ The extent to which accounting estimate depends on judgment.
Ÿ The sensitivity of accounting estimate to changes in assumptions.
Ÿ The existence of recognised measurement techniques that may mitigate estimation uncertainty.
Ÿ The length of forecast period, and relevance of data drawn from past events to forecast future events.
Ÿ The availability of reliable data from external sources.
Ÿ The extent to which accounting estimate is based on observable or unobservable inputs.
Review of Outcome of Accounting Estimates

ØAuditor shall review outcome of accounting estimates included in prior period F.S., or, their subsequent
re-estimation for purpose of current period.
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ØNature and extent of auditor's review takes account of nature of accounting estimates, and
Øwhether info obtained from review would be relevant to identifying and assessing ROMM of accounting
estimates made in current period F.S.
ØHowever, review is not intended to question judgments made in prior periods that were based on info
available at that time.
ØThe outcome of accounting estimate will often differ from accounting estimate recognised in prior
period F.S.
By performing RAP to identify and understand reasons for such differences, auditor may obtain:
ØInfo regarding effectiveness of mgt's prior period estimation process, from which auditor can judge
effectiveness of mgt's current process.
ØAudit evidence that is pertinent to re-estimation, in current period, of prior period accounting
estimates.
ØAudit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in F.S.
ØIt may assist auditor, in current period, in identifying circumstances or conditions that increase
susceptibility of accounting estimates to possible management bias.
ØAuditor's professional scepticism assists in identifying such circumstances and determining NTE of
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further audit procedures.
Identifying & Assessing ROMM

a.In identifying and assessing ROMM as required by SA 315, auditor shall evaluate degree of estimation
uncertainty.
b.Auditor shall determine whether any of those accounting estimate that have been identified as having
high estimation uncertainty give rise to significant risk.
Responses to Assessed Risks of Material Misstatement

(a)Based on assessed ROMM auditor, shall determine:
Ÿ Whether mgt has appropriately applied FRF relevant to accounting estimate; and
Ÿ Whether methods for making accounting estimates are appropriate and have been applied consistently
Ÿ If changes in accounting estimates or in method from prior period, are those appropriate in present
circumstances.
(b)In response to assessed RMM, auditor shall undertake one or more of following:
Ÿ Determine whether events occurring up to date of auditor's report provide sufficient audit evidence
regarding accounting estimate.
Ÿ Test check data used by mgt for making accounting estimate.
Ÿ The auditor shall also evaluate whether method used for measurement is appropriate and
assumptions made are reasonable in light of measurement objective of FRF.
Ÿ This can be achieved by
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Ÿ Testing extent to which data is accurate, complete and relevant and whether accounting estimate
has been properly determined using such data and management assumptions.
Ÿ Considering source, relevance and reliability of external data.
Ÿ Recalculating accounting estimate and reviewing information about accounting estimate for
internal consistency.
Ÿ Test checks effectiveness of controls over estimates used by management with appropriate
substantive procedure.
(c)While determining matters identified or responding to assessed RMM, auditor shall consider whether
specialized skills or knowledge in relation to one or more aspects of accounting estimates are required
in order to obtain SAAE.
Understanding of Assumptions
Matters that the auditor may consider in obtaining an understanding of assumptions underlying the
accounting estimates include, for example:
Ÿ The nature of assumptions, including which of the assumptions are likely to be significant
assumptions.
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Ÿ How management assesses whether assumptions are relevant and complete (that is, that all relevant
variables have been taken into account).
Ÿ Where applicable, how management determines that assumptions used are internally consistent.
Ÿ Whether assumptions relate to matters within control of management (for eg, assumptions about
maintenance programs that may affect estimation of asset's useful life), and how they conform to
entity's business plans and external environment, or to matters that are outside its control (for eg,
assumptions about interest rates, mortality rates, potential judicial or regulatory actions, or variability
and the timing of future cash flows).
Ÿ The nature and extent of documentation, if any, supporting the assumptions.
Disclosures Related to Accounting Estimates

Auditor shall obtain SAAE about whether disclosures in FS related to accounting estimates are in
accordance with FRF. For accounting estimates that give rise to significant risks, evaluate adequacy of
disclosure of their estimation uncertainty in F.S. in context of applicable FRF
(a)The presentation of FS in accordance with applicable FRF includes adequate disclosure of material
matters.
These disclosures may include,
Ÿ The assumptions used.
Ÿ The method of estimation used, including any applicable model.
Ÿ The basis for selection of estimation.
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Ÿ Any changes in method of estimation from prior period and its subsequent effect.
Ÿ The sources and implication of estimation uncertainty.
(b)In relation to accounting estimate having significant risk, even where disclosures are in accordance
with the applicable FRF, the auditor may conclude that the disclosure of estimation uncertainty is
inadequate in light of the circumstances and facts involved.
Written Representations (WR)

SA 580 discusses use of WR. Depending on nature, materiality and extent of estimation uncertainty, WR
about accounting estimates recognised or disclosed in F.S. may include representations:
Ÿ About appropriateness of measurement processes, including related assumptions and models, used by
mgt in determining accounting estimates in context of applicable FRF, and consistency in application
of processes.
Ÿ That assumptions appropriately reflect management's intent and ability to carry out specific courses of
action on behalf of entity, where relevant to accounting estimates and disclosures.
Ÿ That disclosure related to a/c estimates are complete and appropriate under applicable FRF.
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That no subsequent event requires adjustment to a/c estimates and disclosures included in F.S.
SA 550: RELATED PARTiES (RP)
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23 SA 550: Related Parties (RP)
Responsibilities of auditor
= FRF establish a/c & disclosure requiremets RP relationships, transactions & balances then Auditor
must perform Audit procedures to reduce RMM that entity doesn't account & disclose RP relationships,
transn & balances as per FRF
= Even if FRF has no such requirement - Auditor shall obtain understanding of RP relationships &
transn to conclude FS give true & fair view & are not misleading
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(a) Obtain understanding of RP relationships and transactions sufficient to be able:
(i) To recognise fraud risk factors, arising from RP relationships and transn relevant to
identification and assessment of ROMM due to fraud; and
(ii) To conclude whether FS:
a) Achieve true and fair presentation (for fair presentation frameworks); or
b) Are not misleading (for compliance frameworks); and
c) In addition, where FRF establishes RP requirements, to obtain SAAE about whether RP relationships
and transn have been appropriately identified, accounted and disclosed in F.S. in accordance with
FRF
Related party – A party that is either:

(i) RP as defined in FRF; or
(ii) Where FRF establishes minimal or no related party requirements:
a. A person or other entity that has control or significant influence, over reporting entity;
b. Another entity over which reporting entity has control or significant influence, or
c. Another entity that is under common control with reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
However, entities that are under common control by a state (i.e., a national, regional or local government)
are not considered related unless they engage in significant transactions or share resources to significant
extent with one another.
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Understanding Entity's Related Party Relationships and Transactions
The engagement team discussion shall include specific consideration of susceptibility of FS to material
misstatement that could result from entity's RP relationships and transactions.
The auditor shall inquire of management regarding:

(a) The identity of entity's RP, including changes from prior period;
(b) The nature of relationships between entity and these RP; and
(c) Whether entity entered into transactions with these RP during the period and, if so, type and
purpose of transactions.
The auditor shall inquire of management and others within entity, to obtain understanding of controls
that management has established to:
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(a) Identify, account for, and disclose RP relationships and transactions in accordance with FRF;
(a) Authorise and approve significant transactions and arrangements with RP; and
(b) Authorise and approve significant transactions and arrangements o/s normal course of business.
Maintain alertness for RP information when reviewing Records/Documents

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

Auditor shall inspect following for indications of existence of RP relationships or transactions that mgt
has not previously identified or disclosed to auditor:
(a) Bank, legal and 3rd party confirmations obtained as part of auditor's procedures;
(b) Minutes of meetings of shareholders and of TCWG; and
(c) Such other records or documents as auditor considers necessary in circumstances of entity.
During the audit, the auditor may inspect records or documents that may provide information about
related party relationships and transactions, for eg:
i Entity income tax returns.
i Internal auditors' reports.
i Information supplied by the entity to regulatory authorities.
i Documents associated with the entity's filings with a securities regulator (e.g, prospectuses).
i Shareholder registers to identify the entity's principal shareholders.
i Records of the entity's investments and those of its pension plans.
i Statements of conflicts of interest from mgt & TCWG.
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i Contracts and agreements with key mgt or TCWG.
i Significant contracts re-negotiated by the entity during the period.
i Significant contracts and agreements not in the entity's ordinary course of business.
If auditor identifies significant transactions o/s entity's normal course of business when performing audit
procedures , he shall inquire of management about:
(a) The nature of transactions; and
(b) Whether RP could be involved.
Fraud Risk Factors Associated with a Related Party with Dominant Influence Domination of mgt by
single person or small group of persons without compensating controls is a fraud risk factor.
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Indicators of dominant influence exerted by a related party include:

i The related party has vetoed significant business decisions taken by mgt or TCWG.
i Significant transactions are referred to RP for final approval.
i There is little or no debate among mgt and TCWG regarding business proposals initiated by RP.
i Transactions involving RP are rarely independently reviewed and approved.
Identification of Previously Unidentified/Undisclosed RP or Significant RP Transactions
a) Promptly communicate to other members of engg team
b) Where FRF establishes RP requirements:
i Request mgt to identify all transn with newly identified RP
i Inquire as to why entity's IC failed to identify or disclose RP relationship/transaction
c) Perform Substantive procedures relating to newly identified RP relationship/transaction
d) If non-disclosure appears intentional, evaluate implications for audit.
Examples of arrangements that indicate existence of RP relationships or transactions that management

has not previously identified or disclosed to auditor include:
i Participation in unincorporated partnerships with other parties.
i Agreements for provision of services to certain parties under terms and conditions that are o/s
entity's normal course of business.
i Guarantees and guarantor relationships.
What if Identified Significant RP Transactions o/s Entity's Normal Course of Business?
a) Inspect underlying contract/agreement & evaluate:

i Business rationale (or lack thereof) suggest transaction entered to engage in fraudlent financial
reporting or conceal misappropriation of assets
i Terms of transactions are consistent with mgt explaination &
i Transn accounted & disclosed as per FRF
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b) Obtain Audit evidence that transn authorised & approved.
Examples of transactions outside entity's normal course of business may include:
i Complex equity transactions, such as corporate restructurings or acquisitions.

i Transactions with offshore entities in jurisdictions with weak corporate laws.
i The leasing of premises or rendering of mgt services by entity to another party if no
consideration is exchanged.
i Sales transactions with unusually large discounts or returns.
i Transactions with circular arrangements, for example, sales with a commitment to repurchase.
i Transactions under contracts whose terms are changed before expiry.
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SA 560: SUBSEQUENT EVENTS
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24 SA 560: Subsequent Events
Events occurring b/w date of Facts that become known to Facts which become known to
FS & date of Audit Report auditor after date of Audit auditor after FS are issued
report but before F.S. are issued
a) Auditor shall obtain SAAE a) Auditor has no obligation to a) After FS have been issued
to ensure the events which perform any procedure regarding auditor has no obligation.
require adjustment or FS after issue of AR.
disclosure in FS have been b) H o w e v e r i f a n y f a c t
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identified. b) However, if a fact becomes becomes known to auditor, had
known to auditor that had been it been know at date of AR, he
b) In determining NTE of known before issue of AR, it may may have amended the AR, he
Audit procedures, he shall: have amended the AR, he shall: shall:
• Obtain understanding of • Discuss matter with mgt & • Discuss with mgt &
mgt procedures of identifying TCWG TCWG
subsequent events • Determine if FS need • Determine if FS need
• Inquiring of mgt as to amendment & if so amendment & if so,
occurrence of subs. Events • Inquire how mgt intends to • Inquire how mgt
which affect FS address the matter in FS intends to address the matter
• Read minutes mgt
meetings held after date of FS c) If mgt amends FS, he shall, c) If mgt amends the FS,
• Read latest subsequent • Carry our audit procedures on auditor shall:
interim FS, if any amendment • Carry out audit procedures
• If auditor identifies events • Extend these procedures to necessary in circumstances of
which require adjustment or date of new AR amendment
disclosure in FS, then • Provide a new AR on amended • Review steps taken by mgt
determine if it is appropriately FS dated not earlier than date of that everyone in receipt of
adjusted or disclosed in FS approval of amended FS previously issued FS with AR
Written Representation from has been informed of the
mgt that all events occurring d) If law or reg. or FRF doesn't situation
subsequent to date of FS & prohibit mgt from restricting • Extend audit procures to
that require adj or discl have amendment of FS to subsequent date of new AR, dated no earlier
been adjusted or disclosed. event, auditor is permitted to than date of approval of
restrict audit procedures to that amended FS
amendment. Auditor shall either: • Provide a new AR on
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• Amend AR to include an amended FS

additional date restricted to • In New or amended AR
amendment in FS. include EOM/OM para referring
• Provide a new or amended AR to note in FS discussing reasons
that includes EOM/OM para that for amendment in FS & ARd) If
conveys audit procedures on mgt doesn't amend FS & inform
subsequent events r e s t r i c t e d users about the situation à
to amendments in FS.e) If mgt auditor shall notify mgt &
doesn't amend FS when auditor TCWG that auditor seek to
requires: prevent future reliance on ARIf
• If AR not provided to entity, despite such notification, mgt &
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modiy opinion as per SA 705 & TCWG don't take steps, auditor
provide AR shall take action to prevent
• If AR provided, then notify mgt
reliance on AR (obtain legal
& TCWG to not issue FS to 3rd
parties. If mgt still issues FS, advice)
auditor shall take action to prevent
reliance on AR (obtain legal
advice)
Specific inquiries to be made from management:
Ü Whether new commitments, borrowings or guarantees have been entered into.

Ü Whether sales or acquisitions of assets have occurred or are planned.
Ü Whether any assets have been appropriated by govt or destroyed, for eg, by fire or flood.
Ü Whether any events have occurred that are relevant to recoverability of assets.
Ü Whether there have been increases in capital or issuance of debt instruments, such as issue of new
shares or debentures, or an agreement to merge or liquidate has been made or is planned.
Ü Whether there have been any developments regarding contingencies.
Ü Whether any unusual accounting adjustments have been made or are contemplated.
Ü Whether any events have occurred or are likely to occur that will bring into Question (?)
appropriateness of accounting policies used in F.S, for eg, if such events call into question validity of
going concern assumption.
Ü Whether any events have occurred that relevant to measurement of estimates or provisions made in
F.S.
SA 570: GOiNG CONCERN
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25 SA 570: Going Concern
Going Concern Basis of Accounting

t FS are prepared on assumption that entity will continue operations for foreseeable future.
t General purpose FS are prepared using going concern basis of accounting, unless mgt either
intends to liquidate entity or to cease operations, or has no realistic alternative but to do so.
t Special purpose F.S. may or may not be prepared in accordance with FRF for which going concern
basis of accounting is relevant.
t When use of going concern basis of accounting is appropriate, assets and liabilities are recorded on
basis that entity will be able to realize its assets and discharge liabilities in normal course of
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business.
Responsibility for Assessment of the Entity's Ability to Continue as a Going Concern
a) It is mgt responsibility à assess entity's ability to continue as going concern even if FRF does not
include explicit requirement.
b) Mgt's assessment of entity's ability to continue as going concern involves making judgment, at
particular point in time, about inherently uncertain future outcomes of events or conditions.
c) The following factors are relevant to that judgment:
• The degree of uncertainty associated with outcome of an event or condition.
• The size and complexity of entity, nature and condition of business and degree to which it is
affected by external factors.
• Any judgment about future is based on information available at the time at which judgment
is made. Subsequent events may result in outcomes that are inconsistent with judgments that
were reasonable at time they were made.
Auditor's Responsibilities
i Auditor's responsibilities are to obtain SAAE and conclude on, appropriateness of mgt's use of
going concern basis of accounting in preparation of FS
i To conclude, based on audit evidence obtained, whether a material uncertainty exists about the
entity's ability to continue as a going concern.
i These responsibilities exist even if FRF used in preparation of FS does not include explicit
requirement for mgt to make specific assessment of entity's ability to continue as a going
concern.
i The absence of reference to material uncertainty about entity's ability to continue as going
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concern in auditor's report cannot be viewed as a guarantee as to entity's ability to continue as a
going concern.
Requirements of SA 570
When performing RAP as per SA 315, auditor shall consider whether events or conditions exist that may
cast significant doubt on entity's ability to continue as a going concern.
In doing so, determine whether mgt has already performed a preliminary assessment of entity's ability to
continue as a going concern, &
a) If assessment performed à discuss the assessment with mgt and determine whether mgt has
identified events or conditions that, individually or collectively, cast significant doubt on entity's
ability to continue as going concern and, if so, mgt's plans to address them; or
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b) If assessment not performed à discuss with mgt basis for use of going concern basis of accounting,
and inquire whether events or conditions exist that, individually or collectively, may cast significant
doubt on entity's ability to continue as going concern.
The auditor shall remain alert throughout audit for audit evidence of events or conditions that cast
significant doubt over entity's ability to continue as going concern.
Evaluating mgt assessment of Going Concern
i Auditor shall evaluate management's assessment of entity's ability to continue as going concern.
i Auditor shall cover same period as used by mgt to make its assessment as required by applicable
FRF, or by law or regulation if it specifies longer period.
i If mgt's assessment of entity's ability to continue as going concern covers less than 12 months from
date of FS, request mgt to extend assessment period to at least 12 months.
i In evaluating mgt's assessment, consider whether it includes all relevant info of which auditor is
aware as result of audit.
Additional Audit Procedures When Events or Conditions Are Identified
a) Where mgt has not yet performed assessment of entity's ability to continue as going concern,
requesting mgt to make its assessment.
b) Evaluating mgt's plans for future actions, whether outcome of these plans likely to improve situation
and whether management's plans are feasible in the circumstances.
c) Where entity has prepared cash flow forecast, and analysis of forecast is a significant factor in
considering future outcome of events or conditions:
i. Evaluating reliability of underlying data generated to prepare forecast; and
ii. Determining whether there is adequate support for assumptions underlying forecast.
d) Considering whether any additional facts or info become available since date on which mgt made
its assessment.
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e) Requesting written representations from mgt and TCWG , regarding their plans for future actions
and feasibility of these plans.
Additional procedures:
i Analysing and discussing cash flow, profit and other relevant forecasts with mgt.
i Analysing and discussing entity's latest available interim financial statements.
i Reading terms of debentures and loan agreements and determining whether any have been
breached.
i Reading minutes of meetings of shareholders, TCWG and committees for reference to financing
difficulties.
i Inquiring of entity's legal counsel regarding existence of litigation and claims and reasonableness of
mgt's assessments of their outcome and estimate of financial implications.
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i Confirming existence, legality and enforceability of arrangements to provide or maintain financial

support with related and third parties and assessing financial ability of such parties to provide
additional funds.
i Evaluating entity's plans to deal with unfilled customer orders.
i Performing audit procedures regarding subsequent events to identify those that either mitigate or
otherwise affect entity's ability to continue as a going concern.
i Confirming existence, terms and adequacy of borrowing facilities.
i Obtaining and reviewing reports of regulatory actions.
i Determining adequacy of support for any planned disposals of assets.
i
Auditor's Conclusion
i The auditor shall evaluate whether SAAE has been obtained & conclude on, appropriateness of
mgt's use of going concern basis of accounting in preparation of FS.
i Based on audit evidence obtained, conclude whether material uncertainty exists related to events or
conditions that, individually or collectively, may cast significant doubt on entity's ability to continue
as a going concern.
i A material uncertainty exists when magnitude of impact and likelihood of occurrence is such that,
appropriate disclosure of nature and implications of uncertainty is necessary for:
a) In case of a fair presentation FRF à fair presentation of FS,or
b) In case of compliance framework, FS not to be misleading.
Adequacy of Disclosures
When Events or Conditions Have Been Identified and a Material Uncertainty Exists
If auditor concludes that mgt's use of going concern basis of accounting is appropriate in circumstances
but material uncertainty exists, auditor shall determine whether FS:
a) Adequately disclose principal events or conditions that may cast significant doubt on the entity's
ability to continue as a going concern and mgt's plans to deal with these events or conditions; and
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b) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity's ability to continue as a going concern and, therefore, that it may
be unable to realize its assets and discharge its liabilities in the normal course of business.
Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material Uncertainty
Exists
If events or conditions identified that may cast significant doubt on entity's ability to continue as going
concern but, based on audit evidence obtained, auditor concludes that no material uncertainty exists,
auditor shall evaluate whether, in view of the requirements of FRF, F.S. provide adequate disclosures
about these events or conditions.
Implications for Reporting Use of Going Concern
Basis of Accounting Is Inappropriate
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If FS have been prepared using going concern basis of accounting but, in auditor's judgment, mgt's use
of the going concern basis of accounting in the preparation of FS is inappropriate, auditor shall express an
adverse opinion.
Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists
Adequate Disclosure of a Material Uncertainty Is Made in Financial Statements à Auditor shall express an
unmodified opinion and report shall include separate section under the heading “Material Uncertainty
Related to Going Concern” to:
(a) Draw attention to note in F.S. that discloses the matters; and
(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity's ability to continue as a going concern and that the auditor's
opinion is not modified in respect of the matter.
Adequate Disclosure of a Material Uncertainty Is Not Made in F.S. à If adequate disclosure about material
uncertainty is not made in financial statements, auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised);
and
(b) In Basis for Qualified (Adverse) Opinion section of auditor's report, state that a material
uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern
and that the financial statements do not adequately disclose this matter.
Management Unwilling to Make or Extend Its Assessment à Auditor shall consider the implications for
auditor's report.
Communication with TCWG
a. Whether events or conditions constitute a material uncertainty;
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b. Whether mgt's use of going concern basis of accounting is appropriate in preparation of F.S.;
Ü The adequacy of related disclosures in F.S.; and
Ü Where applicable, implications for auditor's report.
Ü Significant Delay in Approval of Financial Statements
Ü Inquire reasons for delay. If delay could be related to events or conditions relating to going concern
assess. perform additional audit procedures & consider effect on auditor's conclusion regarding
existence of a material uncertainty.
Events or Conditions That May Cast Significant Doubt on the Entity's Ability to Continue
as a Going Concern
Ü Financial
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Ü Net liability or net current liability position.

Ü Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or
excessive reliance on short-term borrowings to finance long-term assets.
Ü Inability to pay creditors on due dates.
Ü Indications of withdrawal of financial support by creditors.
Ü Substantial operating losses or significant deterioration in value of assets used to generate cash
flows.
Ü Arrears or discontinuance of dividends.
Ü Negative operating cash flows indicated by historical or prospective financial statements.
Ü Adverse key financial ratios.
Ü Change from credit to cash-on-delivery transactions with suppliers.
Operating
Ü Management intentions to liquidate the entity or to cease operations.
Ü Loss of key mgt without replacement.
Ü Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Ü Labor difficulties.
Ü Shortages of important supplies.
Ü Emergence of a highly successful competitor.
Other
Ü Non-compliance with capital or statutory or regulatory requirements
Ü Pending legal or regulatory proceedings against entity that may result in claims that entity is
unlikely to satisfy.
Ü Changes in law or regulation or government policy expected to adversely affect entity.
Ü Uninsured or underinsured catastrophes when they occur.
SA 580: WRiTTEN
REPRESENTATiONS (WR)
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26 SA 580: Written Representations (WR)
· A written statement by mgt provided to auditor to confirm certain matters or to support other
audit evidence.
· Written representations in this context do not include F.S., assertions therein, or supporting
books and records.
· WR provide necessary audit evidence, they don't provide SAAE on their own about any of
matters with which they deal.
Objectives of Audito
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a. To obtain WR from mgt that they believes they have fulfilled their responsibility for preparation of
F.S and for completeness of information provided to auditor;
b. To support other audit evidence relevant to F.S. or specific assertions in F.S by means of WR, if
determined necessary by auditor or required by other SAs; and
c. To respond appropriately to WR provided by management or if management do not provide the
written representations requested by the auditor.
Date & Period covered by WR

As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
auditor's opinion cannot be expressed, and auditor's report cannot be dated, before the date of written
representations.
Furthermore, because auditor is concerned with events occurring up to date of auditor's report that may
require adjustment to or disclosure in F.S, WR are dated as near as practicable to, but not after, date of
auditor's report on F.S.
In some circumstances it may be appropriate for auditor to obtain a WR about a specific assertion in
F.S. during the course of audit. Where this is the case, it may be necessary to request an updated written
representation.
The written representations are for all periods referred in auditor's report because mgt needs to reaffirm
that WR it previously made wrt prior periods remain appropriate. Auditor and mgt may agree to a form of
WR that updates WRs relating to prior periods by addressing whether there are any changes to such
written representations and, if so, what they are.
Situations may arise where current mgt were not present during all periods referred to in auditor's report.
Such persons may assert that they are not in position to provide some or all of WRs because they were not
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in place during prior period.
This fact, however, does not diminish such persons' responsibilities for F.S. as a whole. Accordingly,
requirement for auditor to request written representations that cover whole of relevant period(s) still
applies.
Doubt as to the Reliability of Written Representations

If auditor has concerns about competence, integrity, ethical values or diligence (DICE) of mgt, auditor
shall determine effect that such concerns may have on reliability of representations (oral or written)
and audit evidence in general.
In particular, if WR are inconsistent with other audit evidence, auditor shall perform audit procedures to
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attempt to resolve the matter. If matter remains unresolved, reconsider assessment of competence,
integrity, ethical values or diligence (DICE) of mgt and determine effect on reliability of representations
(oral or written) and audit evidence in general.
If auditor concludes that WR are not reliable, take appropriate actions, including determining possible
effect on opinion in auditor's report in accordance with SA 705.
Requested Written Representations Not Provided

If mgt does not provide one or more of requested written representations, auditor shall:
a. Discuss matter with mgt;
b. Re-evaluate integrity of mgt and evaluate effect on reliability of representations (oral or written)
and audit evidence in general; and
c. Take appropriate actions, including determining possible effect on the opinion in auditor's report in
accordance with SA 705,.
The auditor shall disclaim an opinion in accordance with SA 705 if:

a. The auditor concludes that there is sufficient doubt about integrity of management such that WR
are not reliable; or
b. Management does not provide WR required.
SA 600: USiNG THE WORK
OF OTHER AUDiTOR
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27 SA 600: Using the work of Other Auditor
Principal Auditor
i ·Auditor who uses work performed by other auditors is Principal auditor.

i ·Auditor with responsibility for reporting on financial information of an entity
i when that financial information includes financial information of one or more components audited
by another auditor.
Acceptance as principal Auditor
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The auditor should consider following before accepting his position as principal auditor:
a. materiality of portion of financial information which principal auditor audits;

b.principal auditor's degree of knowledge regarding business of components;
c. risk of material misstatements in financial information of components audited by other auditor; and
d. performance of additional procedures as set out in this SA regarding components audited by other
auditor resulting in principal auditor having significant participation in such audit.
Principal Auditor's Procedures

1. Right to visit component & examine books of accounts & records, if necessary.
2. If planning to use work of other auditor evaluate his competence if he's not member of ICAI
3. Perform procedures to obtain SAAE that work of other auditor is adequate for principal auditor's
purpose.
i Advise other auditor of use of his work & co-ordinate at planning stage.
i Inform auditor about areas requiring spl. consideration, procedures for identifying inter-
component transaction, & time table for audit completion.
i Advise other auditor about significant accounting, auditing & reporting requirements & obtain
representation as to compliance with them.
Principal Auditor might discuss with other auditor procedures applied or review written summary of his
audit procedures in form of questionnaire or checklist. May also plan to visit other auditor. NTE of audit
procedures would depend on his knowledge of professional competence of other auditor that can be
enhanced from review of his previous audit work.
Role of Principal & Other Auditor (Coordination b/w Auditors)
As per SA 600 “Using the Work of Another Auditor”, there should be sufficient liaison between principal
auditor and other auditor
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Role of Principal Auditor:

1. It is necessary to issue written communication(s) as principal auditor to other auditor.
2. The principal auditor should advise other auditor of any matters that come to his attention that
may have important bearing on other auditor's work.
3. When considered necessary by him, principal auditor may require other auditor to answer a
detailed questionnaire regarding matters on which principal auditor requires information for
discharging his duties.
Role of Other Auditor:
1. The other auditor, knowing context in which his work is to be used by principal auditor, should
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co-ordinate with principal auditor. For example, by bringing to principal auditor's immediate
attention any significant findings requiring to be dealt with at entity level, adhering to time-
table for audit of component, etc.
2. He should ensure compliance with relevant statutory requirements.
3. The other auditor should respond to questionnaire sent by Principal Auditor on a timely basis.
Reporting Considerations
When principal auditor concludes, that work of other auditor can't be used and he has not been able to
perform sufficient additional procedures regarding financial information of component audited by other
auditor, express a qualified or disclaimer of opinion because there is limitation on scope of audit.
In all circumstances, if other auditor issues, or intends to issue, modified auditor's report, principal
auditor should consider whether subject of modification is of such nature and significance, in relation to
financial information of entity that it requires modification of principal auditor's report.
Division of Responsibility
The principal auditor would not be responsible in respect of work entrusted to other auditors, except in
circumstances which should have aroused his suspicion about reliability of work performed by other
auditors.
When principal auditor has to base his opinion on FS of entity as a whole relying upon statements and
reports of other auditors, report should state clearly division of responsibility for financial information of
entity by indicating extent to which financial information of components audited by other auditors
included in financial information of entity, e.g., number of divisions/branches/subsidiaries or other
components audited by other auditors.
SA 620: USiNG THE WORK
OF AUDiTOR'S EXPERT
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28 SA 620: Using the work of Auditor's Expert
SA 620 deals with auditor's responsibilities regarding use of work in a field of expertise other than
accounting or auditing when that work is used to assist the auditor in obtaining SAAE.
Types of report or opinions Auditor can obtain from Auditor's expert?
i The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.
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i The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.
i The estimation of oil and gas reserves.
i The valuation of environmental liabilities, and site clean-up costs.
i The interpretation of contracts, laws and regulations.
i The analysis of complex or unusual tax compliance issues.
a. To determine whether to use work of an auditor's expert; and
b. If using work of an auditor's expert à determine whether that work is adequate for auditor's
purposes.
Areas where Auditor's expert can assist the auditor

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

i Whether management has used a management's expert in preparing F.S.
i The nature and significance of matter, including its complexity.
i The ROMM in matter.
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i The expected nature of procedures to respond to identified risks, including auditor's knowledge of
and experience with work of experts in relation to such matters; and availability of alternative
sources of audit evidence.
When management has used a management's expert
When mgt has used management's expert in preparing F.S, auditor's decision on whether to use an
auditor's expert may also be influenced by such factors as: [Same as SA 500]
i The nature, scope and objectives(NSO) of the management's expert's work.
i Whether mgt's expert is employed by entity, or is a party engaged by it to provide relevant
services.
i The extent to which mgt can exercise control or influence over the work of the management's
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expert.
i The management's expert's competence and capabilities.
i Whether mgt's expert is subject to technical performance standards or other professional or
industry requirements.
i Any controls within entity over management's expert's work.
Nature, Timing & Extent of Audit Procedures when using work of Auditor's Expert
The NTE of auditor's procedures will vary depending on circumstances. The auditor shall consider matters
including:
a. The nature of matter to which that expert's work relates;

b. The risks of material misstatement in the matter to which that expert's work relates;
c. The significance of that expert's work in the context of the audit;
d. The auditor's knowledge of and experience with previous work performed by that expert; and
e. Whether that expert is subject to the auditor's firm's quality control policies and procedures.
The following factors may suggest the need for different or more extensive procedures than would
otherwise be the case:
i The work of auditor's expert relates to significant matter that involves subjective and complex
judgments.
i The auditor has not previously used work of auditor's expert, and has no prior knowledge of expert's
competence, capabilities and objectivity.
i The auditor's expert is performing procedures integral to audit, rather than being consulted to
provide advice on individual matter.
i The expert is auditor's external expert and not subject to firm's quality control policies and
procedures.
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Competence, Capability & Objectivity of Auditor's Expert

Information regarding competence, capabilities and objectivity of auditor's expert may come from a variety
of sources: [Similar to SA 500]
i Personal experience with previous work of that expert.
i Discussions with that expert.
i Discussions with other auditors or others who are familiar with that expert's work.
i Knowledge of that expert's qualifications, membership of a professional body or industry
association, license to practice, or other forms of external recognition.
i Published papers or books written by that expert.
i The auditor's firm's quality control policies and procedures.
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Evaluating the objectivity of an auditor's external expert When evaluating objectivity of auditor's external
expert, it may be relevant to:
a. Inquire entity about any known interests or relationships that it has with auditor's external expert.
b. Discuss with that expert any applicable safeguards, including professional requirements that apply
to him; and evaluate adequacy of safeguards to reduce threats to acceptable level.
Interests and relationships that may be relevant to discuss with the auditor's expert include:
i Financial interests.
i Business and personal relationships.
i Provision of other services by expert
i In some cases, it may also be appropriate for auditor to obtain written representation from
auditor's external expert about interests or relationships with entity of which that expert is
aware.
Agreement with the Auditor's Expert
The auditor shall agree, in writing when appropriate, on following matters with the auditor's expert:
a. The nature, scope and objectives of that expert's work;
b. The respective roles and responsibilities of auditor and expert;
c. The nature, timing and extent of communication between auditor and expert, including form of
report to be provided by expert; and
d. The need for auditor's expert to observe confidentiality requirements.
The following factors suggest need for more detailed agreement or written agreement:
i The auditor's expert will have access to sensitive or confidential entity information.
i The respective roles or responsibilities of auditor and auditor's expert are different from those
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normally expected.
i Multi-jurisdictional legal or regulatory requirements apply.
i The matter to which auditor's expert's work relates is highly complex.
i The auditor has not previously used work performed by that expert.
i The greater the extent of auditor's expert's work, and its significance in context of audit.
Evaluating Adequacy of Auditor's Expert Work

Specific procedures to evaluate adequacy of auditor's expert's work for auditor's purposes may include:
i Inquiries of auditor's expert.
i Reviewing auditor's expert's working papers and reports.
i Corroborative procedures, such as:
o Observing the auditor's expert's work
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o Examining published data, such as statistical reports from reputable, authoritative sources;
o Confirming relevant matters with third parties
o Performing detailed analytical procedures; and
o Re-performing calculations.
i Discussion with another expert with relevant expertise when, for example, the findings or conclusions
of the auditor's expert are not consistent with other audit evidence.
i Discussing the auditor's expert's report with management.
Use of Significant assumptions & methods (Relevance & Reasonableness)
Factors relevant to the auditor's evaluation of those assumptions and methods include whether they are:
i Generally accepted within auditor's expert's field;
i Consistent with requirements of applicable FRF;
i Consistent with those of management, and if not, reason for, and effects of, differences.
i Dependent on use of specialised models;
Source Data (Relevance, Completeness & Accuracy)
i Verifying origin of data, including obtaining understanding of, and where applicable testing, internal
controls over the data and, where relevant, its transmission to expert.
i Reviewing the data for completeness and internal consistency
Inadequate work
If the auditor determines that work not adequate for auditor's purposes, auditor shall:
a) Agree with that expert on nature and extent of further work to be performed by expert; or
b) Perform further audit procedures appropriate to circumstances.
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Reporting: If work is not adequate for auditor's purposes + cannot resolve matter through additional
audit procedures à express modified opinion as per SA 705 because not obtained SAAE.
Reference to Auditor's Expert in Auditor's Report
i The auditor shall not refer to work of auditor's expert in auditor's report containing unmodified
opinion unless required by law or regulation to do so. If such reference required by law or regulation,
auditor shall indicate in report that reference does not reduce auditor's responsibility for audit
opinion.
i In some cases, law or regulation may require reference to work of an auditor's expert, for purposes
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of transparency in public sector.
i If auditor makes reference to work of auditor's expert in auditor's report because such reference is
relevant to understanding of modification to auditor's opinion, indicate in auditor's report that such
reference does not reduce auditor's responsibility for that opinion.
SA 700: FORMiNG AN OPiNiON &
REPORTiNG ON THE FiNANCiAL
STATEMENTS
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SA 700: Forming an Opinion & Reporting on the

29 Financial Statements
Objective:
a. To form an opinion on F.S. based on evaluation of conclusions drawn from audit evidence obtained;
and
b.To express clearly that opinion through a written report.
Specific Evaluations by the Auditor

In particular, the auditor shall evaluate whether:
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a. The F.S. adequately disclose significant accounting policies selected and applied;
b. The a/c policies selected and applied are consistent with applicable FRF and are appropriate;
c. The accounting estimates made by management are reasonable;
d. The information presented in F.S. is relevant, reliable, comparable, and understandable;
e. The F.S. provide adequate disclosures to enable intended users to understand effect of material
transactions and events on information conveyed in F.S.; and
f. The terminology used in F.S., including the title of each financial statement, is appropriate.
Forming an opinion on the Financial Statements
The auditor shall form opinion on whether F.S. are prepared, in all material respects, in accordance with
applicable FRF.
In order to form opinion, obtain reasonable assurance about whether F.S. as whole are free from material
misstatement whether due to fraud or error.
Further, when F.S. are prepared in accordance with fair presentation framework, also evaluate whether
F.S. achieve fair presentation by considering:
a. The overall presentation, structure and content(PCS) of F.S.; and

b. Whether F.S., including related notes, represent underlying transactions and events in a manner
that achieves fair presentation.
In other words, auditor shall express an unmodified opinion when auditor concludes F.S. are prepared, in
all material respects, in accordance with applicable FRF.
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Basic Elements of Audit Report
1. Title: Auditor's report shall have title that clearly indicates that it is report of independent auditor.
“Independent Auditor's Report,” distinguishes independent auditor's report from reports issued by others.
2. Addressee: The auditor's report shall be addressed as required by circumstances of engagement.

Report could be addressed to Members of Company in case of general purpose (statutory) F.S. and to
Board of Directors in case of special purpose F.S.
3. Auditor's Opinion: The first section of auditor's report shall include auditor's opinion, and shall have
heading “Opinion.” Opinion section of auditor's report shall also:
a) Identify entity whose F.S. have been audited;
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b) State that F.S. have been audited;

c) Identify title of each statement comprising F.S.;
d) Refer to notes, including summary of significant accounting policies; and
e) Specify date of, or period covered by, each financial statement comprising the F.S.
4. Basis for Opinion: The auditor's report shall include a section, directly following the Opinion section,
with the heading “Basis for Opinion”, that:
a) States that audit was conducted in accordance with Standards on Auditing;

b) Refers to the section of auditor's report that describes auditor's responsibilities under SAs;
c) Includes statement that auditor is independent of entity in accordance with relevant ethical
requirements relating to audit, and has fulfilled other ethical responsibilities. The statement shall
refer to Code of Ethics issued by ICAI
d) States whether auditor believes that audit evidence obtained is sufficient and appropriate to
provide basis for auditor's opinion.
5. Going Concern: Where applicable, auditor shall report in accordance with SA 570, Auditor's
responsibilities are to obtain SAAE and conclude on, appropriateness of mgt's use of going concern basis
of accounting in preparation of F.S, and conclude whether material uncertainty exists about entity's
ability to continue as going concern.
6. Key Audit Matters: For audits of F.S. of listed entities à communicate KAM in auditor's report in
accordance with SA 701.
When auditor is otherwise required by law or regulation or decides to communicate key audit matters in
auditor's report, auditor shall do in accordance with SA 701.
7. Responsibilities for Financial Statements
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The auditor's report shall include a section with heading “Responsibilities of Management for Financial
Statements.” In some entities, appropriate reference may be to TCWG.
This section of the auditor's report shall describe mgt's responsibility for:
a. Preparing F.S. as per applicable FRF, and for such internal control as mgt determines necessary to
enable preparation of F.S. free from material misstatement, whether due to fraud or error; &
b. Assessing entity's ability to continue as going concern and whether use of GC basis of accounting is
appropriate as well as disclosing matters relating to GC. The expln of mgt's responsibility for this
assessment shall include description of when use of GC basis of accounting is appropriate.
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This section of auditor's report shall also identify those responsible for oversight of financial reporting
process. In this case, heading of this section shall also refer to “Those Charged with Governance”.
When F.S. prepared in accordance with fair presentation framework, description of responsibilities for F.S.
in auditor's report shall refer to “preparation and fair presentation of these financial statements” or
“preparation of financial statements that give a true and fair view,” as appropriate.
8. Auditor's Responsibilities for Audit of F.S:

(I) This section of auditor's report shall:
a) State that objectives of auditor are to:
i. Obtain reasonable assurance about whether F.S. as a whole are free from material
misstatement, whether due to fraud or error; and
ii. Issue an auditor's report that includes auditor's opinion.
b) State that reasonable assurance is high level of assurance, but not a guarantee that audit
conducted in accordance with SAs will always detect a material misstatement when it exists; and
c) State that misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in aggregate, they could reasonably
be expected to influence economic decisions of users taken on basis of these F.S; or
ii. Provide a definition or description of materiality in accordance with applicable FRF.
(II) The Auditor's Responsibilities for the Audit of F.S. section of the auditor's report shall further:
(III) The Auditor's Responsibilities for Audit of Financial Statements section of auditor's report also
shall:
a. State that auditor communicates with TCWG regarding, among other matters: planned scope and
timing of audit and significant audit findings, including any significant deficiencies in internal
control that auditor identifies during audit;
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b. State that auditor provides TCWG with a statement that auditor has complied with relevant ethical
requirements regarding independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on auditor's independence, and where applicable,
related safeguards; and
c. For audits of F.S. of all such entities for which KAM are communicated in accordance with SA 701,
state that, from matters communicated with TCWG, auditor determines those matters that were
of most significance in audit of F.S. of current period and are therefore key audit matters.
KAM to be presented in Audit Report:

As per SA 701, auditor describes these matters in auditor's report unless law or regulation precludes public
disclosure about the matter or in extremely rare circumstances, auditor determines that a matter should
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not be communicated in auditor's report because adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Location of description of auditor's responsibilities: The description of auditor's responsibilities for audit of
F.S. required by this SA shall be included
a) Within body b) Within an appendix to c) By specific reference within

of Audit Report auditor's report in that auditor's report to location of such
case auditor shall include description on website of appropriate
reference to location of authority, where law, regulation or
appendix auditing stds permit.
1. Other reporting responsibilities
2. Signature of auditor: Audit report shall be signed by Auditor in personal name & audit firm. Partner
signing needs to mention membership no. + Registration no. of firm + UDIN
10. Date of Audit Report: Not earlier than date when auditor has obtain SAAE
Audit reports for audit as per both SAs & International Stds on Audit
Auditor may be required to conduct audit in accordance with, in addition to Standards on Auditing issued
by ICAI, International Standards on Auditing or auditing stds of any other jurisdiction. If this is the case,
auditor's report may refer to SA in addition to ISA or auditing standards of such other jurisdiction, but
auditor shall do so only if:
(a) There is no conflict between requirements in ISAs or such auditing standards of other jurisdiction
and those in SAs that would lead auditor
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i. to form a different opinion, or

ii. not to include an Emphasis of Matter or Other Matter para that, in particular circumstances, is
required by SAs; and
(b) The auditor's report includes, at a minimum, each of the elements required by SA. The auditor's
report shall thereby identify such Standards on Auditing.
When auditor's report refers to both the ISAs or auditing standards of a specific jurisdiction and SA issued
by ICAI, auditor's report shall clearly identify the same including jurisdiction of origin of other auditing
stds.
Supplementary Information Presented with Financial Statements
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If supplementary info that is not required by applicable FRF is presented with audited F.S., auditor shall
evaluate whether it is integral part of F.S. due to its nature or how its presented. When it is integral part of
F.S, it shall be covered by auditor's opinion.
If supplementary info that is not required by applicable FRF is not considered an integral part of audited
F.S, evaluate whether it is presented in a way that sufficiently and clearly differentiates it from audited
F.S. If not, then auditor shall ask mgt to change its presentation. If mgt refuses , auditor shall identify
unaudited supplementary info and explain in auditor's report that such supplementary info has not been
audited.
SA 701: COMMUNiCATiNG KEY
AUDiT MATTERS iN THE
INDEPENDENT
AUDiTOR'S REPORT
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SA 701: Communicating Key Audit Matters in the

30 Independent Auditor's Report
i Key Audit matter are matters that in auditor's professional judgment, were of most significance
In audit of F.S. of current period.
i KAM are selected from matters communicated with TCWG.
Objective
i To enhance communicative value of auditor's report by providing greater transparency about audit
that was performed.
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i To assist user in understanding those matters that, in auditor's professional judgment, were of most
significance in audit of F.S. of current period.
Communicating Key Audit Matters is not:
a) A substitute for disclosures in F.S as per applicable FRF

b) A substitute for auditor expressing a modified opinion as per SA 705 (Revised);
c) A substitute for reporting in accordance with SA 570 (Revised) when a material uncertainty exists
relating to events or conditions that may cast significant doubt on an entity's ability to continue as a
going concern; or
d) A separate opinion on individual matters.
Factors à Determining Key Audit Matters
a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315
b) Significant auditor judgments relating to areas in F.S. that involved significant mgt judgment,
including accounting estimates that have been identified as having high estimation uncertainty.
c) The effect on audit of significant events or transactions that occurred during the period.
Examples of Key Audit Matters
Assessment of Impairment, Provision for losses and contingencies, Valuation of financial instruments,
Matters relating to Revenue recognition, Taxation matters (multiple tax jurisdictions, uncertain tax
position, deferred tax assets)
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Communicating Key Audit Matters
The introductory language in this section of auditor's report shall state that:
a) Key audit matters are those matters that, in auditor's professional judgment, were of most
significance in audit of F.S. [of current period]; and
b) These matters were addressed in context of audit of F.S. as a whole, and in forming auditor's opinion
thereon, and auditor does not provide separate opinion on these matters.
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SA 705, “MODiFiCATiONS TO THE
OPiNiON iN THE INDEPENDENT
AUDiTOR'S REPORT”
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SA 705, “Modifications to the Opinion in the

31 Independent Auditor's Report”
Objective:
The objective of auditor is to express clearly an appropriately modified opinion on F.S. that is necessary
when:
a) The auditor concludes, based on audit evidence obtained, that F.S. as a whole are not free from
material misstatement; or
b) The auditor is unable to obtain SAAE to conclude that F.S. as a whole are free from material
misstatement.
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Qualified Opinion: The auditor shall express qualified opinion when:

(a) Obtained SAAE à concludes that misstatements, individually or in aggregate, are material, but not
pervasive, to F.S.; or
(b) Unable to obtain SAAE to base the opinion, but concludes that possible effects on F.S. of
undetected misstatements, if any, could be material but not pervasive.
(Material but not pervasive)
Spl. Considerations: When the auditor expresses qualified opinion due to material misstatement in F.S,
auditor shall state that, in auditor's opinion, except for effects of matter(s) described in Basis for
Qualified Opinion section:
(1) When reporting in accordance with fair presentation framework, accompanying F.S. present fairly,
in all material respects (or give a true and fair view of) […] in accordance with [applicable FRF]; or
(2) When reporting in accordance with compliance framework, accompanying F.S. have been prepared,
in all material respects, in accordance with [applicable FRF]. When modification arises from inability to
obtain SAAE, auditor shall use corresponding phrase “except for possible effects of matter(s) ...” for
modified opinion.
Adverse Opinion: Obtained SAAE, concludes misstatements, individually or in the aggregate, both
material and pervasive to financial statements.
Spl. Considerations: When auditor expresses an adverse opinion, auditor shall state that, in auditor's
opinion, because of significance of matter(s) described in Basis for Adverse Opinion section:
(1) When reporting in accordance with a fair presentation framework, accompanying F.S. do not
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present fairly (or give a true and fair view of) […] in accordance with [applicable FRF]; or
(2) When reporting in accordance with compliance framework, accompanying F.S. have not been
prepared, in all material respects, in accordance with [applicable FRF].
Disclaimer of Opinion: Unable to obtain SAAE to base the opinion, and concludes that possible effects
on F.S. of undetected misstatements, if any, could be both material and pervasive.
Note: Unless required by law or regulation, when auditor disclaims an opinion on F.S., auditor's report
shall not include Key Audit Matters section in accordance with SA 701.
Spl considerations: When auditor disclaims an opinion due to inability to obtain SAAE, auditor shall:
1. State that auditor does not express opinion on accompanying F.S;
2. State that, because of significance of matter(s) described in Basis for Disclaimer of Opinion
section, auditor has not been able to obtain SAAE to provide basis for audit opinion on F.S; and
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3. Amend the statement required in SA 700 (Revised), which indicates that F.S. have been
audited, to state that auditor was engaged to audit the F.S.
Mgt imposed limitation after acceptance of Audit Engagement à Unable to obtain SAAE
Ø After accepting Audit , mgt impose limitation on scope à likely to result in Qualified or Disclaim
of opinion à auditor request mgt to remove limitation
Ø Mgt refuse to remove limitation à Auditor communicate with TCWG & determine if alternate
procedures can be performed to obtain SAAE
Ø If auditor unable to obtain SAAE, determine implications as below:
(a) If auditor concludes that possible effects on F.S.of undetected misstatements, if any, could be
material but not pervasive, auditor shall qualify the opinion; or
(b) If auditor concludes that possible effects on F.S. of undetected misstatements, if any, could be
both material and pervasive so that qualification of opinion would be inadequate to
communicate gravity of situation, the auditor shall:
(i) Withdraw from audit, where practicable and possible under applicable law or regulation; or
(ii) If withdrawal from audit before issuing auditor's report not practicable, disclaim an opinion on
F.S.
Ø If decides to withdraw à communicate with TCWG à matters regarding misstatement à rise to
modification of opinion
Note: If Auditor expresses Adverse or Disclaimer of Opinion then audit report shall not contain
unmodified opinion w.r.t any element of F.S.
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The auditor's inability to obtain SAAE (also referred to as limitation on scope of audit) may arise from:
(a) Circumstances beyond the control of entity;
i The entity's accounting records have been destroyed.
i The accounting records of a significant component have been seized indefinitely by governmental
authorities.
(b) Circumstances relating to nature or timing of auditor's work; or

i The entity is required to use equity method of accounting for associated entity, and auditor is
unable to obtain SAAE about latter's financial information to evaluate whether equity method
has been appropriately applied.
i The timing of auditor's appointment is such that auditor is unable to observe counting of physical
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inventories.
i The auditor determines that performing substantive procedures alone is not sufficient, but
entity's controls are not effective.
(c) Limitations imposed by management.

i Management prevents the auditor from observing the counting of the physical inventory.
i Management prevents the auditor from requesting external confirmation of specific account
balances.
SA 706: EMPHASiS OF MATTER
PARAGRAPHS AND OTHER MATTER
PARAGRAPHS iN THE INDEPENDENT
AUDiTOR'S REPORT
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SA 706: Emphasis of Matter Paragraphs and Other

32 Matter Paragraphs in the Independent Auditor's Report
Emphasis of matter para

i Para included in Auditor's Report
i Refers to matter appropriately presented or disclosed in F.S.
i that in, Auditor's judgment is of
i importance to user's fundamental understanding of F.S.
SAs that contain specific requirements for auditor to include Emphasis of Matter paragraphs in auditor's
report in certain circumstances. These circumstances include:
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i When a FRF prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation. (SA 210)
i To alert users that F.S. are prepared in accordance with a special purpose framework.
i When facts become known to auditor after date of auditor's report and auditor provides a new or
amended auditor's report (i.e., subsequent events). (SA 560)
Examples of circumstances where auditor may consider it necessary to include an

Emphasis of Matter paragraph are:
i An uncertainty relating to future outcome of exceptional litigation or regulatory action.
i A significant subsequent event that occurs between date of F.S and date of auditor's report.
i Early application (where permitted) of new a/c std that has material effect on F.S.
i A major catastrophe that has had, or continues to have, significant effect on entity's financial
position.
When the auditor includes EOM para in auditor's report, auditor shall:
a. Include the paragraph within separate section of auditor's report with appropriate heading that
includes the term “Emphasis of Matter”;
b. Include in the paragraph clear reference to matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in F.S. The para shall refer only to info
presented or disclosed in F.S; and
c. Indicate that auditor's opinion is not modified in respect of matter emphasized.
Note: EOM para is not substitute for KAM, if matter determined as KAM à represent as KAM Other
Matter Para
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i Para included in Auditor's report

i Refers to a matter other than those Presented/Disclosed in F.S.
i Relevant to user's understanding of
i Audit, auditor's responsibilities or Audit report
The auditor shall include an Other Matter paragraph in the auditor's report, provided:
a) Not prohibited by law or regulation; and
b) When SA 701 applies, matter has not been determined to be KAM
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SA 710: Comparative Information
Corresponding Figures and
Comparative Financial Statements
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SA 710: Comparative Information—Corresponding

33 Figures and Comparative Financial Statements
Corresponding figures –
i Comparative info where amounts and disclosures for prior period included as integral part of current
period F.S, and intended to be read only in relation to amounts and other disclosures relating to
current period
i The level of detail presented in corresponding amounts and disclosures is dictated primarily by its
relevance to current period figures.
Comparative financial statements –
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i Comparative information where amounts and disclosures for prior period included for comparison
with F.S. of current period but, if audited, are referred to in auditor's opinion.
i The level of info included in comparative F.S. is comparable with that of F.S. of current period.
Audit Procedures for Comparative Information:

(a) Perform Specific audit Procedure: For determining that F.S. contains appropriately classified
comparative information, auditor should:
i Ensure that comparative info agrees with amount and other disclosure presented in prior period.
i The accounting policies applied are consistent with those applied in current period.
i If there have been any changes in application of accounting policies than they are properly
disclosed and presented.
(b) Evaluating the impact on F.S: If auditor becomes aware of any possible misstatement in
comparative information, then:
i He should perform the necessary audit procedures to obtain sufficient audit evidence.
i If auditor had audited prior period's F.S. than he should follow the relevant requirements of SA 560.
(c) Written Representation: As required by SA 580, auditor should also request written
representation. He should also obtain a specific written representation regarding any prior period item
that is disclosed in current year's F.S.
Audit Reporting
Reporting for Corresponding Figures:

Auditor's opinion shall not refer to corresponding figures except in following circumstances:
i If auditor's report of previous period contains other than unqualified opinion.
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i If auditor has sufficient evidence that material misstatement exists in F.S. of prior period, which
was not addressed earlier.
If prior period F.S. not audited, than obtain sufficient audit evidence that opening balance don't contain
any material misstatement.
If auditor's report on prior period, included qualified, disclaimer of opinion, or adverse opinion and matter
which gave rise to modification is unresolved, auditor shall modify auditor's opinion on current period's F.S.
In Basis for Modification paragraph in auditor's report, auditor shall either:
(a) Refer to both, the current period's figures and the corresponding figures in description of matter
giving rise to modification when the effects or possible effects of matter on current period's figures are
material; or
(b) In other cases, explain that the audit opinion has been modified because of effects or possible
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effects of unresolved matter on comparability of current period's figures and corresponding figures.
Reporting for Comparative Financial Statement:
i The auditor's opinion shall refer to each period for which the F.S. are presented.
i When reporting on current period's audit, if auditor's opinion on such prior period F.S. differs from
opinion previously issued on such F.S, auditor shall disclose substantive reason for different opinion
in OM para in his report.
i If auditor concludes that material misstatement is present in previously audited figures of F.S, he
should report it to mgt and request that predecessor auditor be informed.
If then prior years statements are amended with new report by predecessor auditor, then auditor shall
report only on current period.
Reporting treatment common to both (for corresponding figures and comparative information)
(i) If F.S. of prior period were audited by predecessor auditor, auditor (is permitted by law or regulation
to refer to the predecessor audit report – on case of corresponding figures and decides to do so) shall
state in his audit report:
i That F.S. of the prior period were audited by a predecessor auditor;
i The type of opinion expressed by the predecessor auditor;
i The date of that audit report.
(ii) If prior period F.S. were not audited than he shall report the same in OM Para in his audit report
that corresponding/comparative figures are unaudited.
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However, disclosure does not relieve him from his responsibility of obtaining SAAE that opening balances
do not contain misstatements that materially affect current period's F.S.
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SA 720: The Auditor's
Responsibility in Relation to
Other Information
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SA 720: The Auditor's Responsibility in Relation to

34 Other Information
Scope
i SA 720 deals with Auditor's responsibilities relating to other info, financial or non-financial
contained in Annual Report.
i Auditor's opinion on FS doesn't cover other information (Annual Report)
i He's just reqd to read & consider other info for any materially inconsistent info from F.S. that may
indicate material misstatement in either F.S. or Annual Report
i Auditor's responsibility apply whether other info is recd prior to or after auditor's report Obtaining
the Other Information
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The auditor shall:
a) Determine, through discussion with mgt, which document(s) comprises the annual report, and
entity's planned manner and timing of issuance of such document(s);
b) Make appropriate arrangements with mgt to obtain in timely manner and, if possible, prior to date of
auditor's report, final version of document(s) comprising annual report; and
c) When some or all of document(s) determined in (a) will not be available until after the date of
auditor's report, request mgt to provide a WR that final version of document(s) will be provided to
auditor when available, and prior to its issuance by entity, auditor can complete the procedures
required by this SA.
Reading and Considering the Other Information

The auditor shall read the other info and, in doing so shall:
Consider whether there is material inconsistency between
i other information and F.S. and
i other information and auditor's knowledge obtained in audit, in context of audit evidence obtained
and conclusions reached in the audit.
While reading other info, remain alert for indications that other info may be materially misstated.
When other info is materially misstated
If auditor concludes that a material misstatement of the other information exists, request mgt to correct
the other info. If mgt:
a) Agrees to make correction, auditor shall determine that correction has been made; or
b) Refuses to make correction à communicate the matter with TCWG and request that correction
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be made.
If auditor concludes that material misstatement exists in other information obtained prior to date of
auditor's report, and other information is not corrected after communicating with TCWG, auditor shall
take appropriate action, including:
(a) Considering the implications for auditor's report and communicating with TCWG about how
auditor plans to address the material misstatement in auditor's report or
(b) Withdrawing from engagement, where withdrawal is possible under applicable law or regulation.
When F.S. are materially misstated or Auditor's understanding needs to be updated à respond as
per other SAs.
Reporting
The auditor's report shall include separate section with a heading “Other Information”, or other
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appropriate heading, when, at date of auditor's report:

a. For an audit of F.S. of listed entity, auditor has obtained, or expects to obtain, other info; or
b. For an audit of F.S of an unlisted corporate entity, auditor has obtained some or all of the other
info.
When auditor's report is required to include an Other Information section, it shall include:
a. A statement that management is responsible for the other information;

b. An identification of:
a. Other information obtained by auditor prior to date of the auditor's report; and
b. For an audit of F.S. of listed entity, other information, if any, expected to be obtained
after date of auditor's report;
c. A statement that auditor's opinion does not cover other information and, accordingly, auditor does
not express (or will not express) audit opinion or any form of assurance conclusion thereon;
d. A description of auditor's responsibilities relating to reading, considering and reporting on other
information as required by this SA; and
e. When other information has been obtained prior to date of auditor's report, either:
a. A statement that auditor has nothing to report; or
b. If auditor has concluded that there is uncorrected material misstatement of other information,
statement that describes the uncorrected material misstatement of other information.
Examples of Amounts or Other Items that May Be Included in Other Information
The following are eg of amounts and other items that may be included in other info. This list is not
intended to be exhaustive.
Amounts
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i Items in a summary of key financial results, such as net income, earnings per share, dividends,
sales and other operating revenues, and purchases and operating expenses.
i Selected operating data, such as income from continuing operations by major operating area,
or sales by geographical segment or product line.
i Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganization
expenses.
i Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations.
i Capital expenditures by segment or division.
i Amounts involved in, and related financial effects of, off-balance sheet arrangements.
i Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
34
other contingencies.
i Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders' equity, current ratio, interest coverage ratio and debt ratio.
Other Items
i Explanations of critical accounting estimates and related assumptions.
i Identification of related parties and descriptions of transactions with them.
i Descriptions of the nature of off-balance sheet arrangements.
i Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management's qualitative
assessments of the entity's related exposures.
i Descriptions of changes in legal or regulatory requirements, such as new tax or environmental
regulations.
i General descriptions of the business environment and outlook.
i Overview of strategy.

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Audit Planning, Strategy & Execution

02 Risk Assessment and Internal Control

Audit Risk Components

SPECIAL ASPECTS OF AUDITING IN AN AUTOMATED

Category of Business Applications & Category

Layers of Automated Environment

Real Time Environment

Real Time Environment: IT Components

Understanding & Documenting Automated Environment

Consideration of Automated Environment at each phase of audit cycle

I.Risk Assessment Process

Enterprise Risk Mgt (ERM)

Examples of risks include:

Risk Assessment Process (RAP)

Typical risk assessment process would be given below:

Examples of automated applications include :

Entity Level Risks & Controls (ELCs)

judgement in their evaluation and testing.

Whistle Blower Policy

Computer Assisted Audit Techniques (CAATs)

the framework, guidelines and procedures for an audit of ﬁnancial statements.

Section with Respect to Company Audit:

140.Removal, resignation of auditor and giving of special notice.

Sec 139: Appointment of Auditors

First Auditor Subsequent Auditor

Appointment by BOD Appointment by CAG within Appoinment by Appintment by CAG Within

Following Points to be Noted:

Retiring auditor maybe reappointed at AGM if,

Sec 141: Eligibility, Qualiﬁcation & Disqualiﬁcation of an Auditor

ii)PRP indebted to Co/Associate/Suby/Holding/Subsy of such holding > 5L

Co/Associate/Suby/Holding/Subsy of such holding > 1L

Sec 144: Services not to be rendered by Auditor

Rotation of Auditors: Sec 139(2)

Cooling period - 5 years

Audit Committee – Sec 177

Auditor's Remuneration - Sec 142

Removal of Auditors before expiry of term -Sec 140(1)

ªSend copy of representation to every member to whom notice is sent

In case of Firm: Maximum limit X No. of partners

For tax audit Assignments the limit is 60

Powers & Duties of Auditor:

Sec 143(1) Duty to enquire on Certain Matters

Sec 143(3) Duty to Report

Sec 145 Duty to sign Audit Report

143(13) safeguards auditor from fraud reported out of Good Faith.

Audit of Branch Ofﬁce Accounts

Cost Audit (Sec 148)

Rule 6 - Appoint auditor within 180 days of commencement of FY

Sec 147: Penalty

ÜDefault u/s 139-146 [Company & Ofﬁcer]

ÜDefault u/s 139, 144 & 145 [Auditor]

Final Accounts Preparation & Presentation

Sec-130: Re-opening of Accounts on Court's or Tribunal's orders

National Financial Reporting Authority (NFRA)

Punishment for Non compliance

To check True & Fair, auditor has to see: