Notes CA Inter Audit CA Himanshu

5. The diversity and complexity of the entity’s operations.
6. Applicable legal and regulatory requirements.

7. The circumstances and the applicable component of internal control.
8. The nature and complexity of the systems that are part of the entity’s internal control,
including the use of service organisations.
9. Whether, and how, a specific control, individually or in combination with others, prevents,
or detects and corrects, material misstatement.
13. Nature and Extent of the Understanding of Relevant Controls

What is evaluation of Design:
Evaluating the design of a control involves considering whether the control, individually or
in combination with other controls, is capable of effectively preventing, or detecting and
correcting, material misstatements.
What is evaluation of Implementation:
Implementation of a control means that the control exists and that the entity is using it.
CA Inter with CA Himanshu

There is little point in assessing the implementation of a control that is not effective, and so
the design of a control is considered first.
An improperly designed control may represent a significant deficiency in internal control.
Risk assessment procedures to obtain audit evidence about the design and implementation of
relevant controls may include:
1. Inquiring of entity personnel.
2. Observing the application of specific controls.
3. Inspecting documents and reports.
4. Tracing transactions through the information system relevant to financial reporting.
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1. Evaluation of Internal Control– Methods

Narrative Record
1. Narrative record: written description of a system found in operation by the auditor
2. Actual testing and observation needed before creating it
3. Recommended for small businesses with no formal control system
4. Disadvantages:
a. Difficult to comprehend the system in operation
b. Hard to identify weaknesses or gaps
c. Challenging to incorporate changes due to reshuffling of manpower, etc.
Checklist
1. This is a series of instructions and/or questions which a member of the auditing staff
must follow and/or answer.
2. When he completes instruction, he initials the space against the instruction.
3. Answers to the check list instructions are usually Yes, No or Not Applicable. This is again
an on-the-job requirement and instructions are framed having regard to the desirable
elements of control.
4. Few examples of Checklist instruction are:
a. Are tenders called before placing orders?
b. Are the purchases made on the basis of a written order?
c. Is the purchase order form standardised?
d. Are purchase order forms pre-numbered?
e. Are the inventory control accounts maintained by persons who have nothing to do
with custody of work, receipt of inventory, inspection of inventory and purchase
of inventory?
Internal Control Questionnaire

1. Questionnaire: comprehensive questions for internal control evaluation
2. Most widely used method for collecting information
3. Less oversight/omission of control review procedures
4. Allows for all evaluation to be completed at one time or in sections
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5. Provides orderly means of disclosing control defects
6. Review internal control system annually and record in detail
7. Yes = satisfactory, No = weakness (with explanation option)
8. Not Applicable for irrelevant questions
9. Generally, issued to client for filling by concerned executives and employees
10. Inconsistencies or incongruities further discussed with client
11. Report of deficiencies and recommendations for improvement prepared
Flow Chart
1. Flowchart: graphic presentation of company’s internal control system
2. Most concise way of recording auditor’s review
3. Minimizes narrative explanation
4. Provides bird’s eye view of system and flow of transactions
5. Helps in spotting documentation gaps and suggesting improvements

6. Auditor must study significant features of business and nature of activities
7. Comprehensive study of manufacturing, trading, and administration processes needed
8. Helps in understanding and evaluating internal controls accurately
2. Benefits of evaluation of Internal controls

1. Adequacy of internal control system
2. Identify likelihood of errors and frauds
3. Effectiveness of internal auditing department
4. Administrative control impact on audit work
5. Safeguarding assets
6. Recording function discharge by mgmt
7. Reliability of reports, records, and certificates
8. Extent and depth of examination
9. Appropriate audit technique and procedure
10. Weak or excessive control areas
11. Suggestions for improving control system
3. Formulate Audit Programme after understanding Internal control

1. The auditor must comprehend the internal control systems and how they work before
creating the audit plan.
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2. If the auditor neglects this understanding, the audit plan might become too complex,
losing sight of the audit’s purpose amid the overwhelming volume of records.
3. It’s crucial for the auditor to verify if the system is actively functioning. Sometimes,
systems are installed but not properly monitored, leading the auditor to assume they
are operational when they might not be working fully. The auditor can formulate his
entire audit programme only after he has had a satisfactory understanding of the internal
control systems and their actual operation.
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IT Environment
1. What is Automated Environment

Automated environment basically refers to a business environment where the :
• Processes,
• Operations,
• Accounting and
• Even decisions
are carried out by using computer systems – also known as Information Systems (IS) or
Information Technology (IT) systems.
2. Key features of an Automated Environment

1. Automated environments aim to minimize manual intervention and rely on system-
driven processes for conducting business operations.

2. The level of automation in a business environment determines its complexity. Higher
automation leads to increased complexity, while lower automation results in a less
complex environment.
3. An example of increased complexity is when a company uses integrated software systems,
indicating higher automation. On the other hand, using off-the-shelf systems implies
lower automation and a less complex environment.
If a company uses an integrated enterprise resource planning system (ERP) viz., SAP, Oracle
etc., then it is considered more complex to audit. On the other hand, if a company is using an
off-the-shelf accounting software, then it is likely to be less automated and hence less complex
environment.
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3. Understanding and documenting automated environment

Understanding the entity and its automated environment involves understanding of how IT
department is organised, IT activities, IT dependencies and relevant risks and controls.
The understanding of a company’s IT environment that is obtained should be documented.
Given below are some of the points that an auditor should consider to obtain an understanding
of the company’s automated environment:
1. Information systems being used (one or more application systems and what they are)
2. Their purpose (financial and non-financial)
3. Location of IT systems - local vs global.
4. Architecture (desktop based, client-server, web application, cloud based).
5. Version (functions and risks could vary in different versions of same application).
6. Interfaces within systems (in case multiple systems exist).
7. In-house vs Packaged.
8. Outsourced activities (IT maintenance and support).
9. Key persons (CIO, CISO, Administrators).
Key words: Systems-Purpose-Location-Architecture-Version-Interfaces-Inhouse-Outsourced-

Key Persons
Trick: SPLAVIIOK” could be remembered as “Super People Love Amazing Varieties In
Information, Including In-house, Outsourced, and Key persons.”
4. Risks from the use of IT systems

1. Inaccurate processing of data, processing inaccurate data, or both.
2. Unauthorized access to data.
3. Direct data changes (backend changes).
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4. Excessive access / Privileged access (super users).
5. Lack of adequate segregation of duties.
6. Unauthorized changes to systems or programs.
7. Failure to make necessary changes to systems or programs.
8. Loss of data.
5. Impact of IT risks on Substantive Audit, Controls and Reporting

The above risks have to be mitigated. If not mitigated, such risks, could have an impact on
audit in different ways discussed as under: -
Impact on substantive checking

Inability to address above discussed risks may lead to non-reliance of data obtained from
systems. In such a case, all information, data, and reports would have to be tested thoroughly
for their completeness and accuracy. It could lead to increased substantive checking i.e.,
detailed checking.
Impact on controls

It can lead to non-reliance on automated controls, system calculations and accounting
procedures built into applications. It may result in additional audit work.
Impact on reporting
Due to regulatory requirements in respect of internal financial controls (discussed in
subsequent paras) in case of companies, it may lead to modification of auditor’s report in
some instances.
6. Types of Controls in an Automated Environment

1. General IT Controls
2. Application Controls
3. IT-Dependent Controls
7. General IT Controls
“General IT controls are policies and procedures that relate to many applications and support
the effective functioning of application controls. They apply to mainframe, miniframe, and
end-user environments.
General IT-controls that maintain the integrity of information and security of data commonly
include controls over the following:
1. Data center and network operations
2. Program change
3. Access security
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4. Application system acquisition, development, and maintenance (Business Applications)

These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General
IT controls are known as “pervasive” controls or “indirect” controls.
A. Data centre and network operations

Objective:
The objective of controls over Data centre and network operations is to ensure that production
systems are processed to meet financial reporting objectives.
Activities:
1. Overall Mgmt of Computer Operations Activities
2. Batch jobs – preparing, scheduling and executing
3. Backups – monitoring, storage & retention
4. Performance Monitoring – operating system, database and networks
5. Recovery from Failures – Business continuity planning, Disaster recovery planning
B. Program Change
Objective:
The objective of program change controls is to ensure that modified systems continue to meet
financial reporting objectives.
Activities:
1. Change Mgmt Process
2. Change Requests – record, manage, track
3. Making Changes and tracking change request
4. Testing changes
C. Access Security
Objective:
The objective of controls over access security is to ensure that access to programs and data is
authenticated and authorized to meet financial reporting objectives.
Activities:
1. & Security Organization & Mgmt
2. Security Policies & Procedures
3. Application Security
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4. Data Security
5. Operating System Security
6. Network & Physical Security
D. Application system acquisition, development and maintenance

Objective:
The objective of such controls is to ensure that systems are developed, configured and
implemented to meet financial reporting objectives.
Activities:
1. Overall Mgmt. of Development Activities
2. Project Initiation
3. Analysis & Design
4. Construction
5. Testing & Quality Assurance

8. Application Controls
Application controls include both automated or manual controls that operate at a business
process level. Automated Application controls are embedded into IT applications viz., ERPs
and help in ensuring the completeness, accuracy and integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, sequence
number checks, user limit checks, reasonableness checks, mandatory data fields.
9. IT dependent Controls
IT dependent controls are basically manual controls that make use of some form of data or
information or report produced from IT systems and applications.
In this case, even though the control is performed manually, the design and effectiveness of
such controls depends on the reliability of source data.
Due to the inherent dependency on IT, the effectiveness and reliability of automated application
controls and IT dependent controls require the General IT controls to be effective.
10. GITC vs App Controls

1. Application controls and General IT Controls are interrelated.
2. General IT Controls are necessary to support the functioning of application controls.
3. Both types of controls are required for accurate information processing through IT
systems.
11. Testing Methods in an Automated Environment
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There are basically four types of audit tests that should be used. These are inquiry, observation,
inspection and reperformance.
Inquiry is the most efficient audit test but it also gives the least audit evidence.
Reperformance is most effective as an audit test and gives the best audit evidence.
When testing in an automated environment, some of the more common methods are as
follows:
1. Obtain an understanding of how an automated transaction is processed by doing a
walkthrough of one end-to-end transaction using a combination of inquiry, observation
and inspection.
2. Observe how a user processes transactions under different scenarios.
3. Inspect the configuration defined in an application.
4. Inspect technical manual / user manual of systems and applications.
5. Carry out a test check (negative testing) and observe the error message displayed by the
application
12. Manual elements vs automated elements in entity’s internal control

Manual elements in internal control may be more suitable where judgment and discretion
are required such as for the following circumstances:
1. Large, unusual or non-recurring transactions.
2. Circumstances where errors are difficult to define, anticipate or predict.
3. In changing circumstances that require a control response outside the scope of an existing
automated control.
4. In monitoring the effectiveness of automated controls.
Manual control elements may be less suitable for the following circumstances:
1. High volume or recurring transactions, or in situations where errors that can be anticipated
or predicted can be prevented, or detected and corrected, by control parameters that are
automated.
2. Control activities where the specific ways to perform the control can be adequately
designed and automated.
13. Data Analytics for Audit

The combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information is called data analytics.
The tools and techniques that auditors use in applying the principles of data analytics are
known as Computer Assisted Auditing Techniques or CAATs.
Data analytics can be used in testing of electronic records and data residing in IT systems
using spreadsheets and specialised audit tools viz., IDEA and ACL to perform the following:
1. Check completeness of data and population that is used in either test of controls or
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substantive audit tests.
2. Selection of audit samples – random sampling, systematic sampling.
3. Re-computation of balances – reconstruction of trial balance from transaction data.
4. Reperformance of mathematical calculations – depreciation, bank interest calculation.
5. Analysis of journal entries
6. Fraud investigation.
7. Evaluating impact of control deficiencies.
14. Digital Audit

1. Entities are adopting digitization to keep up with changing times and revamp their
business models through the use of new technologies.
2. Companies are restructuring their business models with technology at the forefront, and
automation plays a key role in the digitization process.
3. Auditors are integrating digital technology into their processes, from planning to providing
the final opinion on FS.

4. Auditors are incorporating artificial intelligence, data analytics, and other cutting-edge
technologies to gain a deeper understanding of business processes.
5. The use of digital tools enables auditors to conduct more effective audits, focusing on
areas that require greater attention and improving risk identification through technology.
15. Assess and Report Audit Findings

At the conclusion of each audit, it is possible that there will be certain findings or exceptions
in IT environment and IT controls of the company that need to be assessed and reported to
relevant stakeholders including mgmt and TCWG:
Some points to consider are as follows:

1. Are there any weaknesses in IT controls?
2. What is the impact of these weaknesses on overall audit?
3. Report deficiencies to mgmt – Internal controls memo or Mgmt letter.
4. Communicate in writing any significant deficiencies to TCWG.
The auditor needs to assess each finding or exception to determine impact on the audit and
evaluate if the exception results in a deficiency in internal control.
A deficiency in internal control exists if a control is designed, implemented or operated in
such a way that it is unable to prevent, or detect and correct, misstatements in the FS on
a timely basis; or the control is missing. Evaluation and assessment of audit findings and
control deficiencies involves applying professional judgement that include considerations for
quantitative and qualitative measures. Each finding should be looked at individually and in
the aggregate by combining with other findings/deficiencies.
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16. Documenting the Risk
The auditor shall document:
1. The discussion among the engagement team and the significant decisions reached
2. Key elements of the understanding obtained regarding each of the aspects of the entity
and its environment and of each of the internal control components, the sources of
information from which the understanding was obtained; and the risk assessment
procedures performed
3. The identified and assessed risks of material misstatement at the FS level and at the
assertion level and
4. The risks identified, and related controls about which the auditor has obtained an
understanding.
17. Internal financial control as per Financial Reporting

The term Internal Financial Controls (IFC) basically refers to the policies and procedures put
in place by companies for ensuring:
1. Reliability of financial reporting

2. Effectiveness and efficiency of operations
3. Compliance with applicable laws and regulations
4. Safeguarding of assets
5. Prevention and detection of frauds
Relevant provision of Nature of Responsibility

Companies Act,2013
Section 134 (5)(e) In case of listed Companies, the Directors’ responsibility
statement shall state that the Directors had laid down Internal
financial controls to be followed by the company and that such
Internal financial controls are adequate and were operating
effectively.
Section 143(3)(i) of the The auditor’s report shall state whether the company has
Act adequate Internal financial controls system in place and also on
the operating effectiveness of such controls.
This requirement shall not apply to a private company which:
1. Is One Person Company or a small company; or
2. Has turnover less than ₹ 50 crore as per latest audited
FS; and which has aggregate borrowings from banks or
financial institutions or any body corporate at any point
of time during the financial Year for less than ₹ 25 crore.
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Relevant provision of Nature of Responsibility
Companies Act,2013
Section 177(4)(vii) of the Every audit Committee shall act in accordance with the terms
Act of reference specified in writing by the Board which shall, inter
alia, include - evaluation of internal financial controls and risk
mgmt systems.
As per Section 149(8) of The company and independent directors shall abide by the
the Act provisions specified in Schedule IV which lays down the Code for
independent Directors. As per this code, the role and functions of
independent directors include that they shall satisfy themselves
on the integrity of financial information and that financial
controls and the systems of risk mgmt are robust and defensible.
18. Documenting the Risks

The Auditor shall document:
1. The discussion among the engagement team and the significant decisions reached

2. Key elements of the understanding obtained regarding each of the aspects of the entity
and its environment and of each of the internal control components, the sources of
information from which the understanding was obtained; and the risk assessment
procedures performed.
3. The identified and assessed risks of material misstatement at the FS level and at the
assertion level and
4. The risks identified, and related controls about which the auditor has obtained an
understanding.
SA 330
1. Objective of SA 330
1. The auditor shall design and implement overall responses to address the assessed risks of
material misstatement at the FS level.
2. The auditor shall design and perform further audit procedures whose nature, timing and
extent are based on and are responsive to the assessed risks of material misstatement at
the assertion level.
In designing the further audit procedures to be performed, the auditor shall:

1. Consider the reasons for the assessment given to the risk of material misstatement at the
assertion level for each class of transactions, account balance, and disclosure, including:
a. The likelihood of material misstatement due to the particular characteristics of
the relevant class of transactions, account balance, or disclosure (i.e., the inherent
risk); and
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b. Whether the risk assessment takes into account the relevant controls (i.e., the
control risk), thereby requiring the auditor to obtain audit evidence to determine
whether the controls are operating effectively (i.e., the auditor intends to rely
on the operating effectiveness of controls in determining the nature, timing and
extent of substantive procedures); and
2. Obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
The auditor shall design and perform tests of controls to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant controls
when:
1. The auditor’s assessment of risks of material misstatement at the assertion level includes
an expectation that the controls are operating effectively (i.e., the auditor intends to rely
on the operating effectiveness of controls in determining the nature, timing and extent of
substantive procedures); or
2. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
In designing and performing tests of controls, the auditor shall obtain more persuasive audit
evidence the greater the reliance the auditor places on the effectiveness of a control.

A higher level of assurance may be sought about the operating effectiveness of controls when
the approach adopted consists primarily of tests of controls, in particular, where it is not
possible or practicable to obtain sufficient appropriate audit evidence only from substantive
procedures.
2. What is Test of Controls (ICAI Module Point 7)

The test of controls is an audit procedure performed by auditors to evaluate the effectiveness
of a company’s internal controls in preventing, or detecting and correcting material
misstatements at the assertion level.
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls when:
1. The auditor expects the controls to be operating effectively at the assertion level as part
of their assessment of Risk of Material Misstatement (ROMM) and plans to rely on them
to determine the nature, timing, and extent of substantive procedures.
2. Substantive procedures alone cannot provide enough suitable audit evidence at the
assertion level.
Test of controls may include:
1. Inspection of documents supporting transactions and other events to gain audit evidence
that internal controls have operated properly, for example, verifying that a transaction
has been authorised.
2. Inquiries about, and observation of, internal controls which leave no audit trail, for
example, determining who actually performs each function and not merely who is
supposed to perform it.
3. Re-performance involves the auditor’s independent execution of procedures or controls
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that were originally performed as part of the entity’s internal control, for example,
reconciliation of bank accounts, to ensure they were correctly performed by the entity.
4. Testing of internal control operating on specific computerised applications or over the
overall information technology function, for example, access or program change controls.
3. Nature and extent of Test of Controls

In designing and performing test of controls, the auditor shall:
1. Perform other audit procedures in combination with inquiry to obtain audit evidence
about the operating effectiveness of the controls, including:
a. How the controls were applied at relevant times during the period under audit.
b. The consistency with which they were applied.
c. By whom or by what means they were applied.
2. Determine whether the controls to be tested depend upon other controls (indirect
controls), and if so, whether it is necessary to obtain audit evidence supporting the
effective operation of those indirect controls.

3. The auditor shall test controls for the particular time, or throughout the period, for which
the auditor intends to rely on those controls.
Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly,
other audit procedures are performed in combination with inquiry. In this regard, inquiry
combined with inspection or reperformance may provide more assurance than inquiry and
observation, since an observation is pertinent only at the point in time at which it is made.
Matters the auditor may consider in determining the extent of test of controls
include the following:
1. The frequency of the performance of the control by the entity during the period.
2. The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control.
3. The expected rate of deviation from a control.
4. The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
5. The extent to which audit evidence is obtained from tests of other controls related to the
assertion.
4. Timing of Test of Controls

The auditor shall test controls for the particular time, or throughout the period, for which
the auditor intends to rely on those controls in order to provide an appropriate basis for the
auditor’s intended reliance.
5. Using Audit Evidence Obtained in Previous Audits
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To determining whether it is appropriate to use audit evidence about the operating effectiveness
of controls obtained in previous audit, the auditor shall consider the following:
1. The risks of material misstatement and the extent of reliance on the control.
2. The effectiveness of the entity’s risk assessment process the entity’s monitoring of controls
3. The effectiveness of general IT-controls;
4. The risks arising from the characteristics of the control, including whether it is manual
or automated;
5. Whether there have been personnel changes that significantly affect the application of
the control
6. Whether the lack of a change in a particular control that poses a risk due to changing
circumstances; and
6. Evaluating the Operating Effectiveness of Controls

When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate
whether misstatements that have been detected by substantive procedures indicate that
controls are not operating effectively.
The absence of misstatements detected by substantive procedures, however, does not provide
audit evidence that controls related to the assertion being tested are effective.
7. Specific inquiries when deviations from controls are detected

The auditor shall make specific inquiries to understand these matters and their potential
consequences, and shall determine whether:
1. The test of controls that have been performed provide an appropriate basis for reliance
on the controls;
2. Additional test of controls are necessary; or
3. The potential risks of misstatement need to be addressed using substantive procedures
Irrespective of the assessed risks of material misstatement, the auditor

shall design and perform substantive procedures for each material class of
transactions, account balance, and disclosure.
This requirement reflects the facts that:
1. The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement and
2. There are inherent limitations to internal control, including mgmt override.
8. What is Substantive Procedure

Substantive procedures are audit procedures designed to detect material misstatements at the
assertion level. Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
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(ii) Substantive analytical procedures.
9. Nature and Extent of Substantive Procedures

Depending on the circumstances, the auditor may determine that:
1. Performing only substantive analytical procedures will be sufficient to reduce audit risk to
an acceptably low level. For example, where the auditor’s assessment of risk is supported
by audit evidence from tests of controls.
2. Only tests of details are appropriate.
3. A combination of substantive analytical procedures and tests of details are most responsive
to the assessed risks.
Because the assessment of the risk of material misstatement takes account

of internal control, the extent of substantive procedures may need to be
increased when the results from test of controls are unsatisfactory.
10. Test of Details

Tests of details are further classified into:

1. Tests of transactions i.e., vouching and
2. Tests of balances i.e., verification
Example:
Test of Transaction: A purchase transaction may be verified by examining the related purchase
invoice, goods received note, inward gate entry register.
Test of Balance: Verification of assets as well as liabilities like reviewing entity’s plan
for performing physical verification of fixed assets and obtaining evidence for performance of
physical verification of fixed assets by mgmt.
11. Substantive analytical procedures

Substantive analytical procedures refer to analytical procedures used as substantive procedures
by auditor.
The term “analytical procedures” means evaluations of financial information through analysis
of plausible relationships among both financial and non-financial data.
Analytical procedures also encompass such investigation as is necessary of identified
fluctuations or relationships that are inconsistent with other relevant information or that
differ from expected values by a significant amount.
SA 320
The objective of the auditor is to apply the concept of materiality appropriately in planning
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and performing the audit.
2. Materiality from Financial Perspective

Financial reporting frameworks often discuss the concept of materiality in the context of the
preparation and presentation of FS
What is material ?
1. Misstatements are material if expected to influence the economic decisions of users taken
on the basis of the FS:
2. Judgments about materiality are affected by the size or nature of a misstatement: For
example a small amount lost by fraudulent practices of certain employees can indicate a
serious flaw in the enterprise’s internal control system
3. Judgments about matters that are material are based on a consideration of the common
financial information needs of users as a group :.
3. What is materiality ?
The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatement, uncorrected misstatement and
in forming the opinion in the auditor’s report.
1. Determining the nature, timing and extent of risk assessment process
2. Identifying and assessing the risk of material misstatement
3. Determining nature, timing and extent of further audit procedures
The auditor’s determination of materiality is a matter of professional judgment, and is affected
by the auditor’s perception of the financial information needs of users of the FS.
In this context, it is reasonable for the auditor to assume that users:
1. Have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information in the FS with reasonable diligence;
2. Understand that FS are prepared, presented and audited to levels of materiality;
3. Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
4. Make reasonable economic decisions on the basis of the information in the FS.
4. Performance materiality
An amount set at less than materiality for the FS as a whole, to reduce to an appropriately
low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the FS as a whole.
If applicable, performance materiality also refers to the amount or amounts set by the
auditor at less than the materiality level or levels for particular classes of transactions,
account balances or disclosures.
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The auditor sets performance materiality at a value lower than overall materiality, and uses
this lower threshold when designing and performing audit procedures.
This reduces the risk that the auditor will fail to identify misstatements that are material when
added together
5. Benchmark
Determining materiality involves the exercise of professional judgment. A percentage is often
applied to a chosen benchmark as a starting point in determining materiality for the FS as a
whole.
Factors that may affect the identification of an appropriate benchmark include the following:
1. Elements of FS: Assets, liabilities, equity, revenue, expenses
2. Items on which attention of users focused: Profit, revenue, net assets
3. Nature of entity, life cycle, industry, economic environment
4. Ownership structure, financing: Debt/Equity emphasis
5. Volatility of benchmark

6. Commonly used benchmarks:
a. profit before tax,
b. total revenue,
c. gross profit and total expenses,
d. total equity or net asset value.
6. Other points related to materiality

Determining a percentage to be applied to a chosen benchmark involves the
exercise of Professional Judgement:
There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher
than a percentage applied to total revenue.
Example:
The auditor may consider five percent of profit before tax from continuing operations to
be appropriate for a profit-oriented entity in a manufacturing industry, while the auditor
may consider one percent of total revenue or total expenses to be appropriate for a not-for-
profit entity. Higher or lower percentages, however, may be deemed appropriate in different
circumstances.
Materiality Level or Levels for Particular Classes of Transactions, Account

Balances or Disclosures:
Factors that may indicate the existence of one or more particular classes of transactions,
account balances or disclosures for which misstatements of lesser amounts than materiality
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for the FS as a whole could reasonably be expected to influence the economic decisions of
users taken on the basis of the FS include the following:
1. Whether law, regulations or the applicable financial reporting framework affect users’
expectations regarding the measurement or disclosure of certain items. Example: Related
party transactions, and the remuneration of mgmt and TCWG.
2. The key disclosures in relation to the industry in which the entity operates. Example:
Research and development costs for a pharmaceutical company.
3. Whether attention is focused on a particular aspect of the entity’s business that is
separately disclosed in the FS.
7. Revision of materiality
1. May need to be revised as a result of a change in circumstances that occurred during the
audit, new information, or a change in the auditor’s understanding of the entity and its
operations as a result of performing further audit procedures.
2. If the auditor concludes that a lower materiality for the FS as a whole than that initially
determined is appropriate, the auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and extent of the further audit
procedures remain appropriate
8. Documentation of materiality
The audit documentation shall include the following amounts and the factors considered in
their determination:
1. Materiality for the FS as a whole;
2. If applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures;
3. Performance materiality; and
4. Any revision of (a)-(c) as the audit progressed
9. Materiality and Audit Risk

The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the FS and in forming the opinion in the auditor’s report. In conducting
an audit of FS, the overall objectives of the auditor are to obtain reasonable assurance about
whether the FS as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the FS are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and to
report on the FS, and communicate as required by the SAs, in accordance with the auditor’s
findings. The auditor obtains reasonable assurance by obtaining sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the FS
are materially misstated. Audit risk is a function of the risks of material misstatement and
detection risk.
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Materiality and Audit Risk are considered throughout the audit, in particular, when:
1. Identifying and assessing the risks of material misstatement;
2. Determining the nature, timing and extent of further audit procedures; and
3. Evaluating the effect of uncorrected misstatements, if any, on the FS and in forming the
opinion in the auditor’s report.
SA 500
1. Meaning of Audit Evidence

Audit evidence may be defined as the information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based.
Audit evidence includes both:
1. Information contained in the accounting records underlying the FS and
2. Other information.

Accounting records include:
1. Records of initial accounting entries and supporting records, such as checks and records
of electronic fund transfers;
2. Invoices;
3. Contracts;
4. General and subsidiary ledgers
5. Journal entries and other adjustments to the FS that are not reflected in journal entries;
and
6. Records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
Other information
Information that authenticates the accounting records and also supports the auditor’s rationale
behind the opinion, for example:
a. Minutes of the meetings,
b. Written confirmations from trade receivables and trade payables,
c. Manuals containing details of internal control etc
2. Types of audit evidence

1. Depending upon nature:
a. Visual
b. Oral
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c. Documentary
2. Depending upon source:
a. Internal : Evidence which originates within the organisation being audited is
internal evidence. Example: Sales invoice, Copies of sales challan and forwarding
notes, goods received note, inspection report, copies of cash memo, debit and
credit notes, etc.
b. External: The evidence that originates outside the client’s organization is external
evidence. Example: Purchase invoice, supplier’s challan and forwarding note,
debit notes and credit notes coming from parties, quotations, confirmations, etc.
The external evidence is generally considered to be more reliable as they come from third
parties who are not normally interested in manipulation of the accounting information of
others.
However, if the auditor has any reason to doubt the independence of any third party who has
provided any material evidence e.g. an invoice of an associated concern, he should exercise
greater vigilance in that matter.
3. Sufficient and appropriate audit evidence

Sufficiency is the measure of the quantity of audit evidence.

The Quantity of audit evidence needed. The quantity is affected by the auditor’s assessment
of the risks of misstatement (the higher the assessed risks, the more audit evidence is likely
to be required) and also by the quality of such audit evidence (the higher the quality, the less
may be required).
Auditor’s judgment as to sufficiency may be affected by the factors such as:
1. Materiality
2. Risk of material misstatement
3. Size and characteristics of the population
Materiality
Significance of classes of transactions, account balances and presentation and disclosures to
the users of the FS.
Less evidence would be required in case assertions are less material to users of the FS. But on
the other hand, if assertions are more material to the users of the FS, more evidence would
be required.
Risk of material misstatement

This may be defined as the risk that the FS are materially misstated prior to audit. This consists
of two components : Inherent risk and control risk at the assertion level.
Less evidence would be required in case assertions that have a lower risk of material
misstatement. But on the other hand, if assertions have a higher risk of material misstatement,
more evidence would be required.
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Size and characteristics of the population
Less evidence would be required in case of smaller, more homogeneous population but on
the other hand in case of larger, more heterogeneous populations, more evidence would be
required.
Appropriateness of Audit Evidence

Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for the conclusions on which the auditor’s opinion is based.
The reliability of evidence is influenced by its source and by its nature, and is dependent on
the individual circumstances under which it is obtained.
4. Relevance and reliability of audit evidence

Relevance
Relevance means the evidence relates to the FS assertions being tested. Relevance deals with
the logical connection or relation with the purpose of audit procedure. For example, when
attending an inventory count, the auditor will:

1. Select a sample of items from physical inventory and trace them to inventory records to
confirm the completeness of accounting records
2. Select a sample of items from inventory records and trace them to physical inventories to
confirm the existence of inventory assets
Whilst the procedures are similar in nature, their purpose (and relevance) is to test different
assertions regarding inventory balances.
Reliability
Auditors should always attempt to obtain evidence from the most trustworthy and dependable
source possible.
The reliability of evidence is influenced by its nature, source, circumstance in which its
obtained and controls over its preparation:
1. Evidence obtained from an independent external source is more reliable than client
generated evidence.
2. Evidence obtained directly by the auditor is more reliable than evidence obtained
indirectly.
3. Written evidence is more reliable than oral evidence as oral representations can be
withdrawn or challenged.
4. Original documents are more reliable than copies or documents transformed into
electronic form as it may be difficult to see if these have been tampered with.
5. The reliability of audit evidence generated internally is increased when the related
controls, including those over its accuracy and completeness, imposed by the entity are
effective.
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5. Auditor’s procedure for audit evidence

1. Risk assessment procedures; and
2. Further audit procedures, which comprise
a. Test of controls, when required by the SAs or when the auditor has chosen to do
so; and
b. Substantive procedures, including tests of details and substantive analytical
procedures.
6. Type of audit procedures

1. Inspection
2. Observation
3. External Confirmation
4. Recalculation
5. Reperformance
6. Analytical Procedures
7. Inquiry
1. Inspection involves examining:

a. Records or documents,
b. Internal or external,
c. In paper form, electronic form, or other media, or
d. Physical examination of an asset
Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature and source and effectiveness of internal controls over their
production.
2. Observation: looking at a process or procedure being performed by others.
a. May provide evidence that a control is being operated, e.g., segregation of duties
or a cheque signatory.
b. Only provides evidence that the control was operating properly at the time of the
observation.
c. Observation of a one-off event, e.g. an inventory count, may give good evidence
that the procedure was carried out effectively.
3. External Confirmation: obtaining a direct response (usually written) from an external,
third party. Examples include:
a. Confirmation of receivables
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b. Confirmation of payables
c. Confirmation of bank balances in a bank letter
d. Confirmation of actual/potential penalties from legal advisers
e. Confirmation of inventories held by third parties.
f. May provide good evidence of existence (receivables confirmation) or valuation
(customers may confirm receivable amounts but, ultimately, be unable to pay in
the future)
4. Recalculation: manually or electronically checking the arithmetical accuracy of
documents, records, or the client’s calculations, e.g. recalculation of the translation of a
foreign currency transaction or recalculation of depreciation.
5. Reperformance: the auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control system, e.g. reperformance of
a bank reconciliation, re-performing the aging of accounts receivable.
6. Analytical procedures: analysis of plausible relationships between both financial and
non-financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or

deviate significantly from predicted amounts.
7. Inquiry: seeking information from knowledgeable persons, both financial and non-
financial, within the entity or outside.
a. Used extensively throughout the audit in addition to other audit procedures.
b. May range from formal written inquiries to informal oral inquiries
c. May provide information not previously available with auditor
d. May provide corroborative audit evidence
e. Whilst a major source of evidence, the results of enquiries will usually need to
be corroborated in some way through other audit procedures. This is because
responses generated by the audit client are considered to be of a low quality due
to their inherent bias.
f. In respect of some matters, auditor may consider it necessary to obtain written
representations from management and where appropriate TCWG to confirm oral
queries.
2. Identifying factors that affect the risks of material misstatement, and
3. Designing the nature, timing, and extent of further audit procedures.
7. Information to be used as Audit Evidence

1. Consider the relevance and reliability of audit evidence including information received
from external source
2. When information to be used as audit evidence has been prepared using the work of a
mgmt’s expert, the auditor shall, to the extent necessary, having regard to the significance
of that expert’s work for the auditor’s purposes :
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a. Evaluate competence, capability and objectivity of expert

b. Obtain understanding of work of expert
c. Evaluate appropriateness of the expert’s work as audit evidence
Who is management’s expert?
An individual or organisation possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the entity to assist
the entity in preparing the FS.
When information to be used as audit evidence has been prepared using

the work of a management’s expert, the nature, timing and extent of audit
procedures may be affected by such matters:
1. The nature and complexity of the matter to which the mgmt’s expert relates.
2. The risks of material misstatement in the matter.
3. The availability of alternative sources of audit evidence.
4. The nature, scope and objectives of the mgmt’s expert’s work.

5. Whether the mgmt’s expert is employed by the entity, or is a party engaged by it to provide
relevant services.
6. The extent to which mgmt can exercise control or influence over the work of the mgmt’s
expert.
7. Whether the mgmt’s expert is subject to technical performance standards or other
professional or industry requirements.
8. The nature and extent of any controls within the entity over the mgmt’s expert’s work.
9. The auditor’s knowledge and experience of the mgmt’s expert’s field of expertise.
10. The auditor’s previous experience of the work of that expert.
When using information produced by the entity, the auditor shall evaluate
whether the information is sufficiently reliable for the auditor’s purposes,
including as necessary in the circumstances:
1. Obtaining audit evidence about the accuracy and completeness of the information;
2. Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.
Relying on the work on a Management’s Expert

If the entity has employed or engaged experts, the auditor may rely on the works of experts,
provided he is satisfied that sufficient and appropriate audit evidence is obtained with
reasonable assurance to form an opinion on the FS.
When information to be used as audit evidence has been prepared using the work of a mgmt’s
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expert, the auditor shall, to the extent necessary, having regard to the significance of that
expert’s work for the auditor’s purposes ;
1. Evaluate the competence, capabilities and objectivity of that expert;
2. Obtain an understanding of the work of that expert; and
3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
8. Selecting Items for Testing to Obtain Audit Evidence

When designing tests of controls and tests of details, the auditor shall determine means of
selecting items for testing that are effective in meeting the purpose of the audit procedure.
The means available to the auditor for selecting items for testing are:
1. Selecting all items (100% examination);
2. Selecting specific items; and
3. Audit sampling

Selecting All Items:
The auditor may decide that it will be most appropriate to examine the entire population
of items that make up a class of transactions or account balance (or a stratum within that
population).
100% examination may be appropriate when:
1. The population constitutes a small number of large value items;
2. There is a significant risk and other means do not provide sufficient appropriate audit
evidence; or
3. The repetitive nature of a calculation or other process performed automatically by an
information system makes a 100% examination cost effective.
Selecting Specific Items:

The auditor may decide to select specific items from a population.
In making this decision, factors that may be relevant include
a. The auditor’s understanding of the entity,
b. The assessed risks of material misstatement, and
c. The characteristics of the population being tested.
Specific items selected may include:
High value or key items : The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristic.
All items over a certain amount : The auditor may decide to examine items whose recorded
values exceed a certain amount so as to verify a large proportion of the total amount of a class
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of transactions or account balance.

Items to obtain information: The auditor may examine items to obtain information about
matters such as the nature of the entity or the nature of transactions.
9. Inconsistency in or Doubts over Reliability of Audit Evidence

If:
1. Audit evidence obtained from one source is inconsistent with that obtained from another;
or
2. The auditor has doubts over the reliability of information to be used as audit evidence,
The auditor shall determine what modifications or additions to audit procedures are necessary
to resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
audit.
SA 501
The auditor should obtain sufficient appropriate evidence regarding:
1. Existence and condition of inventory

2. Completeness of litigation and claims involving the entity
3. Presentation and disclosure of segment information
2. Purpose of physical verification of inventory

1. Attend the physical inventory count, if inventory is material to the FS, then obtain
sufficient and appropriate evidence regarding existence and condition of inventory by:
a. Attending physical inventory count (unless impracticable) to:
- Evaluate management’s instructions and procedures for the inventory count.
- Observe the performance of the count.
- Inspect the inventory.
- Perform test counts.
b. Perform procedures on the final inventory records to determine whether they
accurately reflect the count results
3. Inventory
When inventory is material to the FS, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
1. Attendance at physical inventory counting, unless impracticable, to:
a. Evaluate management’s instructions and procedures for recording and controlling
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the results of the entity’s physical inventory counting
b. Observe the performance of management’s count procedures;
c. Inspect the inventory; and
d. Perform test counts
2. Performing audit procedures over the entity’s final inventory records to determine
whether they accurately reflect actual inventory count results.
4. Auditor’s procedure for physical verification

Attendance at Physical Inventory Counting Involves:
1. Inspecting the inventory to ascertain its existence and evaluate its condition, and
performing test counts;
2. Observing compliance with mgmt’s instructions and the performance of procedures for
recording and controlling the results of the physical inventory count; and
3. Obtaining audit evidence as to the reliability of mgmt’s count procedures.

5. Matters relevant in Planning Physical Verification
Matters relevant in planning attendance at physical inventory counting include, for example:
1. Nature of inventory.
2. Stages of completion of work in progress.
3. The timing of physical inventory counting.
4. The nature of the internal control related to inventory.
5. The risks of material misstatement related to inventory.
6. The locations at which inventory is held, including the materiality of the inventory and
the risks of material misstatement at different locations, in deciding at which locations
attendance is appropriate
7. Whether adequate procedures are expected to be established and proper instructions
issued for physical inventory counting.
8. Whether the entity maintains a perpetual inventory system.
9. Whether the assistance of an auditor’s expert is needed.
5. Physical Verification Counting at Other Dates

Conducted Other than at the Date of the FS
The auditor shall, in addition to the procedures required above, perform audit procedures to
obtain audit evidence about whether changes in inventory between the count date and the
date of the FS are properly recorded.
Relevant matters to be considered:
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1. Whether the perpetual inventory records are properly adjusted.

2. Reliability of the entity’s perpetual inventory records.
3. Reasons for significant differences between the information obtained during the physical
count and the perpetual inventory records.
Auditor is unable to Attend due to Unforeseen Circumstances

The auditor shall make or observe some physical counts on an alternative date, and perform
audit procedures on intervening transactions.
Attendance at Is Impracticable
The auditor shall perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not possible to do so, the
auditor shall modify the opinion in the auditor’s report in accordance with SA 705.
The matter of general inconvenience to the auditor, however, is not sufficient to support a
decision by the auditor that attendance is impracticable.
Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in itself a
valid basis for the auditor to omit an audit procedure for which there is no alternative or to be
satisfied with audit evidence that is less than persuasive.

Example of Alternate procedures:
Inspection of documentation of the subsequent sale of specific inventory items acquired or
purchased prior to the physical inventory counting
Inventory under custody or control of third party location:

When inventory under the custody and control of a third party is material to the FS, the auditor
shall obtain sufficient appropriate audit evidence regarding the existence and condition of
that inventory by performing one or both of the following:
1. Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
2. Perform inspection or other audit procedures appropriate in the circumstances

Other Audit Procedures may include:
a. Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
b. Requesting confirmation from other parties when inventory has been pledged as
collateral.
c. Attending, or arranging for another auditor to attend, the third party’s physical
counting of inventory, if practicable
d. Obtaining another auditor’s report, or a service auditor’s report, on the adequacy
of the third party’s internal control for ensuring that inventory is properly counted
and adequately safeguarded.
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3. The extent of audit coverage.
4. Materiality for the FS as a whole (and, if applicable, materiality level or levels for particular
classes of transactions, account balances or disclosures), and performance materiality.
5. Proposed methods of item selection and sample sizes.
6. Documentation of the work performed.
7. Review and reporting procedures.
Coordination between the external auditor and the internal audit function is
effective when, for example;
1. Discussions take place at appropriate intervals throughout the period.
2. The external auditor informs the internal audit function of significant matters that may
affect the function.
3. The external auditor is advised of and has access to relevant reports of the internal audit
function and is informed of any significant matters that come to the attention of the
function when such matters may affect the work of the external auditor so that the external
auditor is able to consider the implications of such matters for the audit engagement.

13. Determining Whether, in Which Areas, and to What Extent Internal
Auditors Can Be Used to Provide Direct Assistance
Direct assistance refers to the use of internal auditors to perform audit procedures under the
direction, supervision and review of the external auditor.
The external auditor may be prohibited by law or regulation from obtaining direct assistance
from internal auditors.
If using internal auditors to provide direct assistance is not prohibited by law or regulation,
and the external auditor plans to use internal auditors to provide direct assistance on the
audit, the external auditor shall evaluate the existence and significance of threats to objectivity
and the level of competence of the internal auditors who will be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the internal
auditors’ objectivity shall include inquiry of the internal auditors regarding interests and
relationships that may create a threat to their objectivity.
The external auditor shall not use an internal auditor to provide direct
assistance if:
1. There are significant threats to the objectivity of the internal auditor; or
2. The internal auditor lacks sufficient competence to perform the proposed work.
The external auditor shall not use internal auditors to provide direct
assistance to perform procedures that:
1. Involve making significant judgments in the audit;
2. Relate to higher assessed risks of material misstatement where the judgment required
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in performing the relevant audit procedures or evaluating the audit evidence gathered is
more than limited;
3. Relate to work with which the internal auditors have been involved and which has already
been, or will be, reported to mgmt or TCWG by the internal audit function; or
4. Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
Prior to using internal auditors to provide direct assistance for purposes of

the audit, the external auditor shall:
1. Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditor’s instructions, and that the entity
will not intervene in the work the internal auditor performs for the external auditor; and
2. Obtain written agreement from the internal auditors that they will keep confidential
specific matters as instructed by the external auditor and inform the external auditor of
any threat to their objectivity.
14. Basics of Internal Financial Control and Reporting Requirements

Distinction between Internal Financial Control and Internal Control over financial reporting:
The term Internal Financial Controls (IFC) refers to the policies and procedures put in place
by companies for ensuring reliability of financial reporting, effectiveness and efficiency of
operations, compliance with applicable laws and regulations, safeguarding of assets and
prevention and detection of frauds.
On the other hand, Internal controls over financial reporting is required where auditors
are required to express an opinion on the effectiveness of an entity’s internal controls over
financial reporting, such opinion is in addition to and distinct from the opinion expressed by
the auditor on the FS.
Therefore, “internal financial control” is a wider term where as “internal controls over
financial reporting” is a narrower term restricted to entity’s internal controls over financial
reporting only.
Audit of Items of Financial Statements
1. Share Capital
3. Tally Share Capital: Compare the period-end share capital balance (authorized, issued,
and paid up) with the previous year’s audited FS.
4. Confirmation/Representation: If there’s no change during the year, obtain written
confirmation from the Company Secretary stating that there were no changes to the
entity’s capital structure.
5. Verification of Changes: If there’s any change, ensure the paid-up capital at the period-
end aligns with the authorized capital. Verify authorized capital by examining the
Memorandum of Association (MOA).
6. Certified Copies of Resolutions: Obtain certified copies of resolutions passed at board
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and shareholder meetings authorizing changes in authorized or paid-up share capital.
7. Fresh Issue Compliance: For fresh issues in the current year, ensure compliance with
Companies Act 2013, covering aspects like Return of Allotment, Minimum Subscription,
and underwriting commission payment.
8. No Issuance at Discount: Confirm that no shares have been issued at a discount (as per
Section 53 of the Companies Act).
9. Nature of Issuance: Check whether shares are issued for cash or for considerations other
than cash (e.g., services to promoters or underwriters’ commission).
10. SEBI Regulations: Ensure compliance with SEBI regulations and guidelines related to
share issuances.
11. Verification of Filed Forms: Obtain and verify copies of forms filed with the Ministry
of Corporate Affairs (MCA) and Reserve Bank of India (RBI) to confirm the accuracy of
securities issued and their prices.
12. Fee and Stamp Duty: If there’s an increase in share capital, verify whether the company
has accurately calculated the required fees and stamp duty payable to MCA.
Shares Issued at Premium

1. If a company issues shares at a premium, that is the amount in excess of nominal value
of the share, whether for CASH or otherwise, Section 52 of the Companies Act, 2013
mandates the transfer of the premium amount to the securities premium account.
2. The purpose for which the amount in the account can be applied must be stated.
3. No Restriction on Premium Issue: The Act does not impose restrictions or conditions for
issuing shares at a premium.
4. Treatment Similar to Paid-up Capital: Provisions related to the reduction of share capital
apply to the securities premium account as if it were the paid-up share capital.
5. Application of Securities Premium Account: The securities premium account can be
utilized for various purposes, including:
a. Issuing fully paid bonus shares to members.
b. Writing off preliminary expenses.
c. Covering expenses, commission, or discount related to share or debenture issues.
d. Meeting the premium on redeeming preference shares or debentures.
e. Purchasing its own shares or securities under Section 68 (Buyback).
6. Auditor’s Verification: The auditor needs to verify:
a. Transfer of premium received on shares to the securities premium account.
b. Ensuring that any amount from the securities premium account is applied only
for specified purposes mentioned above.
Shares Issued at a Discount
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Section 53 of Companies Act, 2013:

1. A company cannot issue shares at a discount, except for sweat equity shares under Section
54.
2. Any share issued at a discounted price is considered void.
3. Exception: Companies may issue shares at a discount to creditors when debt is converted
into shares under a statutory resolution plan or debt restructuring scheme following RBI
guidelines.
Non-compliance Penalties:
Failure to comply results in penalties:
1. Company and defaulting officers liable to a penalty up to the amount raised through
discounted shares or five lakh rupees, whichever is less.
2. The company must refund all monies received with 12% per annum interest from the
issue date.
Auditor’s Verification:
1. Movement in Share Capital: Check changes in share capital during the year.
2. Discounted Share Issuance: Verify through meeting minutes that the company has not
issued shares at a discount.
3. Exceptional Cases: Verify if shares were issued at a discount to creditors during debt
conversion following RBI guidelines.
Sweat Equity Shares

Section 54 of Companies Act, 2013
According to Section 54 of the Companies Act, 2013, the employees may be compensated in
the form of ‘Sweat Equity Shares”.
Sweat Equity Shares means:
1. Equity shares issued to employees or directors.
2. Can be issued at a discount or for non-cash consideration (know-how, intellectual property
rights, or value additions).
Verification by Auditor:
1. Ensure Sweat Equity Shares are of an existing share class.
2. Compliance with Section 54 conditions:
a. Special resolution passed by the company
b. The resolution specifies details: number, market price, consideration, and
recipients.
c. Verify compliance of SEBI regulations for listed companies or prescribed rules
for unlisted companies.
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Reduction of Capital
1. Verify shareholder meeting for special resolution, proper convening, and advance
circularisation.
2. Check Articles of Association for authorization of capital reduction.
3. Ensure no default in deposit repayment or interest payment.
4. Examine Tribunal order, its registration, and filing with Registrar of Companies.
5. Verify Registrar’s Certificate for capital reduction.
6. Vouch accounting entries for capital reduction, asset write-down, and compliance with
Schedule III.
7. Confirm proper disclosure of asset revaluation in the Balance Sheet.
8. Verify adjustment in members’ accounts in the Register of Members.
9. Confirm alteration or issuance of new share certificates and cancellation of old ones.
10. Add “and reduced” to the company name if required by the Tribunal.

11. Check compliance with tribunal-imposed terms and conditions.
12. Verify suitable alteration of the Memorandum of Association.
Disclosure for Share Capital

Ensure whether the following disclosure requirements of Schedule III (Part I) to Companies
Act, 2013 have been complied with:
1. Authorization and Issuance:
a. Number and amount of authorized shares.
b. Issued, subscribed, fully paid, and subscribed but not fully paid shares.
c. Par value per share.
2. Reconciliation of shares outstanding at the beginning and end of the reporting period.
3. Rights and Preferences:
a. Rights, preferences, and restrictions for each share class.
b. Restrictions on dividends and capital repayment.
4. Holding Company Details:
a. Shares of each class held by the holding company or ultimate holding company.
b. Shares held by subsidiaries or associates of the holding or ultimate holding
company.
5. Major Shareholders: Shares held by shareholders with more than 5% shares, specifying
the number.
6. Reserved Shares: Shares reserved for issue under options, contracts, commitments, or
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disinvestment, including terms and amounts.

7. Historical Data (Last 5 Years):
a. Aggregate number and class of fully paid shares issued without cash receipt.
b. Aggregate number and class of bonus shares issued.
c. Aggregate number and class of shares bought back.
8. Convertible Securities: Terms of convertible securities, including earliest conversion
dates in descending order.
9. Calls Unpaid: Aggregate value of calls unpaid, distinguishing those by directors and
officers.
10. Forfeited Shares: Amount originally paid for forfeited shares.
11. Where in respect of an issue of securities made for a specific purpose, the whole or part
of the amount has not been used for the specific purpose at the balance sheet date, there
shall be indicated by way of note how such unutilised amounts have been used or invested.
Self Practice
2. Reserves and Surplus

Definition of Reserves: Appropriated amounts from profits not intended for specific liabilities,
contingencies, commitments, or asset value diminution.
Revenue Reserves:
Profits available for distribution or various purposes:
1. Supplement divisible profits in lean years.
2. Finance business extension.
3. Augment working capital.
4. Strengthen the company’s financial position.
Capital Reserves:
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1. Reserves not available for distribution.
2. Utilized for limited purposes.
3. Examples of Capital Reserves: Securities premium and Capital redemption reserve.
4. Appropriation for Capital Purpose: If revenue profit is appropriated for the asset
replacement reserve, considered a capital reserve.
5. Creation of Capital Reserve: Originates from capital profits earned, e.g., sale of capital
assets or shares.
Utilization of Capital Reserves:
1. Used for writing down fictitious assets or losses.
2. Permitted for issuing bonus shares if realized.
3. Limitations on Certain Reserves: Securities premium or capital redemption reserve
governed by specific purposes in Sections 52 and 55 of the Companies Act, 2013.
Audit Procedure for Reserve and Surplus

Verification of Opening Balances:

1. Trace and tally the opening balance of reserves and surplus with the previous year’s
audited FS.
Current Year Additions/Utilizations:
1. Profit and Loss Balance:
a. Trace movement to surplus/deficit in the Statement of Profit and Loss for the
current year.
b. Verify the movement in the Statement of Changes in Equity.
c. Verify board resolution on dividend recommendation and shareholder resolution
for dividend declaration.
d. Note: AS-4 (Revised) or IND AS 10 stipulates treatment if dividends are proposed
or declared post the balance sheet date.
2. Securities Premium:
a. Confirm the issuance of shares exceeding nominal value by obtaining and
verifying the board resolution.
b. Ensure utilisation aligns with limited purposes (Section 52 of Companies Act
2013).
Specific Considerations:
1. Dividend Recognition: Dividends proposed or declared after the balance sheet date
should be disclosed but not recognized as a liability.
2. Securities Premium Utilization: Securities premium account utilization restricted to
specified purposes and Confirm adherence to the restrictions outlined in Section 52 of
the Companies Act 2013.
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Other Procedures:
1. Follow appropriate audit procedures to validate the movement in reserves and surplus,
ensuring compliance with regulatory provisions.
Disclosure for Reserve and Surplus

Reserves and Surplus shall be classified as:
1. Capital Reserves;
2. Capital Redemption Reserve;
3. Securities Premium
4. Debenture Redemption Reserve;
5. Revaluation Reserve;
6. Share Options Outstanding Account;
7. Other Reserves– (specify the nature and purpose of each reserve and the amount in
respect thereof)
8. Surplus
A reserve specifically represented by earmarked investments shall be termed as a “fund”

Debit balance of statement of profit and loss shall be shown as a negative figure under the
head “Surplus”
3. Borrowings
Audit Procedure for Existence Assertion

1. Review Board Minutes:
a. Review board minutes for approval of new lending agreements.
b. Ensure authorization of new loan agreements or bond issuances by the board.
c. Verify board approval for significant debt commitments.
2. Loan Agreement Verification:
a. Agree on details of recorded loans (interest rate, nature, and repayment terms)
with the loan agreement.
b. Verify adherence to borrowing limits specified in agreements.
3. Independent Balance Confirmations:
a. Roll out and obtain independent balance confirmations (SA 505) for all borrowings
from lenders (banks/financial institutions).
b. Ascertain that confirmations request all relevant information for testing debt
and related interest balances (e.g., interest rates, due dates, collateral, security
interests).
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c. Send reminders for non-replies to confirmation requests.
d. Compare balances from confirmations to the books of accounts.
e. Ask for reconciliations if differences exist.
f. Test supporting documents for reconciling items on a sample basis.
4. Leases and Hire Purchase Verification: Agree details of leases and hire purchase creditors
with underlying contracts/agreements.
5. Debentures Examination: Examine debenture trust deed for redemption terms, borrowing
restrictions, and covenant compliance.
6. Debt Retirement Confirmation: When retiring debt, ensure receipt of a discharge on
assets securing the debt.
7. Written Representation: Obtain a written representation confirming that all recorded
liabilities represent valid claims by lenders.
Audit Procedure for Completeness Assertion

1. Borrowings Schedule Review:

a. Obtain a detailed schedule of short-term and long-term borrowings, encompassing
debts outstanding at the prior year-end and any new or renewed debt during the
current year.
b. Show beginning and ending balances, along with borrowings taken and repaid
during the year.
2. Evidence of Additional Debt: Consider any evidence of additional debt by examining
minutes of the board of directors, significant contracts, confirmations from banks/
lenders, and support for subsequent cash disbursements (when testing payables).
3. Closing Balance Verification: Trace the closing balances from the schedules to the general
ledger.
4. Review of Subsequent Transactions:
a. After the reporting period, review subsequent transactions to identify any
unrecorded liabilities at year-end and ensure proper recording in the correct
period.
b. Example: Evaluate transactions such as fresh loans taken near the balance sheet
date for accurate accounting.
Audit Procedure for Valuation Assertion

1. Accounting Policies and Methods: Determine appropriateness and consistent application
of accounting policies and methods for recording debt.
2. Agreement of Loan Balance: Agree loan balance and payables to the terms outlined in the
loan agreement.
3. Recomputation of Interest and Redemption Elements: Recompute interest, and assess
Page No.99
any discount or premium on redemption if applicable.

4. Amortization Computation: Check the computation of premium or discount amortization
if applicable.
5. Foreign Currency Loans: Verify the closing exchange rates used and compute restatements
of foreign currency balances per AS 11.
6. Provisions in Loan and Debt Agreements:
a. Test entity compliance with covenants and significant provisions in agreements.
b. Determine the classification of debt if there are non-compliant provisions.
c. Obtain confirmation of waiver if provisions have been waived by the lender.
7. Due Dates and Classification:
a. Examine due dates on loans for proper classification (long-term or short-term).
b. Verify correctness of disclosed installments of long-term loans due within the
next twelve months.
8. Restrictive Covenants and Default Provisions:
a. Examine debt agreements for restrictive covenants and default provisions.

b. Ensure proper disclosure in FS.
9. Security Aspects:
a. Review loan agreements and documents evidencing charge for compliance with
statutory requirements.
b. Verify compliance with applicable statute provisions on creation and registration
of charges.
c. Verify classification of secured loans in case the value of security falls below the
loan outstanding.
10. Hire Purchase Agreements:
a. Examine hire purchase agreements for asset purchases.
b. Ensure accuracy of outstanding amounts in accounts and review the security
aspect.
11. Borrowings from Related Parties: Carefully review borrowings from related parties,
ensuring compliance with AS 18 or IND AS 24.
12. Liabilities Towards Banks: Verify correct reflection and disclosure of liabilities toward
banks (e.g., bills discounted, negotiated, etc.).
13. Borrowing Powers and Restrictions:
a. Verify borrowing within company’s powers laid down by Articles of Association
and Memorandum of Association.
b. Check compliance with Sections 180, 185, and 186 of the Companies Act, 2013.
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14. Purpose of Borrowing: Examine the purpose for borrowing, ensuring it aligns with the
company’s interest.
15. Deposit Compliance: Where applicable, ensure compliance with directives issued by the
Reserve Bank of India or other appropriate authority for accepted deposits.
Disclosure for Borrowings

Ensure whether the following disclosures as required under Schedule III (Part I) to Companies
Act, 2013 are made for each amount disclosed under each of the following headings:
Long- Term Borrowings:

Long-term borrowings shall be classified as:
1. Bonds/debentures;
2. Term loans:
a. From banks.
b. From other parties.

c. Deferred payment liabilities;
d. Deposits;
e. Loans and advances from related parties;
f. Long term maturities of finance lease obligations;
g. Other loans and advances (specify nature).
Short Term Borrowings:

Short-term borrowings shall be classified as:
1. Loans repayable on demand;
a. From banks.
b. From other parties.
3. Loans and advances from related parties;
4. Deposits;
5. Other loans and advances (specify nature)
Current maturities of Long term borrowings shall be disclosed separately.
Common for both Long Term and Short Term Borrowings:

1. Borrowings shall further be sub-classified as secured and unsecured. Nature of security
shall be specified separately in each case.
2. Where loans have been guaranteed by directors or others, the aggregate amount of such
loans under each head shall be disclosed.
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3. Period and amount of default as on the balance sheet date in repayment of loans and
interest, shall be specified separately in each case.
4. Trade Receivables
Test of Controls for Sales and Debtors

1. Ensure that trade receivables arise only from legitimate and genuine sales.
2. Confirm that all sales are made to customers approved by the company.
3. Verify that all sales are accurately recorded in the company’s books of accounts.
4. Confirm that recorded debtors can only be settled through cash receipts or under the
authority of a responsible official.
5. Ensure segregation of duties at various stages of the sales transaction, including accounting
for debtors, collecting payments, and sending reminders.
6. Verify that debtors are collected within the stipulated time frame.
7. Check procedures for sending reminders and initiating legal actions if debtors are not
collected within the specified time.
8. Confirm that balances are regularly reviewed to identify any anomalies or discrepancies.
9. Verify the existence of a robust system for following up on outstanding debts.
10. Ensure that an adequate provision for bad debt is made, supported by the preparation of
an aging schedule for debtors.

1. Check for controls preventing duplicate invoice recording and ensuring automatic recording
of receivable balances in the general ledger from the original invoice.
2. Request and analyze a period-end accounts receivable aging report, comparing the balance
to the general ledger.
3. Send Confirmation to customers to confirm amounts of unpaid accounts receivable.
4. Use preferable forms for confirmation requests, either with or without the balance mentioned.
5. Keep the method of selection confidential until after receiving the trade receivables’ ledger.
6. Provide a list of selected receivables for confirmation to the entity for preparing request
letters.
7. Investigate and reconcile discrepancies revealed by confirmations or additional tests.
8. In case of no replies, perform alternate procedures, including agreeing the balance to
subsequent cash received.
9. If large balances are overdue, inquire about reasons and justifications.
10. Review related party receivables for collectability, proper authorization, and reasonable and
arm’s length values.
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11. Review trends in sales and accounts receivable through analytical procedures.
12. Measure average collection period and inquire about reasons for changes in trends,
documenting them in audit work papers.

1. Ensure accurate cut-offs to prevent understatement or overstatement of sales.
2. Perform cut-off procedures for invoices issued during the last few days of the reporting year.
3. Verify that all goods dispatched before the period/year-end have been invoiced and included
in debtors on a test check basis.
4. Confirm that no goods dispatched after the year-end have been invoiced and included in
debtors for the audited period.
5. Select invoices from the accounts receivable aging report.
6. Compare selected invoices with supporting documentation to ensure correct amounts,
customers, and dates.
7. Confirm that sales are recorded in the correct accounting period by comparing invoice dates

to shipment dates.
8. Review the process of providing discounts/incentives.
9. Review credit memos issued during and after the audit period on a sample basis.
10. Review credit memos issued after the period end to ensure relevance to transactions in the
audited period.

1. Obtain the ageing report for accounts receivable.
2. Scrutinize the analysis, identifying doubtful debtors.
3. Acquire a list of debtors under litigation and compare it with the previous year.
4. Discuss reasons with mgmt for any exclusions from the provision for bad debts.
5. Conduct further testing in case of disputes.
6. Assess the allowance for doubtful accounts, comparing the method used this year with the
one used last year.
7. Prepare a schedule of movements for bad debts, provision accounts, and debts written off.
8. Compare the proportion of bad debt expense to sales for the current year with prior years to
assess reasonableness.
9. Verify if provisions are made at appropriate rates, considering the recoverability of amounts
due.
10. Check that write-offs of receivable balances have been approved by the appropriate authority,
such as the Board of Directors for a company.
Page No.103
Disclosure for Trade receivables

Self Practice
5. Cash and Cash Equivalents

1. Verification of Cash Balances:
a. Conduct surprise checks on cash to ensure the custodian actually holds the
reported cash.
b. Simultaneously check all cash balances, including those with cashiers, petty
cashiers, branch cashiers, and employees with imprest balances.
c. Ensure the cashier is present during cash verification and signs the statement
detailing the cash balance.
d. Cross-check entries in the rough Cash Book or daily balance details with the Cash
Book to validate accuracy.
e. Verify any slips, chits, or I.O.U.s for temporary advances to employees, ensuring
approval by an authorized official.
2. Cash Sensitivity Analysis: Perform cash sensitivity analysis by summarizing total cash
receipts and payments monthly, analyzing trends, and obtaining brief descriptions from
mgmt.
3. Verification of Bank Reconciliation Statements (BRS): Obtain BRS for all entity bank
accounts and understand the client’s BRS process and frequency.
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a. Ensure the BRS is signed by authorized personnel.
b. Verify BRS by tallying bank book balances with bank confirmation/statements.
c. Check reconciling items related to cheques issued but not presented, cheques
deposited but not credited, and amounts/charges debited/credited by the bank.
d. For stale cheques, ensure their exclusion from BRS and reclassification as
liabilities.
4. Direct Confirmation Procedure: Directly contact banks/financial institutions to confirm
account balances in various accounts.
a. Emphasize confirmation of 100% of bank account balances.
b. In cases of non-replies, conduct additional testing, including agreeing balances to
bank statements received by the company or visiting the bank branch with entity
personnel for direct confirmation.
5. The auditor should ensure that all bank accounts holding foreign currency have been
restated at the closing exchange rates as per applicable Financial Reporting Framework.
Disclosure for Cash and Cash Equivalents

Self Practice
6. Inventories
Page No.105

1. Review of Inventory Count Plan: Review the entity’s plan for conducting inventory counts.
2. Consigned Goods: Ensure the segregation of consigned goods.
3. Participation in Inventory Count: Actively participate in the inventory count along with
mgmt.
4. Auditor’s Test Counts:
a. Observe employees adhering to the agreed plan.
b. Assure appropriate supervision during the count procedure.
c. Confirm proper tagging of all items.
d. Verify that tag amounts are correct.
e. Ensure controlled and reconciled tag and summary sheets.
f. Reconcile test counts with tags and summary sheets, noting any discrepancies.
g. Stay alert for issues like empty boxes and obsolete items.
h. Perform cut-off testing by documenting the last 5-10 receiving reports and
shipping documents as of the period end.
i. Exclude third-party stock and damaged or obsolete stock.
j. Ensure accounting for all stock sheets.
k. Investigate significant differences between physical stock and stock records in
books.
l. Ask entity personnel to sign all stock count sheets and agree on observed variances
to prevent conflicts.
4. Periodic System for Inventory Count:
a. When using a periodic system, conduct inventory counts at the end of the period.
b. For entities using a perpetual system with proper records, inventory counts may
be performed at interim dates.
5. Third-Party Inventory Confirmation: Confirm or investigate any inventory of the entity
held by a third party, especially relevant for job work done in the production process.

1. Analytical Procedures:
a. Perform analytical procedures, including comparison tests with industry averages,
budgets, prior years, and trend analysis.
b. Compute the inventory turnover ratio (COGS/average inventory).
c. Conduct vertical analysis (inventory/total assets).
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d. Compare budgetary expectations with actuals.
2. Examination of Non-Financial Information: Examine non-financial information related
to inventory, such as weights and other measurements.
3. Purchase and Sales Cut-off Tests:
a. Perform purchase and sales cut-off tests.
b. Trace shipping documents (bills of lading and receiving reports, warehouse
records, and inventory records) to accounting records immediately before and
after year-end.
4. Tagged Inventory Tests: With respect to tagged inventory, perform tests for omitted
transactions and tests for invalid transactions.
5. Accuracy Verification:
a. Verify the clerical and arithmetical accuracy of inventory listings.
b. Reconcile physical inventory amounts with perpetual records.
c. Reconcile physical counts with general ledger control totals.

6. Third-Party Reconciliation: Reconcile inventories held by third parties like transporters,
warehouses, port authorities, etc.
7. Consignment Basis: Ensure goods received on consignment basis are properly segregated
from other items of inventory.

The choice of inventory valuation method, either First-in, First-out (FIFO) or weighted average,
depends on the business’s operational preferences.
For Raw materials and consumables

1. Identify the components of cost included, such as carriage inward and nonrefundable
duties.
2. If standard costs are employed, inquire about the basis of standards, the process of
comparison with actual costs, and the treatment of variances in accounting records.
3. Verify cost prices by cross-checking with purchase invoices from the preceding month(s).
4. Investigate the valuation of damaged or obsolete inventories observed during the physical
count to determine a realistic net realizable value.
For Work in Progress

1. Determine how different stages of production or value additions are measured, especially
if estimates are involved, and understand the basis for these estimates.
2. Identify the elements of cost included, with special attention to overhead costs. Compare
the basis of including overheads with the costing and financial data maintained by the
entity.
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3. Verify that material costs do not include abnormal wastage factors.
For Finished Goods and Goods for Resale

1. Inquire about the costs included in inventory valuation and how they have been
determined.
2. Verify that overheads are based on normal costs and seem reasonable in relation to the
information in the FS.
3. Ensure inventories are valued at net realizable value if they may fetch a value lower than
their cost.
4. Check if relevant semi/ partly processed inventories (work in progress) and raw materials
have also been written down if needed.
Valuation of Obselete and Damaged Goods

Request the client to provide inventory ageing split and follow up for any inventories which at
time of observance of physical counting were noted as being damaged or obsolete.
1. Compare recorded costs with replacement costs.
2. Examine vendor price lists to determine if recorded cost is less than current prices.
3. Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is

significantly lower.
4. In manufacturing environments, test overhead allocation rates and ensure that only
direct labor, direct material and overhead have been included.
5. Verify the correct application of lower of cost or net realizable value principles.
Disclosure for Inventory

Self Practice
Page No.108
7. Audit of PPE
Recognition Criteria for PPE
The cost of an item of PPE should be recognised as an asset if, and only if:
1. It is probable that future economic benefits associated with the item will flow to the
enterprise, and
2. The cost of the item can be measured reliably.
Elements of Cost
The cost of an item of property, plant and equipment comprises:
1. Purchase price, considering import duties and non-refundable purchase taxes, minus
trade discounts and rebates.
2. Costs directly linked to preparing the asset for operational use.
3. Initial estimate of costs for dismantling, removing the item, and restoring the site
(decommissioning, restoration, and similar liabilities).

4. Incurred obligations for decommissioning, restoration, or similar liabilities upon
acquisition or as a result of using the item for non-inventory production purposes.
Examples of Directly Attributable Cost:

1. Costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from
the construction or acquisition of the item of property, plant and equipment;
2. Costs of site preparation;
3. Initial delivery and handling costs;
4. Installation and assembly costs;
5. Costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items produced while bringing the asset to that location and condition
(such as samples produced when testing equipment);and
6. Professional fees
Examples of costs that are not costs of an item of property, plant and
equipment:
1. Costs of opening a new facility or business, such as, inauguration costs;
2. Costs of introducing a new product or service (including costs of advertising and
promotional activities);
3. Costs of conducting business in a new location or with a new class of customer (including
costs of staff training); and
4. Administration and other general overhead costs.
Page No.109

1. Review the entity’s plan for physical verification of PPE, including the staff or third party
involved and the verification frequency.
2. Check for evidence of appropriate supervision during the physical verification process.
3. Obtain the PPE physical verification report and working sheets from the entity.
4. Assess if all PPE items are properly tagged and have identification marks/numbers.
5. Reconcile physically verified PPE items with the fixed asset register, checking for updated
additions.
6. Verify discrepancies noted during physical verification and how they are addressed in the
entity’s books and FS.
7. Ensure proper accounting for identified shortages or assets not in active use, including
necessary approvals and cessation of depreciation.
Audit for Completeness Assertion

1. Verify the movement in the PPE schedule, including opening balances, additions, and
deletions.
2. Tally the closing balance in the PPE schedule with the entity’s books of account.
3. Check the arithmetical accuracy of the movement in the PPE schedule.
4. Tally opening balances with the previous year’s audited FS.
5. Obtain a listing of all additions from the mgmt for the period under audit.
6. Verify material additions to ensure they meet the criteria of PPE as per AS 10 (Revised).
7. Verify the cost of PPE items, ensuring compliance with AS 10 (Revised).
8. Test purchase invoices, installation certificates, or other documentation for the date of
addition.
9. Verify approval by authorized personnel for PPE additions.
10. Check internal processes and procedures, such as competitive quotations and tendering,
for procuring PPE items.
11. Understand and verify the reasons for deletions to PPE, including the disposal process.
12. Obtain mgmt approval and discard notes for assets taken out of active use.
13. Verify the process followed for the sale of discarded PPE, including competitive quotes
and tenders.
14. Ensure accurate recording of the deletion of PPE and the resulting gain or loss on disposal
in the entity’s books of account.
Audit for Valuation Assertion

1. Verify that the entity has charged depreciation on all items of PPE, excluding non-
Page No.110
depreciable assets like freehold land.
2. Assess that the depreciation method used aligns with the pattern in which the asset’s
future economic benefits are expected to be consumed, such as straight-line, diminishing
value, or unit of production method.
3. Ensure that the mgmt has conducted an impairment assessment, following the
requirements of AS 28 - Impairment of Assets, to determine whether any item of property,
plant, and equipment is impaired.
Audit for Rights Assertion

1. Verify that all purchase invoices for additions to PPE are in the name of the entity,
confirming legal title ownership.
2. For land and building additions, check conveyance deeds/sale deeds to ensure the entity
is the legal owner.
3. Insist on and verify original title deeds for all immovable properties held at the balance
sheet date.
4. If original title deeds are held as security for borrowings, request confirmation from
lenders about holding the deeds.

5. Check the register of charges to ensure that any charge against PPE is appropriately
recorded.
Disclosure for PPE
Page No.111
Self Practice
8. Audit of Intangible Assets
Audit for Existence Assertion

1. Verify the existence of intangible assets by checking if they are actively used in production,
rental, or administrative purposes.
2. For software, confirm its existence by checking if it is actively used, considering sales of
related services/goods during the audit period.
3. For design/drawings, verify their existence by checking production data to confirm if the
related products are being produced and sold.
4. If an intangible asset is not in active use, ensure that its deletion is recorded in the books
Page No.112
with mgmt approval, and amortization ceases after deletion.

1. Verify the movement in the intangible assets schedule, ensuring the accuracy of
calculations.
2. Check the arithmetical accuracy of the schedule and tally closing balances with the
entity’s books.
3. For additions during the audit period, confirm that expenditure meets recognition criteria
per AS 26.
4. Ensure that no intangible asset from research is recognized, and research expenditures
are expensed.
5. Verify the date of use of the intangible asset by checking relevant documentation.
6. Confirm approvals from appropriate personnel for additions and verify adherence to
internal processes.
7. Check if competitive quotations or tenders were followed in vendor selection for intangible
assets.

8. For deletions, understand the rationale, obtain mgmt approval, and verify the disposal
process.
9. Check documentation for the sale of discarded assets, including competitive quotes and
tenders.
10. Verify accurate recording of deletion details and resultant gain/loss on disposal in the
entity’s books.

1. Verify that the entity has charged amortization on all intangible assets.
2. Confirm that the amortization method used aligns with the expected consumption pattern
of economic benefits.
3. Check whether the mgmt has conducted an impairment assessment for intangible assets.
4. Verify if AS 28 - Impairment of Assets has been applied by the entity for reviewing carrying
amounts and determining recoverable amounts.
5. Ensure compliance with impairment assessment procedures to identify any impairment
loss on intangible assets.
Audit for Rights Assertion

1. Verify completeness of additions to intangible assets during the audit period.
2. Confirm that all expense invoices and purchase contracts are in the name of the entity.
3. Ensure legal title of ownership aligns with the entity’s name.
Page No.113
Disclosure for Intangible Assets
Self Practice
9. Trade Payables and Other Current Liabilities

1. Contact vendors independently to confirm accounts payable amounts at the end of the
reporting period.
2. Obtain consent from the entity for direct confirmation and assess the validity of any mgmt
request to exclude certain payables.
3. Decide on the confirmation date in consultation with the company.
4. Choose a confirmation method, preferably using a form with no balance.
5. Keep the method of creditor selection confidential until after receiving the trade payables
ledger.
Page No.114
6. Reconcile and investigate any discrepancies revealed by confirmations or additional tests.
7. Perform additional testing for non-responsive creditors, including testing subsequent
payments and detailed analysis of balances.
8. Review related party payables for proper authorization and reasonable transaction values.
9. Analyze trends in purchases, expenses, and accounts payable over time, inquiring about
any unusual trends from mgmt.

1. Confirm goods received or ownership transfer for the last 5 invoices recorded at the
reporting date.
2. Ensure all goods received before the period-end are included in trade creditors.
3. Test purchases and expenses from accounts payable ledgers with supporting documents.
4. Match purchase invoice dates to gate entry dates for correct recording periods.
5. Review subsequent expense vouchers to identify transactions within the audit period.
6. Verify customer advances, checking documentation and resolving disputes.

7. Analyze statutory dues liabilities (TDS, GST, etc.) for reasonableness based on sales,
purchases, and employee benefit expenses.
8. Calculate and verify GST and Provident Fund liabilities for the last month, comparing
with entity records.
9. Obtain and verify challans for statutory liability deposits post-period end.
10. Prepare a comprehensive list of statutory dues and address reporting requirements under
CARO, 2020.

1. Review the Company’s process to identify and write back any old creditor balances,
comparing it with the method used in the previous year.
2. Obtain the ageing of payable balances and a list of vendors with disputes, claims, or under
litigation, comparing it with the previous year.
3. Verify that write-backs in liability balances deemed no longer payable have been approved
by authorized senior mgmt.
4. Ensure proper restatement of foreign currency trade payables in accordance with AS 11.
5. Understand and test mgmt’s process for identifying the principal amount and unpaid
interest to Micro, Small, and Medium-Sized Enterprises suppliers at the end of the
accounting year.
Disclosure for Trade Payables
Page No.115
Self Practice
10. Loans and Advances and Other Current Assets

1. Use direct confirmation procedures, similar to those for accounts receivable, to establish
the existence of loans and advances.
2. During circularisation, include both the principal amount and any interest receivable
based on agreed terms between the parties for confirmation

1. Comparison of Advances and Current Assets:
a. Obtain a list of all advances and current assets.
b. Compare these lists with ledger balances.
2. Verification of Loan Agreements and Acknowledgments:
a. Verify loan agreements and acknowledgments.
b. Ensure material loans and advances are authorized as per the Memorandum and
Articles of Association.
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3. Confirmation of Competence for Loan Authorization:
a. Confirm that loans are within the competence of individuals who authorized
them.
b. Verify directors’ authorization for Company, partners for a firm, and trustees for
a trust.
4. Review of Board Meeting Minutes:
a. Inspect board meeting minutes.
b. Confirm approval of all material loans and advances by the board of directors.
5. Verification of Loan Acknowledgment and Security:
a. Verify loan acknowledgment by the party.
b. Inspect any deposited security against loan repayment.
c. Ascertain regularity of loan recovery.
6. Examination of Related Party Loans and Advances:
a. Review authorization of related party loans.

b. Ensure the value of transactions is reasonable and at arm’s length.
7. Reasonability Check for Balances with Statutory Authorities:
a. Assess GST input credit balances for reasonability.
b. Apply applicable rates to purchases/expenses for comparison.
h. Request reasons for variances with recorded amounts.
9. Verification of Statutory Returns:
a. Obtain and verify statutory returns (e.g., GST returns).
b. Confirm recorded amounts align with claims made to authorities.

1. Reviewing Allowance for Doubtful Accounts:
a. Assess company’s method for deriving allowance.
b. Compare current method with the previous year.
c. Determine method appropriateness for the business.
2. Examining Aging Report of Loans and Advances:
a. Obtain aging report of loans and advances.
b. Obtain list of loans and advances under litigation and compare with the previous
year.
3. Scrutinizing and Identifying Doubtful Loans/Advances:
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a. Scrutinize analysis to identify doubtful loans and advances.

b. Discuss reasons with management if not included in the provision.
4. Assessing Bad Loans/Advances Write-offs:
a. Evaluate write-offs of bad loans and advances.
b. Prepare schedule showing movements in Bad Loans/Advances – Provision
Accounts and written-off loans/advances.
5. Approval for Write-offs or Reductions: Confirm write-offs or reductions have senior
authority approval.
6. Restatement of Foreign Currency Loans and Advances: Ensure proper restatement per
AS 11.
Disclosure for Loans and Advances

Self Practice
11. Provisions and Contingent Liabilities

A provision is a liability which can be measured only by using a substantial degree of estimation.
A provision is recognised when:
1. An entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
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3. A reliable estimate can be made of the amount of the obligation.
If the above conditions are not met, no provision is recognised.
A contingent liability is:
1. A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
2. A present obligation that arises from past events but is not recognized because:
a. It is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
b. The amount of the obligation cannot be measured with sufficient reliability.
Audit of Existence, Completeness and Valuation Assertion

1. Provision List Comparison:
a. Obtain a list of all provisions.
b. Compare the list with ledger balances.

2. Inspection of Underlying Agreements:
a. Inspect agreements (e.g., customer agreements) to understand warranty
commitments and legal claims.
b. Obtain underlying workings and basis for each provision from management.
3. Verification of Accuracy and Completeness:
a. Verify the completeness and accuracy of provided information.
b. Assess if the provided workings are complete and accurate.
4. Obtaining Expert Reports:
a. Obtain expert reports, calculations, and workings for provision amounts.
b. For complex matters like warranty calculations, request actuarial valuation
reports.
5. Verification of Expert Assumptions:
a. Verify assumptions used by experts.
b. Ensure consistency of expert assumptions with data provided by management.
6. Compliance with SA 500 – Audit Evidence:
a. Evaluate expert competence, capabilities, and objectivity.
b. Assess the independence of the expert.
c. Consider the auditor’s past experience with the expert.
7. Understanding of Expert’s Work:
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a. Understand the nature of the expert’s work.

b. Evaluate the auditor’s expertise to assess the expert’s work.
c. Assess assumptions and methods used by the management.
8. Evaluation of Expert’s Work Appropriateness:
a. Evaluate the appropriateness of the expert’s work as audit evidence.
b. Assess relevance, reasonableness, and completeness of the expert’s findings.
c. Evaluate the relevance, completeness, and accuracy of source data used by the
expert.
9. Obtaining Written Representation:
a. Obtain written representation from management.
b. Confirm that all required provisions have been made according to recognized
accounting principles.
12. Sales of Product and Services

Audit for Occurrence Assertion + Revenue Overstated/Understated:

1. Ensure revenue is not overstated by performing following audit procedures:
a. Check whether a single sales invoice is recorded twice or a cancelled sales invoice
could also be recorded.
b. Test check few invoices with their relevant entries in sales journal.
c. Obtain confirmation from few customers to ensure genuineness of sales
transaction
d. Whether any fictitious customers and sales have been recorded.
e. Whether any shipments were done without the consent and agreement of the
customer, especially at the year end to inflate the sales figure
f. Whether unearned revenue recorded as earned.
g. Whether any substantial uncertainty exists about collectability.
h. Whether customer obligations are contingent on other actions (financing, resale,
etc.).
2. Verification of Shipments:
a. Ensure shipments align with customer consent and agreements.
b. Pay attention to year-end shipments that may inflate sales figures.
3. Recognition of Revenue:
a. Verify the proper recognition of revenue, avoiding unearned revenue recorded as
earned.
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b. Address any substantial uncertainty regarding collectability.
4. Customer Obligations: Examine customer obligations for dependencies on other actions
(e.g., financing, resale).
5. Review of Sales Invoices:
a. Review the sequence of sales invoices for consistency and completeness.
b. Scrutinize journal entries for any unusual transactions.
6. Ratio Analysis: Calculate the sales return to sales ratio and compare the ratio with the
previous year and inquire about any significant changes.
7. Verification of Sales Returns: Verify sales returns against related documents such as sales
invoices, challans, credit notes, and stock registers.
Audit for Completeness Assertion + Revenue Overstated/Understated:

1. Cut-Off Procedures for Revenue Recognition:
a. Ensure accurate recognition of revenues in the current accounting period.
b. Verify that sales were not manipulated towards the end of the period.

2. Identification of Cut-Off Errors:
a. Recognize potential cut-off errors where revenue is based on invoice generation
date rather than the transfer of risks and rewards.
b. Tailor cut-off tests to address specific engagement cut-off error risks.
3. Verification of Credit Notes:
a. Confirm the issuance of credit notes after the accounting period.
b. Guard against fictitious sales made before year-end to meet targets and
subsequently canceled with post-year-end credit notes.
4. Tracing from Shipping Documents: Trace information from shipping documents to the
sales journal.
5. Quantity Verification:
a. Check the appearance of quantities in the sales register.
b. Reconcile total sales/goods dispatched per stock records, financial records, and
statutory records like GST.
6. Review of GST Records:
a. Examine GST tax and returns, reconciling them with revenue reported in the
profit and loss account.
b. Assess reasonability of GST by applying the applicable rate to gross sales value.
c. Analyze variations between GST amounts in statutory returns and those in
financial records, identifying and understanding reasons for any discrepancies.
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Audit for Accuracy Assertion

1. Transaction Tracing:
a. Examine selected transactions from initiation to conclusion (Examination in
depth).
b. For instance, take several sales transactions and scrutinize every underlying
document from the receipt of the sales order to the payment of receivable
balances.
c. Ensure proper recording at each stage, accurate measurement, and adherence to
the entity’s revenue recognition policy, including incentives and discounts.
2. Export Sales Compliance: Ensure compliance with AS 11 (Accounting Standard 11) if the
client is involved in export sales.
3. Understanding Operations and GAAP Issues:
a. Gain a comprehensive understanding of the client’s operations.
b. Address relevant GAAP (Generally Accepted Accounting Principles) issues, such
as revenue recognition policies, especially in cases of point of sale revenue
recognition versus percentage of completion where applicable.
4. Review of Related Party Sales:

a. Compare the rate of sales involving related parties.
b. Scrutinize related party transactions for collectability.
c. Confirm proper authorization of transactions and assess whether the value of
such transactions is reasonable and at arm’s length.
Disclosure for Revenue from Operations
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Self Practice

13. Other Income
Fixed Deposits:
1. Obtain a listing of fixed deposits opened during the period under audit along with the
applicable interest rate and the number of days for which the deposit was outstanding
during the period.
2. Verify the arithmetical accuracy of the interest calculation made by the entity by
recomputing i.e. multiplying the deposit amount with the applicable rate and number of
days during the period under audit.
3. For deposits still outstanding as at the period- end, trace the same to the direct confirmations
obtained from the respective bank/ financial institution.
4. Obtain a confirmation of interest income from the bank and verify that the interest
income as per bank reconciles to the calculation shared by the entity.
5. Also, obtain a copy of Form 26AS (TDS withholding by the bank/ financial institution) and
reconcile the interest reflected therein to the calculation shared by client.
Dividend
1. Verify that the same are recognised in the statement of profit and loss only when the
entity’s right to receive payment of the dividend is established.
2. Verify that Gain/(loss) on sale of investment in mutual funds is recorded as other income
only on:
a. Transfer of title from the entity AND
b. Is determined as the difference between the redemption price and carrying value
of the investments.
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3. For the purpose, obtain the mutual fund statement and trace the gain / loss as recorded in
the books of account to the gain/ loss as reflected in the statement.
Disclosure for Other Income

Self Practice
14. Purchases
Test of Controls for Purchases
1. Identify control points in the purchase cycle, such as segregation of duties, competitive
quotes, purchase committee authorization, goods receipt process, quality checks, invoice
approval, and purchase recognition in the system.
2. Test the effectiveness of controls in the purchase cycle.
3. Effective controls can reduce the need for extensive substantive testing.
4. Common controls include:
a. Competitive quotations,
b. Numbered purchase orders,
c. Authorization limits,
d. GRN generation,
e. Quality inspection,
f. 2-way/3-way matching, and
g. Purchase invoice authorization.
Audit for Occurrence Assertion + Purchase Not Understated:

1. Review vendor selection process to detect fictitious vendors.
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2. Perform procedures to ensure the existence of vendors.
3. Verify goods receipt at the factory gate.
4. Check entry in the security gate inward register.
5. Confirm whether quality inspection of goods was conducted.
6. Check if a goods receipt note (GRN) was prepared and signed by appropriate personnel.
7. Verify approval of purchase invoice based on delegation of authority.
8. Confirm if a 2 or 3-way match process was conducted.
9. Ensure the stock record has been updated by the stores personnel.
10. Verify purchase invoices as the “Original” copy.
11. Confirm purchase invoices were booked only when risk and reward of ownership were
transferred.
12. Check that purchase invoices are in the name of the entity or the appropriate branch.
13. Verify input tax component by comparing it with tax returns filed with authorities.

14. For purchases from related parties, confirm board approval and assess prices for arm’s
length compliance.
15. Use professional judgment to determine whether purchases should be capitalized or
expensed in the Profit and Loss statement.
16. Review journal entries for any unusual transactions.
Audit for Completeness + Accuracy Assertion:

Cut-off Testing:
1. Perform a cut-off test to ensure accurate recognition of purchases in the correct accounting
period.
2. Examine material inward records, especially the last 5 transactions at the period end
3. Verify that all corresponding invoices are entered in the Purchases book and none are
omitted.
Goods in Transit:
Ensure the correct accounting treatment of goods-in-transit based on agreed terms with the
vendor regarding the transfer of risk and reward of ownership.
Written Representation:
Obtain written representation from mgmt confirming the proper recording of all purchases
throughout the year.
Analytical Procedures:
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Conduct analytical procedures to assess the overall reasonableness of purchase

quantity and price.
Consumption Analysis:
1. Scrutinize raw material consumed as per the manufacturing account.
2. Compare with previous years, considering closing stock, and inquire about significant
variations.
Stock Composition Analysis:
1. Collect reports on the composition of stock, such as raw materials as a percentage of total
stock.
2. Compare with the previous year and inquire about significant variations.
Ratios Analysis:
Compare creditors turnover ratios and stock turnover ratios of the current year with previous
years.
Quantitative Reconciliation:
Review quantitative reconciliation of closing stocks with opening stock, purchases, and
consumption.
Disclosure for Purchase:

1. Whether purchases of stock-in-trade have been specifically disclosed.
2. Whether changes in inventories of finished goods, stock–in-trade and work- in-progress
have been specifically disclosed.
3. Whether the transactions with related parties are appropriately disclosed in notes to
accounts.
15. Employee Benefit Expenses

Employee Attendance Process:
1. Understand the entity’s process for capturing employee attendance to mitigate the risk of
recording expenses for fictitious employees.
2. Conduct in-person meetings with employees on a sample basis.
3. Select a sample of employees and request the payroll department to share their bank
details/identity proofs.
Employee List and Movement:
Obtain a list of employees as of the period-end with a monthly movement split between new
hires, leavers, and continuing employees.
New Hires Verification:
For a randomly selected sample of new hires, obtain appointment letters and verify whether
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the salary for the first month and subsequent months was processed as per agreed terms.
Resigned Employees Verification:
1. For a randomly selected sample of resigned employees, obtain their full and final
computation.
2. Verify payment of all dues, including post-retirement benefits, and ensure acknowledgment
on the final computation is obtained.
Monthly Salary Registers:
1. Obtain monthly salary registers for all 12 months.
2. Compile a monthly payroll reasonability by calculating the average salary per employee
per month.
3. Compare with the previous year and preceding month and analyze variances attributable
to factors like annual increments, senior-level employees joining/leaving, bonus payouts,
etc.
Accruals for Employee Benefits:
Verify if accruals/provisions have been made for all employee benefits and obligations such as

bonus, gratuity, leave encashment, etc.
PF and ESI Verification:
1. If PF and ESI are applicable, compile a reasonability by applying the rate to basic wages
and comparing it with the recorded amount in books.
2. Obtain monthly deposit challans to verify timely deposit with authorities.
Analytical Procedures - Employee Benefit Expenses:
1. Perform analytical procedures to assess the overall reasonableness of employee benefit
expenses.
2. Include production per employee analysis, comparing units produced per employee with
previous years and industry trends. Inquire about significant variations.
Disclosure for Employee Benefit Expense

Employee Benefits Expense [showing separately]
1. Salaries and wages,
2. Contribution to provident and other funds,
3. Expense on Employee Stock Option
4. Scheme (ESOP) and Employee Stock Purchase Plan (ESPP),
5. Staff welfare expenses].
16. Depreciation and Amortisation

Understanding Depreciation and Amortization Process:
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Obtain an understanding of the entity’s process of charging depreciation and amortization.

Fixed Asset Register Verification:
1. Obtain the fixed asset register maintained by the entity.
2. Check the nature of assets from the register to prevent capitalization of expenses of
revenue nature or direct inclusion of capital expenditure in the income and expense
statement.
3. Physically verify material fixed assets to mitigate the risk of fake assets being capitalized.
4. Obtain a list of all additions/deletions with proper approval from authorized personnel.
Sample Verification from Fixed Assets Register:
1. Select a sample of assets from the Fixed Assets Register based on materiality considerations.
2. Verify rates of depreciation and depreciation calculations.
3. Obtain a list of all components identified by mgmt.
4. Ensure proper amortization of intangible assets like patents, goodwill, copyrights.
5. Verify that depreciation is charged from the date the asset is ready to use, not from the
date of actual usage.

6. Check proper accounting of depreciation on revalued amounts.
Depreciation Computation Verification:
1. Verify additions against the Companies Act and reconcile with the opening WDV to the
Tax audit schedule for the preceding assessment year.
2. Perform analytical procedures to assess overall reasonableness of depreciation and
amortization expenses.
3. Recompute the depreciation expense for the year.
4. Ensure charges align with the useful lives of Property, Plant, and Equipment (PPE) and
intangible assets.
5. Verify residual values for accurate computation of depreciation.
6. Ensure prospective computation of depreciation and amortization with any change in
useful lives.
Arithmetical Accuracy and Independent Calculations:
1. Check the arithmetical accuracy of records.
2. Independently calculate depreciation to cross-verify.
3. Prospective Changes and Residual Values:
4. Ensure prospective computation for changes in useful lives.
5. Verify and validate residual values impacting depreciation computation.
Disclosure for Depreciation Expense
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1. Accounting policy for depreciation and amortization.
2. Useful lives of assets as per Schedule II to the Companies Act, 2013.
3. Residual value of assets.
4. Depreciation method.
17. Other Expense

Rent expense
1. Obtain a month wise expense schedule along with the rent agreements.
2. Verify if expense has been recorded for all 12 months and whether the rent amount is as
per the underlying agreement.
3. Specific consideration should be given to escalation clause in the agreement to verify
if the rent was required to be recorded on a straight-line basis during the period under
audit.
4. Also, verify if the agreement is in the name of the entity and whether the expense pertains
to premises used for running business operations of the entity.

Power and fuel expense
1. Obtain a month wise expense schedule along with the power bills.
2. Verify if expense has been recorded for all 12 months.
3. Also, compile a month wise summary of power units consumed and the applicable rate
and check the arithmetical accuracy of the bill raised on monthly basis.
4. In relation to the units consumed, analyse the monthly power units consumed by linking
it to units of finished goods produced and investigate reasons for variance in monthly
trends.
Insurance expense
1. Obtain a summary of insurance policies taken along with their validity period.
2. Verify whether the expense has been correctly classified between prepaid and expense
for the period based on number of days.
Legal and professional expenses

1. Obtain a month-wise and consultant-wise summary.
2. In case of monthly retainership agreements, verify whether the expenditure for all 12
months has been recorded correctly.
3. For non- recurring expenses, select a sample and vouch for the attributes discussed above.
4. The auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and the matter
may also not have been discussed/highlighted to the auditor for his specific consideration.
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Travel, repair and maintenance, printing and stationery, miscellaneous

expenses
1. The auditor should select a sample and vouch for the attributes discussed above
2. Wherever possible, the auditor should try to prepare a summary of expenditure on
monthly basis and then analytically compare the trends.
3. Perform analytical procedures to obtain audit evidence as to overall reasonableness of
other expense which may include expenditure per unit of production analysis.
4. Auditor should analyse expense per unit produced and compare the same with previous
years and present industry trends and ask for the reasons from the mgmt, if any significant
variations are found.
18. Other Disclosures

Details of Benami Property held
Where any proceedings have been initiated or pending against the company for holding any
benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the
rules made thereunder, the company shall disclose the following:
1. Details of such property, including year of acquisition,

2. Amount thereof,
3. Details of Beneficiaries,
4. If property is in the books, then reference to the item in the Balance Sheet,
5. If property is not in the books, then the fact shall be stated with reasons,
6. Where there are proceedings against the company under this law as an abetter of the
transaction or as the transferor then the details shall be provided,
7. Nature of proceedings, status of same and company‘s view on same.
Relationship with Struck off Companies

Where the company has any transactions with companies struck off under section 248 of the
Companies Act, 2013 or section 560 of Companies Act, 1956, the Company shall disclose the
following details:-
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Disclosure for Ratio
The company shall explain the items included in numerator and denominator for computing

the above ratios. Further explanation shall be provided for any change in the ratio by more
than 25% as compared to the preceding year.
1. Current Ratio,
2. Debt-Equity Ratio,
3. Debt Service Coverage Ratio,
4. Return on Equity Ratio,
5. Inventory turnover ratio,
6. Trade Receivables turnover ratio,
7. Trade payables turnover ratio,
8. Net capital turnover ratio,
9. Net profit ratio,
10. Return on Capital employed,
11. Return on investment.
Undisclosed income
The Company shall give details of any transaction not recorded in the books of accounts that
has been surrendered or disclosed as income during the year in the tax assessments under
the Income Tax Act, 1961 (such as, search or survey or any other relevant provisions of the
Income Tax Act, 1961), unless there is immunity for disclosure under any scheme and also
shall 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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Corporate Social Responsibility (CSR)

Where the company covered under section 135 of the companies act, the following shall be
disclosed with regard to CSR activities:-
1. Amount required to be spent by the company during the year,
2. Amount of expenditure incurred,
3. Shortfall at the end of the year,
4. Total of previous years shortfall,
5. Reason for shortfall,
6. Nature of CSR activities,
7. 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,
8. 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 should be shown separately.
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:-
1. Profit or loss on transactions involving Crypto currency or Virtual Currency
2. Amount of currency held as at the reporting date,
3. Deposits or advances from any person for the purpose of trading or investing in Crypto
Currency/ virtual currency.
SA 230
The objective of the auditor is to prepare documentation that provides:
4. A sufficient and appropriate record of the basis for the auditor’s report; and
5. Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements
2. What is Audit documentation (Working Papers) ?

Audit documentation refers to the record of:
a. Audit procedures performed,
b. Relevant audit evidence obtained, and
c. Conclusions the auditor reached.
(Terms such as “working papers” or “work papers” are also sometimes used in reference to
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audit documentation)
Examples of audit documentation:

1. Overall Audit Strategy
2. Audit plan
3. Issues memorandum
4. Summaries of significant matters.
5. Letters of confirmation and representation
6. Checklists
7. Correspondence (including e-mail) concerning significant matters
8. Memo on accounting and auditing matters
Benefit of audit documentation

Audit documentation provides:

a. Evidence of the auditor’s basis for conclusion on their report.
b. Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
3. Purpose/Importance of Audit documentation

The following are the purpose of Audit documentation:
1. Assists the engagement team to plan and perform the audit.
2. Assists members of the engagement team responsible for supervision to direct, supervise
and review the audit work
3. Enables the engagement team to be accountable for its work.
4. Retains a record of matters of continuing significance to future audits.
5. Enables the quality control reviews and inspections to be performed.
6. Enables the external quality inspections to be performed
4. Form content and extent of audit documentation

Documentation should be sufficient to enable an experienced auditor, with no previous
connection to the audit, to understand:
1. The nature, timing and extent of audit procedures performed.
a. The identifying characteristics of the specific items or matters tested;
b. Who performed the audit work and the date such work was completed; and
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c. Who reviewed the audit and extent of such review

2. The results of the procedures performed and the evidence obtained.
3. The significant matters arising during the course of the audit and the conclusions reached
thereon, and significant professional judgments made in reaching those conclusions.
The form, content and extent of audit documentation depend on factors such
as:
1. Size and complexity of the entity. (Reliance vs Binod Bhai & Co.)
2. Identified risks of material misstatement. (High vs Low)
3. Nature of the audit procedures to be performed. (Substantive vs TOC)
4. Significance of the audit evidence obtained.
5. Nature and extent of exceptions identified. (Misstatement)
6. Audit methodology and tools used.
7. Need to document a conclusion or the basis for a conclusion that isn’t clear from the audit
evidence or from the documentation of the work performed.
5. Documentation of Significant matters and Judgements

The auditor shall prepare audit documentation that is sufficient to enable an experienced
auditor to understand significant matters arising during the audit.
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Examples of significant matters include:

1. Matters that give rise to significant risks. (As per SA 315)
2. Results of audit procedures indicating
a. That the FS could be materially misstated, or
b. The auditor needs to change their previous assessment of the risks of material
misstatement FS and response to those risks
3. If the auditor faces challenges while performing necessary audit procedures or
4. If they find something that could change the audit opinion or require them to add an
Emphasis of Matter Paragraph in the auditor’s report, then it is significant.
Example of circumstances in which it is appropriate to prepare audit

documentation relating to the use of professional judgment:
1. When a requirement states that the auditor “shall consider” certain information or
factors, the auditor must provide the reasoning for their conclusion, particularly if it is
significant for the engagement.
2. The auditor must provide the basis for their conclusion on the reasonableness of areas of
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subjective judgments made by mgmt, such as significant accounting estimates.
3. If the auditor conducts further investigation to confirm the authenticity of a document due
to identified conditions during the audit, they must provide the basis for their conclusion
on the authenticity of the document, including the use of experts or confirmation
procedures.
6. Completion Memorandum (Audit Summary)

The auditor may consider it helpful to prepare and retain as part of the audit documentation
a summary (sometimes known as a completion memorandum) that describes:
a. The significant matters identified during the audit and
b. How they were addressed.
Such summary can aid in reviewing and inspecting audit documentation, specially useful for
large and complex audits
Preparing a summary can help the auditor focus on significant matters
The summary can help identify whether any SA objective cannot be achieved, which would

prevent achieving overall audit objectives
7. Audit File
Audit file may be defined as one or more folders or other storage media, in physical or
electronic form, containing the records that comprise the audit documentation for a specific
engagement.
8. Assembly of Audit file

1. SQC 1 requires firms to establish policies and procedures for the timely completion of the
assembly of audit files.
2. The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date
of the auditor’s report.
3. An appropriate time limit within which to complete the assembly of the final audit file is
ordinarily not more than 60 days after the date of the auditor’s report.
4. The completion of the assembly of the final audit file after the date of the auditor’s
report is an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions. Changes may, however, be made to the
audit documentation during the final assembly process, if they are administrative in
nature.
5. Examples of such changes include
a. Deleting or discarding superseded documentation.
b. Sorting, collating and cross-referencing working papers.
c. Signing off on completion checklists relating to the file assembly process.
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d. Documenting audit evidence that the auditor has obtained, discussed and agreed
with the relevant members of the engagement team before the date of the auditor’s
report.
6. After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period.
7. SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than
7 years from the date of the auditor’s report, or, if later, the date of the group auditor’s
report
9. Ownership of Audit documentation

1. Standard on Quality Control (SQC) 1 provides that, unless otherwise specified by law or
regulation, audit documentation is the property of the auditor.
2. He may at his discretion, make available portions of, or extracts from, audit documentation
to clients, provided such disclosure does not undermine the validity of the work performed,
or, in the case of assurance engagements, the independence of the auditor
SA 260
The objectives of the auditor are:
1. To communicate clearly with TCWG the responsibilities of the auditor in relation to the
FS audit, and an overview of the planned scope and timing of the audit;
2. To obtain from TCWG information relevant to the audit
3. To provide TCWG with timely observations arising from the audit that are significant and
relevant to their responsibility to oversee the financial reporting process and
4. To promote effective two-way communication between the auditor and TCWG.
2. Who are “TCWG”?

1. Individuals or organizations responsible for overseeing the entity’s strategic direction
and accountability.
2. Includes responsibilities for financial reporting oversight.
3. Mgmt structures differ based on cultural, legal, size, and ownership factors.
4. TCWG may include mgmt personnel or be distinct from them.
5. SA 315 guides the auditor in understanding an entity’s governance structure.
6. Identifying appropriate communication recipients depends on the matter being
communicated.
7. In cases where legal frameworks or engagement circumstances don’t clearly define
communication recipients, discussion with the engaging party is needed.
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3. Significance of communication with TCWG
Communication from auditor is important with TCWG. An effective two-way communication
is important in assisting:
1. The auditor and TCWG in understanding matters related to the audit in context, and in
developing a constructive working relationship. This relationship is developed while
maintaining the auditor’s independence and objectivity
2. The auditor in obtaining from TCWG information relevant to the audit. For example,
TCWG may assist the auditor in understanding the entity and its environment etc.
3. TCWG in fulfilling their responsibility to oversee the financial reporting process, thereby
reducing the risks of material misstatement of the FS.
4. Matters to be communicated by auditor

Following matters are required to be communicated by auditor with TCWG:
1. The auditor’s responsibilities in relation to the FS audit
2. Planned scope and timing of the audit

3. Significant findings from the audit
The auditor’s responsibilities in relation to the FS audit:

The auditor shall communicate with TCWG the responsibilities of the auditor in relation to
the FS audit, including that:
1. The auditor is responsible for forming and expressing an opinion on the FS that have
been prepared by mgmt with the oversight of TCWG and
2. The audit of the FS does not relieve management or TCWG of their responsibilities.
Planned scope and timing of the audit:

The auditor shall communicate with TCWG an overview of the planned scope and timing of
the audit, which includes communicating about the significant risks identified by the auditor.
Significant findings from the audit

The auditor shall communicate with TCWG:
1. The auditor’s views about significant qualitative aspects of the entity’s accounting
practices, including accounting policies, accounting estimates and FS disclosures.
When applicable, the auditor shall explain to TCWG why the auditor considers a
significant accounting practice, that is acceptable under the applicable financial reporting
framework, not to be most appropriate to the particular circumstances of the entity
2. Significant difficulties, if any, encountered during the audit
3. Significant matters arising during the audit that were discussed, or subject to
correspondence, with mgmt
4. Written representations the auditor is requesting
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5. Circumstances that affect the form and content of the auditor’s report, if any and
6. Any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of the financial reporting process.
5. Communication in case of Listed Entities

In the case of listed entities, the auditor shall communicate with TCWG:
1. A statement that the engagement team and others in the firm as appropriate, the firm
and, when applicable, network firms have complied with relevant ethical requirements
regarding independence.
2. The auditor considers and evaluates all relationships and other factors between the
auditing firm, network firms, and the entity under audit, which, in their professional
judgment, could reasonably be perceived to influence or impact independence.
3. This shall include total fees charged during the period covered by the FS for audit and
non-audit services provided by the firm and network firms to the entity and components
controlled by the entity.
4. These fees shall be allocated to categories that are appropriate to assist TCWG in assessing
the effect of services on the independence of the auditor and
5. The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
6. The Communication Process

1. The auditor shall communicate with TCWG the form, timing and expected general content
of communications.
2. The auditor shall communicate in writing with TCWG regarding significant findings from
the audit if, in the auditor’s professional judgment, oral communication would not be
adequate
3. Written communications need not include all matters that arose during the course of the
audit.
4. The auditor shall communicate in writing with TCWG regarding auditor independence
when required in case of listed entities.
5. The auditor shall communicate with TCWG on a timely basis.
7. Adequacy of the communication process

The auditor shall evaluate whether the two-way communication between the auditor and
TCWG has been adequate for the purpose of the audit. If it has not, the auditor shall evaluate
the effect, if any, on the auditor’s assessment of the risks of material misstatement and ability
to obtain sufficient appropriate audit evidence, and shall take appropriate action.
8. Documentation
1. Where matters required by SA 260 to be communicated are communicated orally, the
auditor shall include them in the audit documentation, and when and to whom they
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were communicated.
2. Where matters have been communicated in writing, the auditor shall retain a copy of
the communication as part of the audit documentation.
SA 265
The objective of the auditor is to communicate appropriately to TCWG and mgmt deficiencies
in internal control that the auditor has identified during the audit and that, in the auditor’s
professional judgment, are of sufficient importance to merit their respective attentions.
2. Meaning of Deficiency & Significant Deficiency

Deficiency:
This exists when:
3. A control is designed, implemented or operated in such a way that it is unable to prevent,
or detect and correct, misstatements in the FS on a timely basis or

4. A control necessary to prevent, or detect and correct, misstatements in the FS on a timely
basis is missing.
Significant deficiency in internal control:

A deficiency or combination of deficiencies in internal control that, in the auditor’s professional
judgment, is of sufficient importance to merit the attention of TCWG.
The significance of a deficiency or a combination of deficiencies in internal control depends
not only on whether a misstatement has actually occurred, but also on the likelihood that
a misstatement could occur and the potential magnitude of the misstatement. Significant
deficiencies may, therefore, exist even though the auditor has not identified misstatements
during the audit.
3. Examples of Matters
Examples of matters that the auditor may consider in determining whether
a deficiency or combination of deficiencies in internal control constitutes a
significant deficiency:
1. The importance of the controls to the financial reporting process, for example:
a. General monitoring controls (such as oversight of management).
b. Controls over the prevention and detection of fraud.
c. Controls over the selection and application of significant accounting policies.
d. Controls over significant transactions with related parties.
e. Controls over significant transactions outside the entity’s normal course of
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business.
f. Controls over the period-end financial reporting process (such as controls over
non-recurring journal entries).
2. The cause and frequency of the exceptions detected as a result of the deficiencies in the
controls.
3. The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
4. The subjectivity and complexity of determining estimated amounts, such as fair value
accounting estimates.
5. The susceptibility to loss or fraud of the related asset or liability
4. Examples of Indicators
Examples of Indicators of Significant Deficiency:
1. Absence of a risk assessment process within the entity where such a process would
ordinarily be expected to have been established.
2. Evidence of an ineffective entity risk assessment process, such as mgmt’s failure to

identify a risk of material misstatement that the auditor would expect the entity’s risk
assessment process to have identified.
3. Evidence of an ineffective response to identified significant risks (e.g., absence of controls
over such a risk).
4. Misstatements detected by the auditor’s procedures that were not prevented, or detected
and corrected, by the entity’s internal control.
5. Disclosure of a material misstatement due to error or fraud as prior period items in the
current year’s Statement of Profit and Loss.
6. Evidence of management’s inability to oversee the preparation of the FS.
7. Evidence of ineffective aspects of the control environment, such as:
a. Indication of significant transactions in which management is financially
interested are not being appropriately scrutinised by TCWG.
b. Identification of management fraud, whether or not material, that was not
prevented by the entity’s internal control.
c. Management’s failure to implement appropriate remedial action on significant
deficiencies previously communicated.
5. Communication of Significant deficiencies

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

The auditor shall include in the written communication of significant deficiencies in internal
control:
1. A description of the deficiencies and an explanation of their potential effects; and
2. Sufficient information to enable TCWG and mgmt to understand the context of the
communication.
In particular, the auditor shall explain that:

1. The purpose of the audit was for the auditor to express an opinion on the FS

2. The audit included consideration of internal control relevant to the preparation of the FS
in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of internal control; and
3. The matters being reported are limited to those deficiencies that the auditor has identified
during the audit and that the auditor has concluded are of sufficient importance to merit
being reported to TCWG.
SA 560
1. Meaning of Subsequent events
Events occurring between the date of the FS and the date of the auditor’s report, and facts that
become known to the auditor after the date of the auditor’s report.
For example: if a company prepares FS for the period ending 31 March, 2023, and the auditor
issued an unqualified opinion on May 15, 2023, any events or facts that occurred between 31
March, 2023, and May 15, 2023, would be considered subsequent events.
FS may be affected by certain events that occur after the date of the FS. Many financial
reporting frameworks specifically refer to such events. Such financial reporting frameworks
ordinarily identify two types of events:
4. Those that provide evidence of conditions that existed at the date of the FS and
5. Those that provide evidence of conditions that arose after the date of the FS.
Examples of events providing evidence of conditions that existed at the date of the FS
Declaration of insolvency of a major debtor of the entity between the date of FS and the date
of auditor’s report providing evidence on the recoverability of the money due from debtor as
on date of the FS.
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Examples of events providing evidence of conditions that arose after the date of the FS
1. Issue of new share capital.
2. Planned merger of the company.
3. Destruction of substantial inventories due to fire between the date of the FS and the date
of auditor’s report.
1. Obtain sufficient appropriate audit evidence about whether events occurring between the
date of the FS and the date of the auditor’s report, that require adjustment or disclosure are
appropriately reflected in accordance with the applicable financial reporting framework.
2. Respond appropriately to facts that become known to the auditor after the date of the
auditor’s report, that, had they been known to the auditor at that date, may have caused
the auditor to amend the auditor’s report.
3. Audit procedures for Subsequent events

The auditor shall take into account the auditor’s risk assessment which shall include:
1. Obtaining an understanding of any procedures management has established to ensure

that subsequent events are identified.
2. Inquiring of management and, where appropriate, TCWG as to whether any subsequent
events have occurred which might affect the FS.
3. Reading minutes, if any, of the meetings, of the entity’s owners, mgmt and TCWG, that
have been held after the date of the FS and inquiring about matters discussed at any such
meetings for which minutes are not yet available.
4. Reading the entity’s latest subsequent interim FS, if any
4. Fact known After Date of Audit Report but Before Date of Issue of FS
1. Discuss the matter with management and, where appropriate, TCWG.
2. Determine whether the FS need amendment and, if so,
3. Inquire how mgmt intends to address the matter in the FS.
If management amends the FS, the auditor shall:

1. Carry out the audit procedures necessary in the circumstances on the amendment.
2. Unless the circumstances in succeeding para apply:
a. Extend the audit procedures, already referred, to the date of the new auditor’s
report and
b. Provide a new auditor’s report on the amended FS.
The new auditor’s report shall not be dated earlier than the date of approval of the amended
FS.
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If the rules don’t prohibit mgmt from changing the FS only for recent events, and those
approving the statements agree, auditors can focus their checks on those specific changes. In
such case that auditor shall either:
1. Amend the auditor’s report to include an additional date restricted to that amendment
that thereby indicates that the auditor’s procedures on subsequent events are restricted
solely to the amendment of the FS described in the relevant note to the FS or
2. Provide a new or amended auditor’s report that includes a statement in an Emphasis of
Matter paragraph or Other Matter(s) paragraph that conveys that auditor’s procedures on
subsequent events are restricted solely to the amendment of the FS as described in the
relevant note to the FS.
If management does not amends the FS, the auditor shall:

1. If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by SA 705 and then provide the auditor’s report or
2. If the auditor’s report has already been provided to the entity, the auditor shall notify
mgmt and, unless all of TCWG are involved in managing the entity, TCWG, not to issue
the FS to third parties before the necessary amendments have been made. If the FS are
nevertheless subsequently issued without the necessary amendments, the auditor shall

take appropriate action, to seek to prevent reliance on the auditor’s report.
5. Fact known After Date of Issue of FS

The auditor has no obligation to perform any audit procedures regarding the FS after the
date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the FS are issued, a
fact becomes known to the auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall:
1. Discuss the matter with management and, where appropriate, TCWG.
2. Determine whether the FS need amendment and, if so,
3. Inquire how management intends to address the matter in the FS.
Same procedure as above plus:

1. Carry out the audit procedures necessary in the circumstances on the amendment.
2. Review the steps taken by mgmt to ensure that anyone in receipt of the previously issued
FS together with the auditor’s report thereon is informed of the situation.
6. Refusal of Management to Amend

When mgmt does not amend the FS in circumstances where the auditor believes they need to
be amended, then:
1. If the auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by SA 705 and then provide the auditor’s report or
2. If the auditor’s report has already been provided to the entity, the auditor shall notify
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mgmt and, unless all of TCWG are involved in managing the entity.
3. If, despite such notification, mgmt or TCWG do not take these necessary steps, the auditor
shall take appropriate action to seek to prevent reliance on the audit report.
SA 570
1. Meaning of Going Concern
Under the going concern basis of accounting, the FS are prepared on the assumption that the
entity is a going concern and will continue its operations for the foreseeable future.
General purpose FS are prepared using the going concern basis of accounting, unless mgmt
either:
1. Intends to liquidate the entity or to cease operations, or
2. Has no realistic alternative but to do so.
2. Management’s Responsibility for Assessment of Going Concern

Mgmt’s assessment of the entity’s ability to continue as a going concern involves making a
judgment, at a particular point in time, about inherently uncertain future outcomes of events
or conditions.
The following factors are relevant to that judgment:
1. Uncertainty Increases with Time: The further into the future an event occurs, the more
uncertain its outcome becomes.
2. Entity Size and External Factors Matter: The size, complexity, and external influences on
a business affect predictions about future events or conditions.
3. Judgment Based on Current Information: Predictions about the future are made using
available information at that time. Subsequent events may change these predictions, even
if they were reasonable at the time they were made.
The objectives of the auditor are:
1. To obtain sufficient appropriate audit evidence regarding and conclude on the
appropriateness of mgmt’s use of the going concern basis of accounting in the preparation
of the FS; The auditor’s responsibilities in the audit of FS relating to going concern and
2. To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and
3. To report in accordance with this SA.
4. Risk Assessment Procedures

When assessing risks as per auditing standards, auditors check if there are events or conditions
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that might seriously question the company’s ability to survive. They also see if the mgmt has
already assessed this.
The auditor shall remain alert throughout the audit for audit evidence of events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern.
A. Assessment Already Performed by Management:

1. If mgmt has assessed the company’s ability to continue, the auditor talks to mgmt.
2. Auditor inquire if any events or conditions raise serious concerns about the company’s
survival.
3. If issues are found, the auditor discusses how mgmt plans to handle them.
B. Assessment Not Yet Done by Management:

1. If mgmt hasn’t assessed yet, the auditor discusses why the company plans to continue.
2. Auditor inquire if there are any events or conditions that might threaten the company’s
survival.
The auditor shall remain alert throughout the audit for audit evidence of events or conditions

that may cast significant doubt on the entity’s ability to continue as a going concern.
5. Example of events that may impact Going Concern

Financial
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
3. Indications of withdrawal of financial support by creditors.
4. Negative operating cash flows indicated by historical or prospective FS.
5. Adverse key financial ratios
6. Arrears or discontinuance of dividends
7. Inability to pay creditors on due dates
8. Inability to comply with the terms of loan agreements
9. Change from credit to cash-on-delivery transactions with suppliers
Operating
1. Mgmt intentions to liquidate the entity or to cease operations.
2. Loss of key mgmt without replacement.
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
4. Labour difficulties.
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5. Shortages of important supplies.

6. Emergence of a highly successful competitor.
Others:
1. Non-compliance with capital or other statutory or regulatory requirements, such as
solvency or liquidity requirements for financial institutions.
2. Pending legal or regulatory proceedings against the entity that may, if successful, result
in claims that the entity is unlikely to be able to satisfy.
3. Changes in law or regulation or government policy expected to adversely affect the entity.
4. Uninsured or under insured catastrophes when they occur.
6. Evaluating Managements Assessment

The auditor shall evaluate mgmt’s assessment of the entity’s ability to continue as a going
concern. Mgmt’s assessment of the entity’s ability to continue as a going concern is a key part
of the auditor’s consideration of mgmt’s use of the going concern basis of accounting.
It is not the auditor’s responsibility to rectify the lack of analysis by mgmt. In some
circumstances, however, the lack of detailed analysis by mgmt to support its assessment may
not prevent the auditor from concluding whether mgmt’s use of the going concern basis of
accounting is appropriate in the circumstances.
For example, when there is a history of profitable operations and a ready access to financial
resources, mgmt may make its assessment without detailed analysis. In this case, the auditor’s
evaluation of the appropriateness of mgmt’s assessment may be made without performing
detailed evaluation procedures if the auditor’s other audit procedures are sufficient to enable
the auditor to conclude whether mgmt’s use of the going concern basis of accounting in the
preparation of the FS is appropriate in the circumstances.
In other circumstances, evaluating mgmt’s assessment of the entity’s ability to continue
as a going concern, may include an evaluation of the process mgmt followed to make its
assessment, the assumptions on which the assessment is based and mgmt’s plans for future
action and whether mgmt’s plans are feasible in the circumstances.
In evaluating mgmt’s assessment of the entity’s ability to continue as a going concern, the
auditor shall cover the same period as that used by mgmt to make its assessment as required
by the applicable financial reporting framework, or by law or regulation if it specifies a longer
period. If mgmt’s assessment of the entity’s ability to continue as a going concern covers less
than twelve months from the date of the FS, the auditor shall request mgmt to extend its
assessment period to at least twelve months from that date.
7. Audit procedures : When Event or Conditions are Identified

If events or conditions have been identified that may cast significant doubt on the entity’s
ability to continue as a going concern.
The auditor shall obtain sufficient appropriate audit evidence to determine whether or not
a material uncertainty exists related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern through performing additional audit
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procedures, including consideration of mitigating factors.
These procedures shall include:
1. Inquire of mgmt about their assessment of the entity’s ability to continue as a going
concern.
2. Evaluate mgmt’s proposed future actions to mitigate going concern issues.
3. Analyse mgmt’s cash flow forecast in terms of mgmt’s plans for future action by
a. Evaluating the reliability of the underlying data of the forecast and
b. Determine if there is adequate support for the assumptions underlying the
forecast.
c. Consider whether any significant additional facts have occurred since the date of
the going concern assessment.
d. Request written representations from mgmt regarding their future action plans
and the feasibility of these plans.
Audit procedures that are relevant to the requirement as stated above may include the
following:

1. Analyzing and discussing cashflow
2. Analyzing and discussing the entity’s latest available interim financial statements.
3. Reading the terms of debentures and loan agreements and determining whether any have
been breached.
4. Reading minutes of the meetings of shareholders, TCWG and relevant committees
5. Inquiring of the entity’s legal counsel regarding the existence of litigation and claims
6. Evaluating the entity’s plans to deal with unfilled customer orders.
7. Confirming the existence, terms and adequacy of borrowing facilities
8. Obtaining and reviewing reports of regulatory actions
8. Implications for the auditor’s report

If the auditor concludes that mgmt’s use of the going concern basis of accounting is appropriate
in the circumstances but a material uncertainty exists, the auditor shall determine whether
the FS: -
1. Adequately disclose the principal events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern and mgmt’s plans to deal with these
events or conditions and
2. Disclose clearly that there is a material uncertainty related to events or conditions that
may cast significant doubt on the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business.
If events or conditions have been identified that may cast significant doubt on the entity’s
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ability to continue as a going concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of
the requirements of the applicable financial reporting framework, the FS provide adequate
disclosures about these events or conditions.
I. If use of Going concern basis of accounting is inappropriate

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

uncertainty exists
A. Adequate Disclosure of a Material Uncertainty is made in the FS
If adequate disclosure about the material uncertainty is made in the FS, the auditor shall
express an unmodified opinion and the auditor’s report shall include a separate section under
the heading “Material Uncertainty Related to Going Concern” to:
1. Draw attention to the note in the FS that discloses such matters.
2. 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.
B. Adequate Disclosure of a Material Uncertainty is Not Made in the FS
If adequate disclosure about the material uncertainty is not made in the FS, the auditor
shall:
1. Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA
705.
2. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that
a material uncertainty exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the FS do not adequately disclose this matter.
C. Management unwilling to make or extend its assessment
1. The auditor shall consider the implications for the auditor’s report.
2. In such a situation, a qualified opinion or a disclaimer of opinion in the auditor’s report
may be appropriate, because it may not be possible for the auditor to obtain sufficient
appropriate audit evidence regarding mgmt’s use of the going concern basis of accounting
in the preparation of the FS.
SA 580
1. Meaning of Written Representation
Written representations may be defined as a written statement by mgmt provided to the
auditor to confirm certain matters or to support other audit evidence.
Written representations in this context do not include FS, the assertions therein, or supporting
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books and records.
Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal.
Furthermore, the fact that mgmt has provided written representations does not affect the
nature or extent of other audit evidence that the auditor obtains.
Written Representations requires the auditor to obtain written representations from mgmt:
To obtain written representations

That they have fulfilled their responsibility for the preparation of the FS and completeness of
the information provided to the auditor
To support other evidence

To support other audit evidence relevant to the FS or specific assertions if deemed necessary
by the auditor or required by specific SAs.

To respond appropriately
To respond appropriately to written representations provided by mgmt or if mgmt does not
provide the written representations requested by the auditor.
3. Written representation is requested from ?

3. People who have responsibility for FS are asked to provide written confirmation.
4. Depending on who makes the FS, the request for written confirmation is usually sent to
the CEO, CFO, or similar positions.
5. Mgmt should have enough knowledge of the FS preparation process to provide written
confirmation, as they are responsible for making the statements and running the business.
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6. In some cases, mgmt used experts who have specialised knowledge,

7. Mgmt may use a qualifying language like: ‘representations are made to the best of its
knowledge and belief’, such wordings are reasonable to accept.
4. Written representation about management’s responsibility

Written representation about mgmt’s responsibilities involves confirmation of fulfilment of
mgmt’s responsibilities in following areas:
1. Preparation of the FS
2. Information provided and completeness of transactions
I. Preparation of FS
The auditor shall request mgmt to provide a written representation that it has fulfilled its
responsibility for the preparation of the FS.
The written representation requests mgmt to confirm that they have fulfilled their
responsibilities based on their previously agreed acknowledgment and understanding.
In some cases, however, mgmt may decide to make inquiries of others who participate in
preparing and presenting the FS and assertions therein, including individuals who have
specialized knowledge relating to the matters about which written representations are
requested. Such individuals may include:
a. An actuary responsible for actuarially determined accounting measurements.
b. Staff engineers who may have responsibility for and specialized knowledge about
environmental liability measurements.
c. Internal counsel who may provide information essential to provisions for legal
claims.
II. Information provided and completeness of transactions

The auditor shall request mgmt to provide a written representation that:
1. It has provided the auditor with all relevant information and access as agreed in the
terms of the audit engagement and
2. All transactions have been recorded and are reflected in the FS.
5. Why WR about management responsibilities are necessary?

Audit evidence obtained during the audit that mgmt has fulfilled its responsibilities regarding
preparation of FS and about information provided and completeness of transactions is not
sufficient without obtaining confirmation from mgmt that it believes that it has fulfilled those
responsibilities.
This is because the auditor is not able to judge solely on other audit evidence whether mgmt
has prepared and presented the FS and provided information to the auditor on the basis of
the agreed acknowledgement and understanding of its responsibilities.
The auditor may also ask for reconfirmation of these responsibilities. This is especially
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16. Reporting Procedures
Article 151 of the Indian Constitution enjoins that the C&AG shall report on the accounts of
the Union and of each of the States to the President or the Governor concern and the letter
shall cause the report to be laid before the legislatures.
A. Audit of NGO’s
1. Questions
1. What important points should an auditor keep in mind while checking receipt of income
of a Non-Governmental Organization (N.G.O.) ? (Nov 2010)
2. NGOs registered under the Companies Act, 2013 can maintain their books on either
accrual or cash basis. (May 2011)
3. What are the points on which an auditor should concentrate while planning audit of an
N.G.O. ? (May 2013)
4. As an Auditor of NGO, how do you check/ verify at least four receipts of income during’
the year ? (Jan 21)

5. While planning the audit of an NGO, the auditor may focus on Knowledge of the NGO’s
work, its mission and vision, Updating knowledge of relevant statutes especially with
regard to recent amendments, circulars etc. Explain the other relevant points the auditor
needs to focus while planning the audit of NGO. (Nov 21)
6. You have been appointed as an auditor of an NGO, briefly state the points on which you
would concentrate while planning the audit of such an organisation?
7. An NGO operating in Delhi had collected large scale donations for Tsunami victims. The
donations so collected were sent to different NGOs operating in Tamilnadu for relief
operations. This NGO operating in Delhi has appointed you to audit its accounts for
the year in which it collected and remitted donations for Tsunami victims. Draft audit
programme for audit of receipts of donations and remittance of the collected amount
to different NGOs. Mention six points each, peculiar to the situation, which you will like
to incorporate in your audit programme for audit of said receipts and remittances of
donations.
Registration
1. 1. If an NGO is established as a trust and involves immovable property valued at more
than one hundred rupees:
a. Compliance with Section 17(1) of the Registration Act, 1908 and Section 123 of the
Transfer of Property Act, 1882 is mandatory.
b. Registration of the trust is required.
2. In some states, such as Maharashtra and Gujarat, specific Public Trusts Acts (e.g., Bombay
Public Trusts Act 1950) mandate the registration of all charitable trusts
3. Additionally, registration under the Income Tax Act, 1961, and the Foreign Contribution
(Regulation) Act, 1976 may be required in many cases for NGOs
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Accounting method:
1. NGOs registered under the Companies Act, 2013 must maintain their books of account on
an accrual basis as per section 128.
2. Non-compliance of this provision would occur if accounts are not maintained on an
accrual basis.
3. NGOs not registered under the Companies Act, 2013 can maintain accounts either on an
accrual or cash basis.
2. Sources and Applications of Funds

1. NGOs obtain funding through various means, including grants, donations, fundraising,
fees, subscriptions, and sales.
2. Promoter’s contributions can be either corpus contributions (for the NGO’s capital) or
revolving fund contributions (for temporary loans).
3. Corpus contributions are shown as liabilities on the balance sheet, and voluntary
contributions to the corpus are exempt from income tax.
4. Revolving fund contributions are meant to be rotated by lending to other NGOs or
beneficiaries.
5. Grants for specific fixed assets require the NGO to acquire those assets.
6. NGOs may receive contributions in kind, such as buildings, vehicles, and materials for
projects
7. NGOs allocate their funds into various areas including:
a. Establishment Costs
b. Office and Administrative Expenses
c. Maintenance Expenses
d. Programme/Project Expenses
e. Charity
f. Donations and Contributions Given
3. Provisions Relating to Audit

1. Auditors of an NGO are appointed by the Mgmt of the Society or Trust or the members of
the company, depending on the type of registration.
2. Certain statutes require the accounts of NGOs to be audited and submitted to the prescribed
authorities, and failure to do so may result in forfeiture of exemptions and benefits.
3. The Foreign Contribution (Regulation) Act 1976 prescribes a specific format for audit
reports, which must be submitted to the Ministry of Home Affairs within 60 days from
the close of the financial year.
To plan the audit, the auditor should focus on:
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1. Knowledge of the NGO’s work, mission and vision, areas of operation, and environment
2. Updating knowledge of relevant statutes and rules
3. Reviewing legal forms of the organization and related documents
4. Reviewing financial and administrative manuals, project and program guidelines, funding
agency requirements, and budgetary policies
5. Examining minutes of governing bodies to understand their impact on financial records
6. Studying accounting systems, procedures, internal controls, and internal checks
7. Setting materiality levels for audit purposes
8. Determining the nature and timing of reports or other communications
9. Involving experts and reviewing their reports
10. Reviewing the previous year’s audit report.
4. Audit Programme
The audit program should cover all assets, liabilities, income, and expenditures in sequential

order to ensure no material item is omitted:
1. Verification of contribution/Grants
2. Checking of Ear-Marked Funds
3. Vouching for Disbursements/Expenditures
4. Verification of loans
5. Verification of fixed assets
6. Verification of Investments
7. Physical Verification of Cash & Bank Balance
8. Verification of Inventory
9. Verification of project and programme expense
10. Checking of Establishment expense
Verification of Contributions/Grants
1. Verify contributions/grants for the corpus fund with reference to donor letters.
2. Check transfers from projects/programs with donor letters and board resolutions of the
NGO.
Ear-Marked Funds Check

1. Check ear-marked funds for requirements of donor institutions, board resolutions of the
NGO, and rules and regulations of the schemes.
Vouching for Disbursements/Expenditures
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1. Vouch for disbursements and expenditures as per agreements with donors for project/
agency balances.
2. Verify loans with loan agreements and counterfoils of receipts issued.
Vouching of Fixed Assets

1. Vouch for acquisitions, sales, or disposal of assets including depreciation and
authorizations for the same.
2. Check the title of immovable property.
Verification of Investments:
1. Verify investments through the investment register and physically ensure that investments
are in the name of the NGO.
Physical Verification of Cash:

1. Physically verify cash in hand and imprest balances.
2. Check bank reconciliation statements and ascertain details for old outstanding and
unadjusted amounts.
Verification of Inventory:
1. Verify inventory in hand and obtain a certificate from the mgmt for the quantities and
valuation of the same
Verification of Program/Project Agreements:

1. Verify agreement with the donor/contributor(s) supporting a particular program or
project.
2. Ascertain the conditions with respect to undertaking the program/project.
Verification of Establishment expense:

1. Verify that provident fund, life insurance premium, employees state insurance, and their
administrative charges are deducted, contributed, and deposited within the prescribed
time.
2. Check other office and administrative expenses such as postage, stationery, traveling, etc.
5. Verification of Income/Receipts
1. Contributions and Grants: Verify agreements, ensure proper accounting, and deposit
foreign contributions as per the law.
2. Receipts from Fundraising Programs: Verify internal controls and ensure daily counting
and depositing of collections.
3. Membership Fees: Check fees with the Membership Register, classify types of fees, and
reconcile received fees with expected fees.
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4. Subscriptions: Check with subscription register and receipts, reconcile received
subscriptions with printed and dispatched materials, and verify receipts with the
subscription rate schedule.
5. Interest and Dividends: Verify received and receivable interest and dividends with
investments held during the year.
B. Audit of Firm
1. Questions
1. Mention important points which auditors will consider while conducting audit of
accounts of a partnership firm. (May 2013)
2. What are the advantages of the audit of the accounts of a partnership firm ? (May 2015)
3. Mention any six special points which you as an auditor would look into while auditing the
books of a partnership firm. (May 2016)
4. There are certain points which are required to consider specially in the audit of accounts
of a partnership. Discuss any three points briefly. (Nov 2019)

Appointment
1. Auditors are usually appointed by the partners of a firm and their remuneration is fixed
by the partners.
2. The appointment letter should clearly state the nature and scope of the audit and any
limitations.
3. If there is a change of auditor, the incoming auditor should communicate with the
previous auditor.
4. The auditor should ensure the application of accounting standards and disclose any non-
compliance in the audit report.
2. Matter Prior to Audit

When auditing a partnership, the auditor should review the partnership agreement for
information on the following:
1. Business name
2. Partnership duration
3. Capital contributions by partners
4. Proportions for profit/loss distribution
5. Accounting standards and corrections
6. Borrowing capacity
7. Interest rates on loans and accounts
8. Salaries and withdrawals
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9. Partner duties and mgmt roles

10. Bank account operation and investment of surplus funds
11. Limitations, partner rights, and implied authority.
3. Advantage of Audit
1. Disputes: Audited accounts prevent disputes among partners and provide a reliable
means of settling accounts.
2. Dissolution: Audited accounts help in calculating amounts due to retiring or deceased
partners.
3. Reliable: Banks and prospective buyers rely on audited accounts for evidence of a
business’s profitability and financial position.
4. Admission: Audited accounts aid in admitting new partners.
5. An audit is an effective safeguard against any undue advantage being taken by a working
partner or partners especially in the case of those partners who are not actively associated
with the working of the firm.
An audit prevents working partners from taking undue advantage, especially those not actively
involved in the business.
4. Audit of Accounts of Partnership firm

1. Letter of Apppointment: The letter of appointment should clearly define the scope of the
audit and any limitations.
2. Partnership Documents: Review partnership documents and minute book to ensure
authorization of decisions such as extraordinary expenditures, loans, and asset purchases.
3. Object of Partnership: Verify that the partnership’s business is authorized under the
partnership agreement or any extensions or modifications agreed upon subsequently.
4. Books of Accounts: Examine the partnership’s books of account to ensure they are
reasonable and adequate for the nature of the business.
5. Mutual Interest: Verify that no partner’s interest has been negatively affected by
unauthorized activities or violations of the partnership agreement.
6. Provision for taxes: Confirm that the accounts have made a provision for the firm’s tax
payable before calculating the amount of profit divisible among partners.
7. Division of Profit: Verify that profits and losses have been divided among partners
according to their agreed profit-sharing ratio.
8. The overall objective of auditing a partnership is to ensure that the balance sheet and
statement of profit and loss exhibit a true and fair state of affairs for the firm.
9. Examining the partnership agreement is important to report to the partners if any
partner’s interest has been negatively affected by unauthorized activities or violations of
the partnership agreement.
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C. Audit of LLP
1. Questions
1. If an LLP (Limited Liability Partnership Firm) is appointed ‘- an auditor of a company,
every partner of a firm shall be authorized to act as an auditor. (May 2015)
2. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules 2009.
(May 2019)
3. Every LLP is required to submit Statement of Account and Solvency in Form 8, which shall
be filed within a period of sixty days from the end of three months of the financial year to
which the Statement of Account and Solvency relates. (Nov 2020)
4. Torno Construction Engineering T J ,P approached CA K to understand various returns to
be maintained and filed by them. Guide/Discuss the various returns to be maintained and
filed by them. (Jul 21)
Registration:

1. Minimum of 2 Partners can form an LLP and atleast two partners would be Designated
Partners who would be required to take DPIN ( Designated Partner Identification Number
)
2. LLPs are required to have their accounts audited in accordance with Rule 24 of the LLP
Rules 2009.
3. LLPs with a turnover not exceeding 40 lakh rupees or a contribution not exceeding 25
lakh rupees in any financial year are not required to get their accounts audited.
Small Limited Liability Partnership to denote any LLP:

1. The Contribution of which, does not exceed twenty-five lakh rupees (INR 25,00,000) or
such higher amount, not exceeding five crore rupees, as may be prescribed; and
2. The Turnover of which, as per the Statement of Accounts and Solvency for the immediately
preceding financial year, does not exceed forty lakh rupees (INR 40,00,000) or such higher
amount, not exceeding fifty crore rupees, as may be prescribed;
Whether LLP is required to maintain Books of Accounts:

An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of
its state of affairs. LLP’s are required to maintain books of accounts which shall contain:
1. Particulars of all sums of money received and expended by the LLP and the matters in
respect of which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finished goods
and costs of goods sold,
4. Any other particulars which the partners may decide.
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Advantages / Purpose / Need of Audit:

1. Detection of Errors:- Auditing the accounts of a LLP helps in detecting errors & frauds &
verification of FS.
2. Disputes: Disputes, if any between any partners in the matter of accounts can be settled
with the help of audited accounts.
3. Reliability:- Banks & financial institutions lend money to the firms only on the basis of
audited accounts.
4. Better Compliance and Mgmt:-Periodical visits & suggestions by the auditor will be helpful
in improving the mgmt of the LLP.
5. Reconstitution:- 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.
Appointment of Auditor:
The auditor may be appointed by the designated partners of the LLP:
1. At any time for the first financial year but before the end of first financial year,
2. At least thirty days prior to the end of each financial year (other than the first financial
year),
3. To fill the casual vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to appoint
them.
Auditor’s Duty Regarding Audit of LLP:

1. Engagement Letter: The auditor must receive clear written instructions outlining the
scope of work to be performed.
2. Minutes Book: If the partners maintain a minute book, the auditor should refer to it for
any resolutions related to the accounts.
3. LLP Agreement: The auditor should review the LLP agreement and take note of specific
provisions, including:
a. Nature of the LLP’s business.
b. Capital contributions by each partner.
c. Interest on additional capital contributions.
d. Duration of the partnership.
e. Allowable partner drawings.
f. Payments such as salaries and commissions to partners.
g. Borrowing powers of the LLP.
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h. Rights and duties of partners.
i. Method of settling accounts during events like partner admission, retirement,
etc.
j. Any loans provided by the partners.
k. Profit-sharing ratios.
4. Reporting: The auditor’s report should include:
a. Confirmation of the correctness and reliability of the firm’s records.
b. Confirmation of obtaining all necessary information and explanations.
c. Mention of any restrictions imposed on the auditor during the audit process.
Returns to be maintained and filed by an LLP:

1. Every LLP would be required to file annual return in Form 11 with ROC within 60 days
of closer of financial year. The annual return will be available for public inspection on
payment of prescribed fees to Registrar.
2. Every LLP is also required to submit Statement of Account and Solvency in Form 8 which

shall be filed within a period of thirty days from the end of six months the financial year
to which the Statement of Account and Solvency relates.
D. Audit of Charitable Institutions

1. Questions
1. In the case of audit of a charitable institution, what attentions should be paid by auditor
regarding audit of expenditure items ? (Nov 2019)
2. CA A is appointed as the auditor of a charitable institution. Discuss the audit procedure
undertaken by him while auditing the Subscription and Donation received by the
charitable institution.(Dec 21)
Point to be considered during audit:

1. General
a. Study the institution’s constitution.
b. Verify legal compliance in its mgmt.
c. Examine the internal control system, especially for collections.
d. Verify income, ensuring prompt bank deposits.
e. Review the Trust Deed or Regulations
2. Subscriptions and Donations:
a. Check changes in membership subscription amounts.
b. Ensure official receipts are issued and controlled.
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c. Verify counterfoils with the cash book.

d. Examine systems for controlling collections, including box collections and flag
days.
e. Match total subscriptions with figures in charity reports.
3. Legacies: Verify legacy amounts through correspondence and available information.
4. Grants:
a. Verify grant amounts through relevant correspondence, receipts, and minute
books.
b. Obtain a certificate from a responsible official.
5. Investments Income:
a. Vouching the amounts received with the dividend and interest counterfoils.
b. Checking the calculations of interest received on securities bearing fixed rates of
interest.
c. Checking that the appropriate dividend has been received where any investment
has been sold ex-dividend or purchased cum-dividend.
d. Comparing the amounts of dividend received with schedule of investments

making special enquiries into any investments held for which no dividend has
been received.
5. Rent & Expenditure
a. Examining the rent roll and inspecting tenancy agreements, noting in each case:
The amount of Rent and due dates.
b. Vouching the rent on to the rent roll from the counterfoils of receipt books and
checking the totals of the cash book.
6. Income Tax Refunds: Where income-tax has been deducted at source from the Investment
income, it should be seen that a refund thereof has been obtained since charitable
institutions are exempt from payment of Income-tax. This involves:
a. Vouching the Income-tax refund with the correspondence with the Income- tax
Department; and
b. Checking the calculation of the repayment of claims.
7. Expenditure:
a. Vouching payment of grants, also verifying that the grants have been paid only
for a charitable purpose or purposes falling within the purview of the objects for
which the charitable institution has been set up and that no trustee, director or
member of the Managing Committee has benefited there from either directly or
indirectly.
b. Verifying the schedules of securities held, as well as inventories of properties both
movable and immovable by inspecting the securities and title deeds of property
and by physical verification of the movable properties on a test- basis.
Page No.210
c. Verifying the cash and bank payments.
d. Ascertaining that any funds contributed for a special purpose have been utilised
for the purpose.
E. Audit of Educational Institutions

1. Questions
1. National College, an institution managed by a trust, has received a grant of Rs 2.40 crore
from Government nodal agencies for funding a project of research on rural health systems
in India. Draft an audit programme for auditing this fund in the accounts of the college.
(May 2011)
2. Mention the eight important points which an auditor will consider while conducting the
audit of educational institutions. (May 2012)
3. You have been appointed as an auditor of VJM Schools. Discuss the points which merit
your consideration as an auditor while: verifying Assets and Liabilities of VJM Schools.
(Jul 21)
Point to be considered during audit:

1. General
a. Review the Trust Deed or Regulations and relevant legislative Acts.
b. Examine minutes of Managing Committee meetings for resolutions affecting
accounts and compliance
2. Fee from Students:
a. Verify student fees by cross-referencing with class registers.
b. Check fees received through counterfoils, Cash Book entries, and Fee Register
c. Ensure advance fees and irrecoverable arrears are properly handled.
d. Verify admission fees and proper crediting.
e. Confirm compliance with rules for free studentships and concessions.
f. Check collection or remission of fines.’
g. Ensure hostel dues are collected and caution money refunded.
3. Other Receipts/Grants & Donations:
a. Verify rental income, endowments, legacies, and investment income.
b. Inspect securities related to investments.
c. Verify Government or local authority grants and reasons for any disallowed
expenses.
4. Expenditure:
a. Confirm Provident Fund investments.
Page No.211
b. Vouch donations and ensure their intended use.

c. Verify capital expenditure with Committee sanction.
d. Audit establishment expenses and report any excessive spending.
e. Confirm staff salary increases were sanctioned.
5. Assets & Liabilities:
a. Report old arrears to the Committee.
b. Ensure student deposits are classified as liabilities and not transferred to income
unless they are non-refundable.
c. Check investments for prize endowment funds and any income in excess of the
prizes have been accumulated and invested along with corpus.
d. Verify inventory items against registers and previous records.
e. Verify all bills are authorised before approved before payment.
6. Compliances:
a. Confirm the refund of deducted taxes on investment income.
b. Verify annual statements, including specific fund statements.
F. Audit of Hospitals:
1. Questions
1. The general transactions of a hospital include patient treatment, collection of receipts,
donations, capital expenditures. You are required to mention special points of
consideration while auditing such transactions of a hospital?
2. What steps would you take into consideration in auditing the receipts from patients of a
Hospital ‘? (Nov 2011)
3. Mention any 8 special points which you as an auditor would look into while auditing the
books of accounts of Hospital (May 2011)
4. What are the eight audit points to be considered by the auditor during the audit of a
Hospital ? (Nov 2012)
5. Mention any eight important points which an auditor will consider while conducting the
audit of hospital. (May 2014)
6. Mis T & Co. Chartered Accountants, a partnership firm, is appointed as an auditor of
Treatment Hospital run by Smile Foundation, a charitable trust. Over and above the
receipts of treatment of patients, during the year trust has received donations from
various donors to treat COVID-19 patients and also incurred some capital expenditure for
further development of the hospital. On some of the investment income, income tax has
been deducted. What are the special points to be considered by Mis T & Co. while auditing
such transactions of Treatment Hospital ? (May 2022)
Points to be considered:
Page No.212
1. Register of Patients:
a. Vouch patient records with bills issued.
b. Cross-check bills for accuracy against attendance records.
c. Ensure all recoverable amounts have been billed.
2. Collection of Cash:
a. Match cash collections in the Cash Book with supporting evidence, like receipts
and counterfoils.
3. Income from Investments, Rent, etc:
a. Confirm that all expected income from rent and investments has been collected.
4. Legacies and Donations:
a. Verify that legacies and donations are used for their intended purpose.
5. Reconciliation of Subscriptions:
a. Reconcile collected subscriptions and donations with the respective registers.

6. Authorizations and Sanctions:
a. Ensure purchases, expenses, and capital expenditure had proper authorization.
b. Verify staff appointments and increments were duly authorized.
7. Grants and TDS:
a. Check for government grants and ensure proper accounting.
b. Verify the claim for tax deductions at source.
8. Budgets:
a. Compare actual expenditure and income with the budgeted amounts.
b. Report significant variations to the Trustees or Managing Committee.
9. Internal Check:
a. Review the internal control system for receipt and issuance of various items.
b. Ensure proper recording of purchases and authorized issues.
10. Depreciation:
a. Confirm that depreciation has been correctly applied to all assets.
11. Registers:
a. Inspect bonds, share certificates, and property deeds.
b. Verify their details against property and Investment Registers.
12. Inventories:
a. Obtain year-end inventories, physically check a sample.
Page No.213
b. Compare total values with ledger balances.

13. Mgmt Representation and Certificate:
a. Request proper representation and certification from mgmt for various audit
aspects.
G. Audit of Hotels
1. Questions
1. You have been appointed as an auditor of ABC Hotel, a three star hotel, for Financial Year
2021-22. As an auditor what are the special points that need to be considered in verifying
the Inventories in the nature of food and beverages? (Nov 22)
2. Pilfering is one of the greatest problems in any hotel and the importance of internal
control cannot be undermined. Explain. (May 2022)
Points to be considered while auditing:

Internal Controls:
1. Internal controls are essential to prevent pilfering in hotels.
2. Mgmt must implement controls to minimize theft.

3. Regular trading accounts are prepared and scrutinized for profit percentages.
4. Auditors should verify restaurant bills and tax payments to authorities.
5. Weak internal controls pose serious issues for auditors.
Room Sales & Hall Bookings:
1. Charges for room sales are recorded in guest bills.
2. Auditors should ensure correct guest charges and investigate rate discrepancies.
3. Daily reports of occupied rooms should be cross-checked.
4. Proper valuation of occupancy-in-progress and booking records for special events are
important
Inventories:
1. Proper documentation for inventory movements is crucial.
2. Secure storage areas with restricted access are necessary.
3. Professional valuers often assess inventories; auditors should verify their reasonableness.
4. Auditors may attend physical inventory counts and perform pricing tests.
Fixed Assets:
1. Different hotels have varied accounting policies for fixed assets.
2. Detailed definitions for inventory items are essential.
Page No.214
3. Costs of repairs and minor renovations are considered revenue expenditure.
4. Costs of major alterations and additions are capitalized.
Casual Labour:
1. Casual labour is common in the hotel industry, but wage payment records are often
inadequate.
2. Auditors should suggest controls to prevent defalcation.
Travel Agents & Shops:
1. Bills from travel agents should be settled according to credit terms.
2. Commission payments to travel agents should be checked against agreements.
H. Audit of Cinema
1. Question
1. Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and
has appointed you as an internal auditor. What are the areas that need to be verified in

relation to receipts from sale of Tickets? (Nov 22)
Point to be considered in audit:

1. Internal Control Verification:
a. Confirm that entrance is allowed only with printed tickets.
b. Ensure tickets are serially numbered.
c. Check that ticket numbers vary for each show and class, even if it’s on the same
day.
d. Verify a separate series for advance bookings.
e. Ensure ticket inventory is in the custody of a responsible official.
2. Cash Reconciliation:
a. Verify that a statement of tickets sold and cash collected is prepared at the end of
each show.
3. Free Passes Record:
a. Confirm that records of ‘free passes’ are maintained and issued under proper
authority.
4. Entertainment Tax:
a. Reconcile the collected Entertainment Tax with the total number of tickets issued
for each class.
b. Verify the monthly entertainment tax returns.
5. Cash Book Entries:
Page No.215
a. Match cash collected for different shows with Daily Statements and records of
tickets issued.
6. Advertisement Charges:
a. Verify charges for advertisement slides and shorts by referencing the Register of
Slides and Shorts Exhibited and agreements with advertisers.
b. Expenditure Verification:
c. Audit expenses for advertisement, repairs, and maintenance.
d. Ensure none of these expenses are capitalized.
7. Depreciation Check:
a. Confirm that depreciation on machinery and furniture is correctly charged at an
appropriate rate.
8. Film Hire Payments:
a. Verify payments for film hire with distributor bills and refer to relevant agreements.
9. Advance Payment Reconciliation:
a. Examine unadjusted balances of advances paid to distributors for recoverability.

c. Enquire about unadjusted advances for films that have already run.
d. Consider making provisions for advances deemed irrecoverable.
10. Restaurant Income:
a. Investigate the arrangement for collecting the share of restaurant income, whether
it’s a fixed sum or percentage.
b. If the cinema operates the restaurant, audit its accounts, covering the sale and
purchase of various food items and beverages.
I. Audit of Club
1. Entrance Fee: Verify entrance fee receipts by cross-referencing with member applications,
counterfoils, and committee minutes.
2. Subscriptions: Confirm member subscriptions by comparing receipt counterfoils with
the Register of Members; reconcile total due with collections and outstanding amounts.
3. Arrears of Subscriptions: Ensure correct treatment of arrears from the previous year,
arrears for the current year, and advance payments.
4. Arithmetical Accuracy: Check and cross-verify totals in the Register of Members.
5. Irrecoverable Member Dues: Identify and inquire about overdue member dues; report
any irrecoverable amounts in the audit report.
6. Pricing: Verify charges for food, drinks, and special services provided to members and
guests.
7. Member Accounts: Confirm that member accounts accurately reflect amounts owed for
Page No.216
supplies and services.
8. Purchases: Validate purchases of sports items, furniture, crockery, etc., and ensure they
are correctly recorded in inventory registers.
9. Margins Earned: Check purchases of consumables and confirm that gross profit rates
align with industry norms; physically verify year-end inventory and its valuation.
10. Inventories: Physically check the inventory of furniture, sports equipment, and other
assets against inventory registers or year-end inventories.
11. Investments: Inspect share scrips and bonds for investments, determine their current
values for financial reporting, and assess their safe custody arrangements.
12. Management Powers: Examine the financial authority of the secretary; report any
instances of exceeding authorized limits to the Managing Committee for confirmation.
J. Audit of Local body:

1. Questions
1. Draft an audit programme for conducting audit of accounts of a Local Body. (May 2010)

2. What are the important objectives of local body audits ? (May 2011)
3. State the background of “Local Bodies”. Draft an audit programme for audit of local
bodies. (May 2014)
4. State the important objectives of local body’s audit. (May 2015)
5. Draft an audit programme for conducting audit of accounts of a local body. (May 2016)
6. Explain the different types of revenue grants which. local bodies may receive. (Nov 2020)
7. Local Fund Audit Wing of a State Government has appointed you to audit accounts of one
of the Local body governed by it. As an auditor, what will be your reporting areas? (Dec
21)
Municipal government in India covers five distinct types of urban local

authorities-
1. The municipal corporations,
2. The municipal councils,
3. The notified area committees,
4. The town area committees and
5. The cantonment committees.
Objective of Audit of Municipal government:

The important objectives of audit are:
1. Reporting on the fairness of the content and presentation of FS;
Page No.217
2. Reporting upon the strengths and weaknesses of systems of financial control;

3. Reporting on the adherence to legal and/or administrative requirements;
4. Reporting upon whether value is being fully received on money spent; and
5. Detection and prevention of error, fraud and misuse of resources.
Aspects to be considered in Audit Programme:

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

Local bodies may receive different types of grants from the state administration as
well. Broadly, the revenue grants are of three categories:
1. General purpose grants: These are primarily intended to substantially bridge the gap
between the needs and resources of the local bodies.
2. Specific purpose grants: These grants which are tied to the provision of certain services
or performance of certain tasks.
3. Statutory and compensatory grants: These grants, under various enactments, are given
to local bodies as compensation on account of loss of any revenue on taking over a tax by
state government from local government.
Page No.218
K. Audit of Cooperative Society:
1. Questions
1. You are appointed as an auditor of co-operative society. State the special features of the
co-operative audit to be borne in mind by 1st auditor, concerning.
a. Audit classification of society.
b. Discussion of draft audit report with the mgmt committee.
2. Mr. M, has served as an auditor in the Co-Operative Department of a Government, is
appointed as a statutory auditor by a Co-Operative Society that has receipts over Rs 3
crores during the financial year. He is not a Chartered Accountant. Mr. D, Chartered
Accountant is appointed to conduct tax audit of the society under section 44AB of the
Income Tax Act, 1961. Comment.
Qualification of Auditor
CA or any persons holding govt diploma in co-operative accounts/in co-operation &
accountancy & also person served as an auditor in co-operative department of govt.

Restrictions on shareholding (Sec 5)
Where liability of member limited, no member of society other than registered society hold
portion of share capital of society as would exceed a maximum of 20% of total no of shares or
of the value of shareholding to 1,000/-.
Restriction on loans
Registered society not make loan to any person other than member. With special sanction of
Registrar, registered society may make a loan to another registered society
Contribution for charitable purpose:

Registered society may, with sanction of Registrar, contribute an amt not exceeding 10% of
net profits remaining after compulsory transfer to reserve fund for any charitable purpose
Appropriation of profit (Sec 33)

“Prescribed % of profits transferred to Reserve Fund before distribution as dividend/bonus to
members”
Contribution to education fund:

Some of the state acts provide that every society shall contribute annually towards the
education fund of the state federal society.
Special feature of Co-operative audit

1. Examination of overdue debts : Overdue debts for period from 6 months to 5 years and
more than 5 years to be classified & reported by an auditor. Auditor to ascertain proper
provision for doubtful debts made
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2. Overdue Interest : Overdue interest amount should be excluded from interest outstanding
and accrued while calculating profit.
3. Certification of Bad debts: In some state act, bad debts to be written off are certified by
auditor.
4. Verification of assets and liabilities
5. Adherence to co-operative principles
6. Observation of the provisions of the Acts and Rules
7. Verification of members register and examination of their passbook
8. Special report to registrar
9. Audit classification of society : After a judgement of overall performance of the society,
the auditor has to award a class to the society. The judgement is to be based on the criteria
specified by the registrar. If mgmt of the society is not satisfied about the award of the
class, it can make an appeal to the registrar.
10. Discussion of draft audit report with managing committee: on conclusion, the auditor
should ask the secretary of the society to convene the managing committee meeting to
discuss the draft report. The audit report should never be finalised without discussion
with the managing committee.
Special report to registrar

“If auditor notices some irregularities in working of society, report these to the Registrar. In
following cases, a special report may become necessary:
a. Personal profiteering by members detrimental to interest of society.
b. Detection of fraud
c. Specific examples of mis-mgmt
d. In case of urban co-operative banks, disproportionate advances to vested interest
groups, & deliberate negligence about recovery thereof.
Form of Audit report:

1. Whether he obtained all necessary info & explanations which were necessary for purpose
of audit.
2. In his opinion & to best of his info & according to explains, said accounts give all info
required by Act.
3. PL A/c gives true & fair view of Profit & Loss made
4. BS gives true & fair view of state of affairs
5. Proper books of account as required properly maintained.
6. Whether BS and PL A/c in agreement with books of account”
“In addition, auditor attach schedules regards following info:
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1. All transactions which appear to be contrary to provisions of the Act, the rules and byelaws
of the society.
2. All sums, which ought to have been, but have not been brought into account by the society.
3. Any material, or property belonging to society which appears to the auditor to be bad or
doubtful of recovery.
4. Any material irregularity or impropriety in expenditure or in the realisation or monies
due to society.
5. Any other matters specified by the Registrar in this behalf.”
Audit Questionnaires
1. “Auditor to answer 2 sets of questionnaires called as audit memos:-
2. First set of general nature & applicable to all types of societies.
3. Second set is specific for particular type Generally audit report as per convention divided
into two parts styled as part I & part-II:-
4. Part I throws light on comparative financial position, capital structure, solvency position

& profitability. Contain comments on working of society & suggestions for future
improvements.
5. Part II points out observations of routine nature, which are finished products of routine
vouch & post audit such as missing vouchers, loan bonds, inadequacies of documents
etc.”
Investment of funds (Sec 32)

“Society may invest its funds in any one or more of following:
1. In Central or State Co-operative Bank
2. In any of securities specified in section 20 of Indian Trusts Act, 1882
3. In shares, securities, bonds or debentures of any other society with limited liability.
4. In any co-operative bank, other than Central/State co-operative bank, as approved by
Registrar
5. In any other moneys permitted by Central or State Government.”
L. Audit of Multi-State- Cooperative society

1. Question
1. Central Govt. hold 55% of the paid up share Capital in Kisan Credit Co-operative Society,
which is incurring huge losses. Advise when the Central Government can direct Special
Audit under Section 77 of the Multi State Co-operative Society Act. (May 2019)
2. Briefly explain the provisions for qualification and appointment of Auditors under the
Multi-State Co-operative Societies Act, 2002.
3. No inspection under Section 79 of Multi-State Co-operative Societies Act, 2002 shall be
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made unless a notice has been given to the multi-state co-operative society. Explain stating
clearly when and how such inspection can be made. Also state the powers available with
the Central Registrar in this regard along with provisions relating to communication of
the inspection report under the said section.
4. Multi-State Co-operative Societies Act, 2002 states that a person who is a Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949 can only be
appointed as auditor of Multi-State cooperative society. Explain stating also the persons
who are not eligible for appointment as auditors of a Multi-State co-operative society.
5. “As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report to the
members of the Multi-State co-operative society on the accounts examined by him and on
every balance-sheet and profit and loss account and on every other document required to
be part of or annexed to the balance-sheet or profit and loss account. Explain”
Qualification of auditor (Sec 72)

“Chartered accounted to be appointed as auditor.
Persons not eligible for appointment as auditors:
1. A body corporate
2. An officer/employee of the society

3. A person member/who is in employment, of an officer or employee of society
4. A person indebted to the society or has given any guarantee or provided any security of
any third person to the society for an amount exceeding 1,000”
Appointment of Auditor (Sec 70)

1. First auditor: by BOD within 1 month of date of registration & hold office until conclusion
of First AGM
2. If BOD fails, society in GM may appoint first auditor
3. Subsequent auditor appointed by society, at each AGM. Hold office from conclusion of
that meeting until conclusion of next AGM.”
Books of accounts
“Every MSCS keep books of account with respect to:
1. all sum of money received & expended & matters in respect of which receipt & expenditure
take place;
2. all sale & purchase of goods;
3. the assets & liabilities;
4. in case of MSCS engaged in production, processing & manufacturing, particulars relating
to utilization of materials or labour or other items of cost”
Content of Auditor’s report

“In his opinion & to best of his info & according to explanation given, said account give info
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required & give a true & fair view :
1. In case of BS, of state of society’s affairs as at end of its FY; &
2. In case of PL, of PL for its FY. The report shall also state:
a. He obtained all info & explanation necessary for audit
b. Proper books of account kept by the society so far as appears from examination of
books & proper returns received from branches or offices not visited by him.
3. Report on accounts of any branch audited by person other than him forwarded to him &
how he dealt with same
4. Society’s BS & PL A/c in agreement with books of account & return
5. Where any matters answered in negative, the auditor’s report shall state reason”
Powers of CG to direct special audit (Section 77)

1. Affairs Not Managed in Accordance With, Prudent Commercial Practices
2. Financial Position its such as would endanger its Insolvency

3. Managed as it would Cause Injury to Interest of Trade or Industry or Business
4. CG at any time by order direct that a special audit of the society’s accounts for such period
as may be specified
5. CG order for special audit only if Govt hold 51% or more of paid-up share capital in such
society.
6. Special auditor same powers & duties as an auditor has under section 73. Special auditor
make report to CG.
7. On receipts of report CG take such action as it considers necessary. If CG does not take
any action within 4 months, govt send to the society copy of, or relevant extract from,
there port with its comments thereon & require the society either to circulate that copy to
members or to have such copy or extracts read before the society at its next GM”
Inquiry by central registrar (section 78) or Inspection of society (Section 79)
When:
On request from: federal co-operative to which society is affiliated or
a creditor or
not less than 1/3 of members or
not less than 1/5 of total no of members
Opportunity of being Heard

Before holding such inquiry/inspection 15 days notice must be given to the society
Powers given to Central Registrar:
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1. Access to books, accounts, documents, securities, cash & other properties & summon any
person in possession/responsible for custody of any such thing
2. Require officers to call GM by giving notice of not less than 7 days & place at head quarters
to consider such matters as may be directed, and where officers refuse to call such a
meeting, he have power to call it himself.
3. Summon any person reasonably believed to have any knowledge of affairs of the society
to appear before him”
Powers given for Inspection:

1. Access to all books, accounts, papers, vouchers, securities, stock & other property of
society & in event of serious irregularities discovered take them into custody & have power
to verify cash balance & to call a meeting where such GM is, in his opinion necessary.
2. Every officer or member shall furnish such info with regard to working as the central
registrar or the person making such inspection may require.”
Followup:
With in a period of 3 months communicate report of inquiry to the society
M. Audit of Hire Purchase and Leasing Companies

Hire Purchase
Definition: A hire-purchase agreement involves letting goods on hire with an option for the
hirer to purchase them based on agreed terms.
Inclusions: The agreement covers cases where possession is delivered based on periodic
payments, property transfer occurs upon the last installment, and the hirer can terminate the
agreement before property transfer.
Parties Involved: The hirer is the person in possession under the hire-purchase agreement,
and the owner is the one delivering possession to facilitate the purchase, including any initial
payments by the hirer.
Audit Procedures for Hire-Purchase Transaction:

The auditor may examine the following:
1. Hire purchase agreement is in writing and is signed by all parties.
2. Hire purchase agreement specifies clearly:
a. The hire-purchase price of the goods to which the agreement relates;
b. The cash price of the goods, that is to say, the price at which the goods may be
purchased by the hirer for cash;
c. The date on which the agreement shall be deemed to have commenced;
d. The number of installments by which the hire- purchase price is to be paid, the
amount of each of those installments, and the date, or the mode of determining
the date, upon which it is payable, and the person to whom and the place where it
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is payable; and
e. The goods to which the agreement relates, in a manner sufficient to identify them.
3. Ensure that installment payments are being received regularly as per the agreement.
LEASES:
Audit Procedures for Lease Transaction:

1. Object Clause: Check if the leasing company’s object clause allows leasing of goods, such
as capital goods or consumer durables, and if it permits financing activities.
2. Credit Analysis: Verify the existence of a procedure to assess the lessee’s creditworthiness,
considering factors like ability to meet commitments, credit history, and collateral.
3. Lease Agreement: Examine the lease agreement for details like parties involved,
equipment description, installation location, tenure, payment terms, return conditions,
and restrictions on assignment or subletting.
4. Lease Proposal Form: Review the lessee’s lease proposal form submitted to the lessor.
5. Invoice: Ensure safekeeping of the lease invoice due to the long-term nature of the

contract.
6. Acceptance Letter: Examine the acceptance letter from the lessee confirming the
satisfactory receipt of the equipment.
7. Board Resolution: Confirm that a board resolution authorizing a specific director to
execute the lease agreement has been passed.
8. Insurance Policies: Verify that copies of insurance policies have been obtained by the
lessor for record-keeping.
1. Meaning of Independence
Independence implies that the judgement of a person is not subordinate to the wishes or
direction of another person who might have engaged him. Independence is linked to the
fundamental principles of objectivity and integrity. It comprises:
a. Independence of mind
b. Independence in appearance
Independence of mind:
The state of mind that permits the expression of conclusion/opinion without being affected by
influences that compromise professional judgement, thereby allowing an individual to:
a. Act with integrity
b. Exercise objectivity and
c. Professional skepticism
Independence in appearance:
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The avoidance of facts and circumstance that are so significant that a reasonable and informed
third party would be likely to conclude that a firm’s or an audit or assurance team member’s
integrity, objectivity and professional skepticism has been compromised. (This relates to
others perception of auditor’s independence).
2. Threat to Independence
Self Interest Threats:
which occur when an auditing firm, its partner or associate could benefit from a financial
interest in an audit client. Examples include:
1. Direct financial interest or materially significant indirect financial interest in a client.
E.g., equity ownership
2. Loan or guarantee to or from the concerned client
3. Undue dependence on a client’s fees and, hence, concerns about losing the engagement.
E.g., large proportion of revenue from one client.
4. Close business relationship with an audit client. E.g., joint venture with client
5. Potential employment with the client. E.g., Auditor or auditor’s spouse enters into
employment negotiation with client

6. Contingent fees for the audit engagement. E.g., contingent fees are arrangement where
fee is dependent of outcome of a certain event or fixed fees is not charged and computed
on percentage basis.
Self-Review Threats:
This occur:
1. During the review of any judgement or conclusion reached in a previous audit or non-
audit engagement
2. When a member of the audit team previously was an employee of the client (especially
a director or senior officer) in a position to exert significant influence over the subject
matter of the audit engagement. For example, assisting an audit client in matters such as
preparing accounting records or FS. This may create a self-review threat when the firm
subsequently audits the FS.
Advocacy Threats:
This occur when the auditor promotes, or seems to promote, a client’s opinion to a point
where people may believe that objectivity is getting compromised. E.g., when an auditor deals
with shares or securities of the audited company, or becomes the client’s advocate in litigation
and third-party disputes.
Familiarity threats:
These threats are self-evident, and occur when auditors become too sympathetic to the client’s
interests. This can occur in many ways:
1. Close relative of an audit team member is working in a senior position in the client
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company,
2. Former partner of the audit firm being a director or senior employee of the client
3. Long association between specific auditors and their specific client counterparts, and
4. Acceptance of significant gifts or hospitality from the client company, its directors or
employees.
Intimidation threats:
This occurs when auditors are deterred from acting objectively with an adequate degree of
professional skepticism. Two examples of intimidation threats are:
1. When an auditor is told he will be replaced based on a disagreement over application of
an accounting principle and
2. Pressure to reduce the scope of the audit in order to reduce fees.
3. Safeguard to Independence
The Chartered Accountant has a responsibility to remain independent, safeguards should be
identified and applied to eliminate the threats. The following are the guiding principles in this

regard :
1. For the public to have confidence in the quality of audit, it is essential that auditors should
always be and appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, which necessarily require the auditor to be independent. (Extra
point)
3. Before taking on any work, an auditor must conscientiously consider whether it involves
threats to his independence.
4. When such threats exist, the auditor should either desist from the task or eliminate
the threat or at the very least, put in place safeguards which reduce the threats to an
acceptable level. All such safeguards measures need to be recorded in a form that can
serve as evidence of compliance with due process. When such threats exist, the auditor
should either desist from the task or put in place safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work
4. Professional Skepticism (SA 200)

As per SA 200, Professional skepticism refers to 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.
The auditor has to remain alert forever. The auditor’s attitude should be of questioning mind-
of challenging the things in light of available evidence.
The auditor shall plan and perform an audit with professional skepticism recognising that
circumstances may exist that cause the FS to be materially misstated.
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Professional skepticism requires the auditor to be alert to (for example) :

1. When audit evidence contradicts other evidence obtained, this can indicate a problem.
2. When information raises doubts about the reliability of documents and responses to
inquiries, this can indicate an issue.
3. When there are conditions that may suggest possible fraud.
4. Sometimes, circumstances arise that suggest the need for additional audit procedures
beyond what is required by the Standards on Auditing
5. During an audit, the auditor needs to be careful and maintain professional skepticism to
avoid making mistakes. This helps in reducing the chances of missing important things
like:
a. Unusual changes (Overlooking unusual circumstances)
b. Relying on incomplete information (Over generalising)
c. Making wrong assumptions when planning the audit work (Using inappropriate
assumption in planning and concluding audit)
SA 210
The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:
a. Establishing whether the preconditions for an audit are present; and
b. Confirming that there is a common understanding between the auditor and
mgmt and, where appropriate, TCWG of the terms of the engagement.
2. Preconditions of Audit (SA 210)

As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be
defined as mgmt’s use of an acceptable financial reporting framework in the preparation of
the FS and the agreement of mgmt and, where appropriate, TCWG to the premise on which
an audit is conducted.
In order to establish whether the preconditions for an audit are present, the auditor shall:
1. Determine whether the financial reporting framework is acceptable; and
2. Obtain the agreement of mgmt that it acknowledges and understands its responsibility:
a. For the preparation of the FS in accordance with the applicable financial reporting
framework;
b. For the internal control as mgmt considers necessary; and
3. To provide the auditor with:
a. Access to all information such as records, documentation and other matters
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b. Additional information that the auditor may request from mgmt for the purpose
of the audit; and
4. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
3. Terms of Engagement Letter (SA 210)

According to SA 210 “Agreeing the Terms of Audit Engagements”, the auditor shall agree the
terms of the audit engagement with mgmt or TCWG, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
1. The objective and scope of the audit of the FS;
2. The responsibilities of the auditor;
3. The responsibilities of mgmt;
4. Identification of the applicable financial reporting framework for the preparation of the
FS; and

5. Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content.
“If law or regulation prescribes in sufficient detail the terms of the audit engagement, the
auditor need not record them in a written agreement, except for the fact that such law or
regulation applies and that mgmt acknowledges and understands its responsibilities.”
4. If Preconditions are Not Present (SA 210)

1. If the preconditions for an audit are not present, the auditor shall discuss the matter with
mgmt.
2. Unless required by law or regulation to do so, the auditor shall not accept the proposed
audit engagement:
a. If the auditor has determined that the financial reporting framework to be applied
in the preparation of the FS is unacceptable or
b. If the agreement of mgmt is not obtained on matters relating to understanding
of responsibility of mgmt on preparation of FS, internal controls for preparation
of FS, providing access to all information to auditor and unrestricted access to
persons within the entity.
5. Limitation on Scope Prior to Engagement (SA210)

If the auditor believes the limitation will result in the auditor disclaiming an opinion on the
FS, the auditor shall not accept such a limited engagement as an audit engagement, unless
required by law or regulation to do so.
6. Acceptance of change in terms of Engagement (SA 210)
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1. If, prior to completing the audit engagement, the auditor is requested to change the audit
engagement to an engagement that conveys a lower level of assurance, the auditor shall
determine whether there is reasonable justification for doing so.
2. The auditor shall not agree to a change in the terms of the audit engagement where there
is no reasonable justification for doing so.
3. The auditor considers the justification given for the request, particularly the implications
of a restriction on the scope of the audit engagement.
4. Change may not be considered reasonable if it appears that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory.
5. Before agreeing to change an audit engagement to a review or a related service, an auditor
who was engaged to perform an audit in accordance with SAs may also need to assess any
legal or contractual implications of the change.
A request from the client for the auditor to change the engagement may result from:
1. A misunderstanding as to the nature of an audit or related service originally requested.
2. Change in circumstances affecting the need for the service,
3. Restriction on the scope of the engagement, whether imposed by mgmt or caused by
circumstances.
7. Agreeing on New Terms (SA 210)

If the auditor concludes that there is reasonable justification to change the audit engagement
to a review or a related service, the audit work performed to the date of change may be relevant
to the changed engagement. However, the work required to be performed and the report to be
issued would be those appropriate to the revised engagement.
In order to avoid confusing the reader, the report on the related service would not include
reference to:
1. The original engagement; Or

2. Any procedures that may have been performed in the original audit engagement, except
where the audit engagement is changed to an engagement to undertake agreed- upon
procedures and thus reference to the procedures performed is a normal part of the report.
If the terms of the audit engagement are changed, the auditor and mgmt shall agree on and
record the new terms of the engagement in an engagement letter or other suitable form of
written agreement.
8. Unable to agree on new terms (SA 210)

If the auditor cannot agree to a change in the terms of the audit engagement and mgmt does
not allow the original engagement to continue, then the auditor shall:
1. Withdraw from the audit engagement where possible under applicable law or regulation;
And
2. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as TCWG, owners or regulators.
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9. Recurring Audit (SA 210)
Recurring audit is an audit which is performed by an auditor over years. On recurring audits,
the auditor shall assess whether circumstances require the terms of the audit engagement to
be revised and whether there is a need to remind the entity of the existing terms of the audit
engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, the following factors may make it appropriate to revise the terms of the
audit engagement or to remind the entity of existing terms:
1. Any indication that the entity misunderstands the objective and scope of the Audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior mgmt.
4. A significant change in ownership.
5. A significant change in nature or size of the entity’s business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the FS.

8. A change in other reporting requirements.
SQC1
1. Audit Quality
1. SQC 1 and SA 220 both deal with quality control.
2. SQC 1 deals with all engagements including audits, reviews and other assurance and
related service engagements, SA 220 applies to audit engagements only.
3. SQC 1 applies to entire firm. However, SA 220 applies to a particular audit engagement
2. Objective of SQC 1
The objective of the firm is to establish and maintain a system of quality control to provide it
with reasonable assurance that::
a. The firm and its personnel comply with professional standards and
b. Reports issued by the firm or engagement partners are appropriate in the
circumstances.
3. Elements of System of Quality Control (HEMALE)

The firm’s system of quality control should include policies and procedures addressing each
of the following elements:
1. Leadership responsibilities for quality within the firm
2. Ethical requirements
Page No.231
3. Acceptance and continuance of client relationships and specific engagements

4. Human resources
5. Engagement performance
6. Monitoring
1. Leadership Responsibilities for quality within the firm

The behavior of the firm’s leaders has a big impact on the firm’s internal culture.
To create a culture that values quality, the firm’s mgmt at all levels should frequently and
consistently demonstrate the importance of the firm’s quality control policies and procedures,
and the need to follow them and requirement to:
1. Perform work that complies with professional standards and applicable legal and
regulatory requirements; and
2. Issue reports that are appropriate in the circumstances.
2. Ethical Requirements
The firm must establish policies ensuring compliance with ethical requirements from the
Code of Ethics issued by ICAI. Firm leaders are responsible for maintaining quality within the
firm.
Ethical Requirements 1. The Code outlines fundamental principles like

integrity, objectivity, competence, confidentiality, and
professional behavior.
Independence Requirement 2. Independence in all engagements is crucial.

3. Policies should be in place to communicate
independence requirements to its personnel
4. Identify and evaluate circumstances and relationships
that create threats, and take appropriate action to
maintain independence.
5. Take actions or apply safeguards to reduce them to
acceptable low level or if considered appropriate
withdraw from the engagement.
Reporting Mechanism 6. There should be a system for engagement partners to

report relevant information about client engagements
and any threats to independence.
7. Breaches in independence must be promptly reported
for necessary action
Annual Confirmation 8. The firm should obtain written confirmation

annually from personnel required to be independent,
ensuring compliance with independence policies and
procedures.
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The Code establishes the following as the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of FS:
Integrity:
1. Integrity Principle: Accountants must be honest and straightforward in their professional
dealings.
2. Fair Practices: They should engage in fair and ethical conduct in all financial matters.
3. Avoid Misleading Information: Accountants shouldn’t be part of any reports or
communication that contains false or misleading statements.
4. Full Disclosure: They must include all necessary information and avoid hiding or
obscuring details that could mislead others.
Objectivity:
The principle of objectivity requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
It requires that a professional accountant shall not undertake a professional activity if a
circumstance or relationship unduly influences the accountant’s professional judgment

regarding that activity
Professional competence and due care:

It requires that auditor attains and maintains professional knowledge and skill at the level
required to render competent professional service based on current technical and professional
standards and legislations.
Diligence includes responsibility to act carefully, thoroughly and on a timely basis in
accordance with requirements of an assignment.
Confidentiality:
Confidentiality principle requires an auditor to respect the confidentiality of information
acquired as a result of professional or business relationships.
Keeping information confidential helps because it allows clients to share freely with
accountants, knowing their information won’t be shared with others. Professional behaviour:
However, such confidential information may be disclosed, for example, when it is required
by law.
Professional behaviour:
It requires an auditor to comply with relevant laws and regulations and avoid any conduct that
he knows or should know might discredit the profession.
3. Acceptance and continuation of client relationship

SQC 1 requires the firm to obtain information before accepting an engagement.
The following factors assists the engagement partner in determining whether the decisions
regarding the acceptance and continuance of audit engagements are appropriate:
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1. Integrity, trustworthiness of the owners, mgmt, and TCWG of the entity.

2. Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
3. Compliance with ethical requirements by the firm and the engagement team.
4. Any significant issues that arose during the current or past audit engagement and their
impact on the continuity of the relationship.
With regard to the integrity of a client, matters that the firm considers include, for example:
(Any four or five)
1. The identity and business reputation of the client’s principal owners, key mgmt, related
parties and those charged with its governance.
2. The nature of the client’s operations, including its business practices.
3. Information concerning the attitude of the client’s principal owners, key mgmt and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible.
5. Indications of an inappropriate limitation in the scope of work.

6. Indications that the client might be involved in money laundering or other criminal
activities.
7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
Human resources (Not asked in Exams)

The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment
to ethical principles necessary to perform its engagements:
Such policies and procedures address the following personnel issues:
1. Recruitment;
2. Performance evaluation;
3. Capabilities;
4. Competence;
5. Career development;
6. Promotion;
7. Compensation; and
8. Estimation of personnel needs.
Engagement Performance
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Consistency in 1. Ensured by briefing teams, complying with standards,
Performance: supervision, training, and proper documentation of
work.
Consultation 2. Team discusses difficult matters, consulting experts
within/outside the firm. External consultation allowed if
internal resources lacking.
Quality Control Review 3. Significant judgments reviewed objectively by a control
reviewer. Mandatory for listed entities; criteria set for
other cases for necessary action
Resolution of 4. Disagreements resolved within the team. If not, follow

Differences firm procedures or consult external parties
Timely Documentation: 5. Engagement files assembled within 60 days for audits,

appropriate timelines for other engagements.
Documentation Security 6. Policies maintain confidentiality, safe storage, integrity,

and accessibility. Documentation is firm property, can be
shared with clients if it doesn’t compromise work validity

or independence.
Retention Period 7. Documentation retained for monitoring evaluation, not

less than seven years from the auditor’s report date or
group auditor’s report date, or longer if required by law.
Monitoring
1. The firm must create policies and take steps to ensure its quality control system is relevant,
sufficient, works well, and is followed in practice.
2. Checking compliance ensures that the firm meets professional standards and legal rules.
3. It assesses if the quality control system is designed and implemented correctly.
4. The evaluation checks if the firm’s policies and procedures are used correctly.
5. The aim is to make sure that the reports issued by the firm or engagement partners are
suitable for the situation.
SA 220
The objective of the auditor is to implement quality control procedures at the Engagement
level that provides the auditor with reasonable assurance that:
a. The audit complies with professional standards and applicable legal and
regulatory requirements; and
b. The auditor’s report issued is appropriate in the circumstances.
Page No.235
2. Leadership responsibilities for quality on audits

The engagement partner shall take responsibility for the Overall Quality on each audit
engagement to which that partner is assigned.
1. The engagement partner should emphasise the importance of:
a. Performing work that complies with professional standards 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.
2. The fact that quality is essential in performing audit engagements.
3. Ethical Requirements
The responsibilities of an engagement partner in relation to ethical requirements in an audit
engagement are as under:
1. Identifying a threat to independence regarding the audit engagement that safeguards
may not be able to eliminate or reduce to an acceptable level.

2. Reporting by engagement partner to the relevant persons within the firm to determine
appropriate action., which may include eliminating the threat, or withdrawing from the
audit engagement, where withdrawal is legally permitted.
4. Acceptance and continuance of client relationship

1. Pre-engagement Assessment: The engagement partner, as per SQC 1, gathers essential
information before accepting a new client, continuing an existing engagement, or taking
on new work from an existing client.
2. Information Considered: This includes assessing the integrity of client owners, the
competence of the engagement team, and ensuring they have necessary resources.
3. Ethical Compliance: Checking if the client complies with ethical requirements and
reviewing significant issues from past or current audits to make informed decisions about
client relationships and engagements.
5. Assignment of Engagement teams

It should be ensured by engagement partner that the engagement team and any auditor’s
experts who are not part of the engagement team, collectively have the appropriate competence
and capabilities to perform the engagement.
6. Engagement Performance
1. Engagement partner has the responsibility for direction, supervision and performance
of audit engagement in accordance with professional standards and regulatory and legal
requirements
Page No.236
2. Engagement partner is also responsible for ensuring undertaking appropriate consultation
on difficult or contentious matters by engagement team not only within the team but also
with others at appropriate level within or outside the firm.
3. For audits of FS of listed entities, the engagement partner shall:
a. Determine that an engagement quality control reviewer has been appointed.
b. Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer.
c. Not date the auditor’s report until the completion of the engagement quality
control review
4. If differences of opinion arise within the engagement team, with those consulted or,
where applicable, between the engagement partner and the engagement quality control
reviewer, the engagement team shall follow the firm’s policies and procedures for dealing
with and resolving differences of opinion.
7. Monitoring
The engagement partner should document following matters pertaining to an audit

engagement:
1. Issues identified with respect to compliance with relevant ethical requirements and how
they were resolved.
2. Conclusions on compliance with independence requirements that apply to the audit
engagement, and any relevant discussions with the firm that support these conclusions.
3. Conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements.
4. The nature and scope of, and conclusions resulting from, consultations undertaken
during the course of the audit engagement.
Other Topics
1. Audit Trail
An audit trail is a documented flow of a transaction. It is used to investigate how a source
document was translated into an account entry and from there it was inserted into financial
statement of an entity. It is used as audit evidence to establish authentication and integrity
of a transaction. Audit trails help in maintaining record of system and user activity. Like, in
case of banks, there is an audit trail keeping track of log-on activity detailing record of log-on
attempts and device used.
It is a step-by-step record by which accounting, trade details, or other financial data can be
traced to their source. Audit trails are used to verify and track many types of transactions
including accounting and financial transactions.
Audit trails (or audit logs) act as record-keepers that document evidence of certain events,
procedures or operations, because their purpose is to reduce fraud, material errors, and
unauthorized use. Audit trails help to enhance internal controls and data security. Audit trails
Page No.237
can help in fixing responsibility, rebuilding events and in thorough analysis of problem areas.
For example, audit trails can track activities of users thus fixing responsibility for users. These
can also be used to rebuild events upon occurring of some problem. Audit trail analysis can
specify reason of the problem. It can also help in ensuring operation of system as intended.
In this way, audit trails can help entities in their regular system operations.
However, audit trails involve costs. The cost is not only in terms of system expenditure but
also in terms of time involved in analysing data made available by audit trails. However, use of
automated tools can be made to analyse large volume of data thrown up by audit trails.
Systems which have a feature of audit trail inspires confidence in auditors. It helps auditors
in verifying whether controls devised by the management were operating effectively or not. It
aids in verification whether a transaction was indeed performed by a person authorised to do
it. Since audit trails also enhance data security, these can be used by auditor while performing
audit procedures thus increasing reliability of audit evidence obtained.
2. Assertions
A. Meaning of Assertions
It refer to representations by management, explicit or otherwise, that are embodied in
the financial statements, as used by the auditor to consider the different types of potential
misstatements that may occur.
B. Use of Assertions
In representing that the financial statements are in accordance with the applicable financial
reporting framework, management implicitly or explicitly makes assertions regarding the
recognition, measurement, presentation and disclosure of the various elements of financial
statements and related disclosures.
Assertions used by the auditor to consider the different types of potential misstatements
that may occur fall into following three categories:
Assertions about Classes of Transaction and events for the Period under Audit:
[OCACC]
5. Completeness (C): all transactions and events that should have been recorded have been
recorded.
6. Accuracy (A): amounts and other data relating to recorded transactions and events have
been recorded appropriately.
7. Occurrence (O): transactions and events that have been recorded have occurred and
pertain to the entity.
8. Cut-off (C): transactions and events have been recorded in the correct accounting period.
9. Classification (C): transactions and events have been recorded in the proper accounts.
Assertions about Account Balances at the Period End: [Everyone Require

Valuable Components]
Page No.238
1. Completeness (C): all assets, liabilities and equity interests that should have been recorded
have been recorded.
2. Existence (E): assets, liabilities, and equity interests exist.
3. Rights and obligations (R&O): the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
4. Valuation and Allocation (V&A): assets, liabilities, and equity interests are included in
the financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
Assertions about presentation and disclosure: [See All Our Cool Understandable
Disclosures]
1. Completeness (C): all disclosures that should have been included in the financial
statements shave been included
2. Accuracy and valuation (A&V): financial and other information are disclosed fairly and
at appropriate amounts.
3. Occurrence and rights and obligations (O&R&O): disclosed events, transactions, and
other matters have occurred and pertain to the entity.

4. Classification and understandability (C&U): financial information is appropriately
presented and described, and disclosures are clearly expressed
The auditor may choose to combine the assertions about transactions and events with the
assertions about account balances.
In case of entities where the Government is a major stakeholder, in addition to those assertions
explained above, management may often assert that transactions and events have been carried
out in accordance with legislation or proper authority.
Negative assertions are also encountered in the financial statements and the same may be
expressed or implied. For example, if it is stated that there is no contingent liability it would
be an expressed negative assertion.
Page No.239
CA Inter Audit May 24

1. Meaning and Nature of Auditing 2
2. Purpose of Auditing 2
3. Auditor’s task that Financial should not mislead 2
4. Objective of SA 200 2
5. Scope of Audit - What it includes & won’t 3
6. Inherent Limitation of Audit (SA 200) 3
7. Advantages of Audit of FS 5
8. Audit Mandatory or Voluntary ? 5
9. What is Engagement 5
10. Meaning of Assurance Engagement 6
11. Audit Vs. Review 6

12. Reasonable Assurance vs Limited Assurance 7
13. Prospective vs Historical financial Information 7
14. Engagement and Quality control standards : An Overview 7
15. Why are Standards required ? 9
16. Duties in relation to Standards 9
SA 300 11
1. Introduction 11
2. Benefits of Planning 11
3. Planning is a CONTINUOUS process 11
4. Planning Process- Elements of Planning 12
5. Audit Plan 14
6. Audit Plan : Auditor’s Responsibility 15
7. Relation between Strategy and Plan 15
8. Changes to Planning during the course of Audit 15
Page No.240
9. Direction Supervision and Review work of Team members 16
10. Documentation 16
11. Meaning of Audit Programme 16
12. Constructing an Audit Programme 17
13. Advantages of Audit Programme 17
14. Disadvantage of Audit Programme 18
Concept of Risk 19
1. Audit Risk 19
2. Risk of Material Misstatement 19
3. Inherent Risk 19

4. Control Risk 20
5. Detection Risk 20
6. What is not Audit Risk ? 21
7. Combined assessment of ROMM 21
8. Significant Risk 21
9. Assessment of risks- A matter of professional Judgment 22
SA 315 23
2. What is Risk Assessment Procedure? 23
3. How to do Risk Assessment Procedure? 23
4. What is included in Risk Assessment Procedure 23
5. Information obtained by performing RAP - Used as audit evidence 25
6. Understanding of Entity 25
7. Why understanding the entity and its environment is significant? 26
8. Understanding of the entity – a continuous process 26
9. Meaning of Internal Control 27
Page No.241
10. Limitation of Internal Control 27

11. Components Of Internal Control 28
12. Are all controls relevant to Audit ? 30
13. Nature and Extent of the Understanding of Relevant Controls 31
1. Evaluation of Internal Control– Methods 32
2. Benefits of evaluation of Internal controls 33
3. Formulate Audit Programme after understanding Internal control 33
IT Environment 35
1. What is Automated Environment 35
2. Key features of an Automated Environment 35
3. Understanding and documenting automated environment 36
4. Risks from the use of IT systems 36

5. Impact of IT risks on Substantive Audit, Controls and Reporting 37
6. Types of Controls in an Automated Environment 37
7. General IT Controls 37
8. Application Controls 39
9. IT dependent Controls 39
10. GITC vs App Controls 39
11. Testing Methods in an Automated Environment 39
12. Manual elements vs automated elements in entity’s internal control 40
13. Data Analytics for Audit 40
14. Digital Audit 41
15. Assess and Report Audit Findings 41
16. Documenting the Risk 42
17. Internal financial control as per Financial Reporting 42
18. Documenting the Risks 43
Page No.242
SA 330 43
2. What is Test of Controls (ICAI Module Point 7) 44
3. Nature and extent of Test of Controls 45
4. Timing of Test of Controls 45
5. Using Audit Evidence Obtained in Previous Audits 45
6. Evaluating the Operating Effectiveness of Controls 46
7. Specific inquiries when deviations from controls are detected 46
8. What is Substantive Procedure 46
9. Nature and Extent of Substantive Procedures 47
10. Test of Details 47
11. Substantive analytical procedures 47

SA 320 47
2. Materiality from Financial Perspective 48
3. What is materiality ? 48
4. Performance materiality 48
5. Benchmark 49
6. Other points related to materiality 49
7. Revision of materiality 50
8. Documentation of materiality 50
9. Materiality and Audit Risk 50
SA 500 51
1. Meaning of Audit Evidence 51
2. Types of audit evidence 51
3. Sufficient and appropriate audit evidence 52
Page No.243
4. Relevance and reliability of audit evidence 53

5. Auditor’s procedure for audit evidence 54
6. Type of audit procedures 54
7. Information to be used as Audit Evidence 55
8. Selecting Items for Testing to Obtain Audit Evidence 57
9. Inconsistency in or Doubts over Reliability of Audit Evidence 58
SA 501 58
2. Purpose of physical verification of inventory 58
3. Inventory 58
4. Auditor’s procedure for physical verification 59
5. Matters relevant in Planning Physical Verification 59

5. Physical Verification Counting at Other Dates 59
6. Auditor’s procedure for litigation & claims 61
7. Communication with External Legal Counsel 61
8. Segment Information 62
9. Obtaining sufficient appropriate audit evidence 62
10. Auditor’s Responsibility 62
11. Understanding of the Methods Used by Management 62
SA 505 63
1. Meaning of External Confirmation 63
2. Important Terms 63
3. Audit procedures for External Confirmations 63
4. Design of Confirmation Requests 63
5. Management Refusal to send confirmation requests 64
6. Negative Confirmations 65
Page No.244
7. Evaluating the Evidence Obtained 65
SA 510 66
1. Meaning of Initial audit engagement 66
3. Audit procedures for Opening balances 66
4. Misstatement in Opening Balances 66
5. Procedures adopted to Obtain Audit Evidence 67
6. Audit reporting 67
SA 520 68
1. Meaning of Analytical Procedures 68

3. Timing of Analytical Procedure 69
4. Factors to be considered for Analytical Procedures 69
5. Types of Analytical Procedure 70
6. Analytical Procedures as Substantive test 72
7. Suitability of particular analytical procedures for given assertions 72
8. Extent of Reliance on Analytical Procedures 72
9. The reliability of DATA 73
10. Evaluation whether expectation is sufficiently Precise 73
11. Amount of Acceptable Difference 74
12. Investigating results of Analytical Procedures 74
SA 530 74
1. Meaning of Audit Sampling 74
3. Meaning of Population 75
Page No.245
4. Characteristics of Population 75
5. Approaches to Sampling 75
6. Advantage of Statistical Sampling 76
7. Disadvantage with Non- Statistical Sampling 77
8. Sampling Risk 77
9. Non-Sampling Risk 77
10. Extent on checking on Sampling Plan 77
11. Stratification 77
12. Sampling Process 78
15. Selection of items for testing 80
16. Methods of Sample Selection 81
17. Random Sampling 81
18. Interval Sampling or Systematic Sampling 81

19. Monetary Unit Sampling 82
20. Haphazard Sampling 82
21. Block Sampling 82
22. Nature and causes of Deviation and misstatements 83
23. Projecting Misstatements 83
24. Evaluating Results from Audit Sampling 83
25. Important Terms 83
SA 550 84
1. Meaning of Related Parties 84
2. Nature of Related Party Transactions 84
3. Understanding of Related Party Relationships & Transaction 85
SA 610 86
1. Definition of Internal Audit Function 86
Page No.246
2. Ways in which the external auditor may make use for audit 86
3. Scope of SA 610 87
4. External Auditor’s Responsibility for the audit 87
5. Objectives of external auditor : Entity has internal audit function 87
6. Evaluating the Internal Audit Function 87
6. Objectivity and its evaluation 88
7. Competence and its evaluation 88
8. Application of a Systematic and Disciplined Approach 89
9. Circumstances :Work of the Internal Audit function Can’t Be Used 89
10. Determining the Nature and Extent of Work of the Internal Audit Function
that Can Be Used 89
11. Circumstances in which the external auditor shall plan to use less of the work

of the Internal audit function and perform more of the work directly 90
12. Using the Work of the Internal Audit Function 90
13. Determining Whether, in Which Areas, and to What Extent Internal Auditors
Can Be Used to Provide Direct Assistance 91
14. Basics of Internal Financial Control and Reporting Requirements 92
Audit of Items of Financial Statements 92

1. Share Capital 92
2. Reserves and Surplus 96
3. Borrowings 98
4. Trade Receivables 102
5. Cash and Cash Equivalents 104
6. Inventories 105
7. Audit of PPE 109
8. Audit of Intangible Assets 112
9. Trade Payables and Other Current Liabilities 114
10. Loans and Advances and Other Current Assets 116
Page No.247
11. Provisions and Contingent Liabilities 118

12. Sales of Product and Services 120
13. Other Income 123
14. Purchases 124
15. Employee Benefit Expenses 126
16. Depreciation and Amortisation 127
17. Other Expense 129
18. Other Disclosures 130
SA 230 132
2. What is Audit documentation (Working Papers) ? 132
3. Purpose/Importance of Audit documentation 133

4. Form content and extent of audit documentation 133
5. Documentation of Significant matters and Judgements 134
6. Completion Memorandum (Audit Summary) 135
7. Audit File 135
8. Assembly of Audit file 135
9. Ownership of Audit documentation 136
SA 260 136
2. Who are “TCWG”? 136
3. Significance of communication with TCWG 137
4. Matters to be communicated by auditor 137
5. Communication in case of Listed Entities 138
6. The Communication Process 138
7. Adequacy of the communication process 138
Page No.248
8. Documentation 138
SA 265 139
2. Meaning of Deficiency & Significant Deficiency 139
3. Examples of Matters 139
4. Examples of Indicators 140
5. Communication of Significant deficiencies 140
6. How it should be communicated ? 141
SA 560 141
1. Meaning of Subsequent events 141

3. Audit procedures for Subsequent events 142
4. Fact known After Date of Audit Report but Before Date of Issue of FS 142
5. Fact known After Date of Issue of FS 143
6. Refusal of Management to Amend 143
SA 570 144
1. Meaning of Going Concern 144
2. Management’s Responsibility for Assessment of Going Concern 144
4. Risk Assessment Procedures 144
5. Example of events that may impact Going Concern 145
6. Evaluating Managements Assessment 146
7. Audit procedures : When Event or Conditions are Identified 146
8. Implications for the auditor’s report 147
Page No.249
SA 580 148
1. Meaning of Written Representation 148
3. Written representation is requested from ? 149
4. Written representation about management’s responsibility 150
5. Why WR about management responsibilities are necessary? 150
6. Other Written Representations 151
7. Written representations about specific assertions 151
5. Date of and Period covered by Written Representations 151
6. Doubt as to the reliability of Written representations 152
7. Management’s refusal to provide representation 152
8. Disclaimer of opinion in case of Non Reliability of WR 152
SA 450 152
1. Objective 152
2. Accumulation of misstatements identified during the audit 152
3. Consideration of identified misstatements as the audit progresses 153
3. Communication and correction of misstatements 153
4. Evaluating the effect of uncorrected misstatements 153
5. Communication with TCWG 153
6. WR from management regarding effects of uncorrected statements 153
7. Documentation regarding misstatements identified during audit 154
SA 700 154
2. Financial Reporting Framework 154
3. Forming Opinion on FS 155
4. Evaluation of Qualitative aspects of accounting 155
Page No.250
5. Specific Evaluation of applicable FRF 155
6. Other Evaluation 156
7. Elements of Audit Report 156
8. UDIN 165
9. Audit Report as required by Law or Regulation (Along with Module) 165
SA 705 165
1. Types of Opinion 166
2. Circumstances when modification is required 166
3. Meaning of Pervasive 166
4. Types of Modified Opinions 168
5. Which type of Opinion is appropriate ? 168

6. Unable to obtain Sufficient Evidence - Mgmt. Imposed limitation 169
7. Audit Opinion: Form and Content in case of Modified Opinion 170
8. Basis for Opinion - Important 171
9. Description of Auditor’s responsibility in case of Disclaimer 172
10. Disclaimer of Opinion and KAM 172
SA 701 173
1. Meaning of KAM 173
3. Applicability 173
4. Purpose of Communicating KAM 173
5. Determining Key Audit Matters 173
6. Communicating Key Audit Matters 174
7. KAM is not a substitute for disclosure in FS 174
8. Communicating with TCWG 174
Page No.251
9. Example 174
SA 706 175
1. Meaning of Emphasis of Matter Paragraph 175
2. Meaning of Other Matter Paragraph 175
4. Emphasis of Matter Paragraphs in the Auditor’s Report 175
5. Separate section for Emphasis of Matter paragraph 175
6. Examples of circumstances of EOM 176
6. EOM is not Substitute for ? 176
6. Other Matter Paragraphs in the Auditor’s Report 176
7. Separate section for Other Matter paragraph 176
SA 710 177
1. Background 177
2. Meaning of Comparative Information 177
3. Type of Comparative Information 177
4. Difference in Approach 177
6. Audit Procedures for comparative information 178
7. Audit Reporting regarding Corresponding Figures 178
8. Prior Period Audited by a Predecessor Auditor 179
9. Audit Reporting regarding Comparative Financial Approach 179
SA 299 180
1. Requirements 180
2. Joint Responsibility 181
Page No.252
3. Communication Responsibility 181
4. Difference of Opinion 181
Audit of Branch Accounts 181

1. Responsibility of Principal Auditor 182
Companies (Auditor’s Report) Order (CARO) 183

A. Applicability of CARO, 2020 184
1. Clause (i): Property, Plant & Equipment & Intangible Asset 184
2. Clause (ii): Inventory 186
3. Clause (iii): Investments made, Guarantee or security given 186
4. Clause (iv): loans, investments, guarantees, and security given 187

5. Clause (v): Deposits 187
6. Clause (vi): Cost Records 187
7. Clause (vii): Statutory Dues 187
8. Clause (viii): Prior period undisclosed Income 188
9. Clause (ix): Default in repayment of loans and Borrowings 188
10. Clause (x): Issuance of Security 189
11. Clause (xi): Fraud 189
12. Clause (xii): Nidhi Companies 189
13. Clause (xiii): Related Party Transactions 190
14. Clause (xiv): Internal Audit & Auditor 190
15. Clause (xv): Non-Cash transactions 190
16. Clause (xvi): Banking & Investment Companies 190
17. Clause (xvii): Cash Losses 190
18. Clause (xviii): Resignation of statutory auditors 190
19. Clause (xix): Liquidity and solvency position 191
20. Clause (xx): Transfer of unspent amount of CSR funds 191
Page No.253
21. Clause (xxi): Qualification in CARO,2020 191

B. Qualification in report/unfavorable report 191
C. Fraud Reporting: 192
Audit of other Entities 192

1. What is Government Audit 193
2. Objective of Government Audit 193
3. Appointment of C&AG 194
4. Tenure and Fees 194
5. Duties of C&AG 194
6. Powers of C&AG 195
7. Expenditure Audit 195
8. Audit against Rules & Orders 196

9. Audit of sanctions 196
10. Audit against provision of funds 196
11. Propriety audit 197
12. Performance audit 197
13. Audit of Receipts 198
14. Audit of Stores and Inventories 198
15. Audit of Commercial Accounts 198
16. Reporting Procedures 200
A. Audit of NGO’s 201
1. Questions 201
2. Sources and Applications of Funds 202
3. Provisions Relating to Audit 202
4. Audit Programme 203
5. Verification of Income/Receipts 204
B. Audit of Firm 205
Page No.254
1. Questions 205
2. Matter Prior to Audit 205
3. Advantage of Audit 206
4. Audit of Accounts of Partnership firm 206
C. Audit of LLP 207
D. Audit of Charitable Institutions 209
E. Audit of Educational Institutions 211
F. Audit of Hospitals: 212
G. Audit of Hotels 214
H. Audit of Cinema 215
I. Audit of Club 216
J. Audit of Local body: 217

K. Audit of Cooperative Society: 219
L. Audit of Multi-State- Cooperative society 221
M. Audit of Hire Purchase and Leasing Companies 224
1. Meaning of Independence 225
2. Threat to Independence 226
4. Professional Skepticism (SA 200) 227
SA 210 228
2. Preconditions of Audit (SA 210) 228
3. Terms of Engagement Letter (SA 210) 229
4. If Preconditions are Not Present (SA 210) 229
5. Limitation on Scope Prior to Engagement (SA210) 229
6. Acceptance of change in terms of Engagement (SA 210) 229
7. Agreeing on New Terms (SA 210) 230
8. Unable to agree on new terms (SA 210) 230
Page No.255
9. Recurring Audit (SA 210) 231
SQC1 231
1. Audit Quality 231
2. Objective of SQC 1 231
3. Elements of System of Quality Control (HEMALE) 231
SA 220 235
2. Leadership responsibilities for quality on audits 236
3. Ethical Requirements 236
4. Acceptance and continuance of client relationship 236
5. Assignment of Engagement teams 236

6. Engagement Performance 236
7. Monitoring 237
Other Topics 237

1. Audit Trail 237
2. Assertions 238
A. Meaning of Assertions 238
B. Use of Assertions 238
Page No.256
Page No.257

Notes CA Inter Audit CA Himanshu

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5. The diversity and complexity of the entity’s operations.

6. Applicable legal and regulatory requirements.

13. Nature and Extent of the Understanding of Relevant Controls

CA Inter with CA Himanshu

1. Evaluation of Internal Control– Methods

Internal Control Questionnaire

CA Inter with CA Himanshu

2. Benefits of evaluation of Internal controls

3. Formulate Audit Programme after understanding Internal control

1. What is Automated Environment

2. Key features of an Automated Environment

CA Inter with CA Himanshu

3. Understanding and documenting automated environment

9. Key persons (CIO, CISO, Administrators).

Key words: Systems-Purpose-Location-Architecture-Version-Interfaces-Inhouse-Outsourced-

4. Risks from the use of IT systems

5. Impact of IT risks on Substantive Audit, Controls and Reporting

Impact on substantive checking

CA Inter with CA Himanshu

6. Types of Controls in an Automated Environment

4. Application system acquisition, development, and maintenance (Business Applications)

A. Data centre and network operations

D. Application system acquisition, development and maintenance

CA Inter with CA Himanshu

10. GITC vs App Controls

11. Testing Methods in an Automated Environment

12. Manual elements vs automated elements in entity’s internal control

13. Data Analytics for Audit

14. Digital Audit

CA Inter with CA Himanshu

15. Assess and Report Audit Findings

Some points to consider are as follows:

17. Internal financial control as per Financial Reporting

CA Inter with CA Himanshu

Relevant provision of Nature of Responsibility

18. Documenting the Risks

CA Inter with CA Himanshu

In designing the further audit procedures to be performed, the auditor shall:

CA Inter with CA Himanshu

2. What is Test of Controls (ICAI Module Point 7)

3. Nature and extent of Test of Controls

CA Inter with CA Himanshu

4. Timing of Test of Controls

5. Using Audit Evidence Obtained in Previous Audits

6. Evaluating the Operating Effectiveness of Controls

7. Specific inquiries when deviations from controls are detected

Irrespective of the assessed risks of material misstatement, the auditor

8. What is Substantive Procedure

9. Nature and Extent of Substantive Procedures

Because the assessment of the risk of material misstatement takes account

10. Test of Details

CA Inter with CA Himanshu

11. Substantive analytical procedures

and performing the audit.

2. Materiality from Financial Perspective

CA Inter with CA Himanshu

6. Other points related to materiality

Materiality Level or Levels for Particular Classes of Transactions, Account

procedures remain appropriate

9. Materiality and Audit Risk

1. Meaning of Audit Evidence

CA Inter with CA Himanshu