Auditing

Important Areas for CA – IPC
November Attempt
CA ARUN KUMAR THIRAKKANAM

GURUKUL FOR CA
AUDITING & ASSURANCE
Some General Points

 Students are adviced to refer to the RTPs for the
November Attempt without any failure
 Answer the practical questions in three parts
o Facts of the case
o Provisions of the law or standard
o Analysis and Conclusion
 Try to refer the section numbers and standard
numbers as far as possible
 With respect to the true or false statements – try to
give the reason for your answer in three of four
lines
 Vouching, verification, and special audits related
questions must be answered points wise
Wishing you all the success

CA T Arun kumar
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What are the advantages of an Independent Audit?

 Safeguards the interest of persons who are not associated with the management of the entity.
 Acts as a moral check on the employees from committing frauds.
 Helpful in calculating taxes, negotiating loans
 Helpful in determining the purchase consideration for a business.
 Useful in settling trade disputes for higher wages or bonus
 Useful in settling claims in respect of damage suffered by property, by fire or some other calamity.
 Detects internal control weaknesses.
 Audit ascertains whether the necessary books of account and allied records have been properly kept.
 Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
 Government may require audited and certified statement before it gives assistance or issues a license for a
particular trade.
What are the factors influencing existence of frauds and errors?
The risk of fraud or error in the financial statements depends upon so many factors such as
 Integrity and competence of the management
 Internal controls – weaknesses
 Availability of audit evidences
 Unusual pressures upon the entity
 Unusual transactions in the entity
What are the inherent limitations of an audit?
As per SA 200 the auditor can only obtain reasonable assurance because of the following limitations that the audit
suffers from-
Nature of Financial Reporting: Accounting involves accounting estimates. The accounting estimates are based
upon certain assumptions. There is always a risk that the assumptions may not be correct. Examples: Depreciation,
provisions etc.
Nature of Auditing: During the course of audit the auditor will be mostly relying on the information provided by
the management of the entity. The management at times may not provide information to the auditor or may
mislead the auditor by providing wrong information to the auditor and in these cases it will not be possible for the
auditor to arrive at a correct opinion.
Nature of Audit evidences: During the course of audit most of the evidences collected by the auditor will be of
persuasive in nature than conclusive.
Time and cost constraints: The audit has to be completed within certain cost limits and time limits. Thus for the
entities with huge volumes of transactions it might not be possible for the auditor to go for total verification. Most
of the times the auditor resorts to test checking or selective basis of checking. As the auditor is not verifying all the
transactions there is obvious risk that the auditor may not be able to identify all the misstatements.
Limitations of Internal Controls: The auditor for the purposes of his audit relies on strengths and weaknesses of
internal controls. However the internal controls do suffer from certain limitations. At times they look strong but
may not prevent the frauds and errors due to the limitations like collusion, manual errors, and management’s
abuse of power and business changes.
Define True and Fair view
The term true and fair view is not exhaustively defined. It includes the following aspects.
 Following accounting standards, consistency in accounting policies.
 In case of a company preparation of financial statements in accordance with Schedule III, and in case of
companies like insurance, banking and electricity companies in accordance with their respective statutes for
whom schedule – III is not applicable.
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 Following the pronouncements of ICAI issued in this regard (guidance notes, accounting standards)
 Proper valuation and disclosure of assets and liabilities along with charges on assets in accordance with
accepted accounting principles.
 Separate disclosure of all unusual, exceptional or non recurring items.
 Preparation of Books of accounts on accrual basis and double entry system
 Compliance with going concern assumption and prudence concept.
What is scope of an audit (or) Explain OVER ALL APPROACH FOR AN AUDIT
 Examination of the accounting and internal control system. Reviewing the system and procedures to find out
whether they are adequate and comprehensive and incidentally whether material inadequacies and
weaknesses exist to allow frauds and errors going unnoticed.
 Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.
 Verification of the authenticity and validity of transaction entered into by making an examination of the
entries in the books of accounts with the relevant supporting documents.
 Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that
the amounts of various items of income and expenditure adjusted in the accounts corresponding to the
accounting period.
 Comparison of the balance sheet and profit and loss account or other statements with the underlying record
in order to see that they are in accordance therewith.
 Verification of the title, existence and value of the assets appearing in the balance sheet.
 Verification of the liabilities stated in the balance sheet.
 Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
 Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
 Reporting to the appropriate person/body whether the statements of account examined do reveal a true and
fair view of the state of affairs and of the profit and loss of the organisation
What are the basic principles governing an audit?
The following are some of the basic rules that the auditor should follow while conducting an audit.
a. Integrity: The auditor should be straightforward, honest and sincere in his approach to his professional work.
b. Objectivity: The auditor should not hold any other contradictory works.
c. Independence: The auditor must be fair and must not allow prejudice or bias to override his objectivity. He
should maintain an impartial attitude.
d. Confidentiality: The auditor should not disclose any information to a third party without specific authority or
unless there is a legal or professional duty to disclose.
e. Skills and competence: The audit should be performed and the report prepared with due professional care by
persons who have adequate training, experience and competence in auditing. The auditor requires specialised
skills and competence which are acquired through a combination of general education, knowledge. The
auditor requires a continuing awareness of developments including pronouncements of the ICAI on
accounting and auditing matters, and relevant regulations and statutory requirements.
f. Work performed by others: When the auditor delegates work to assistants or uses work performed by other
auditors and experts he continues to be responsible for forming and expressing his opinion on the financial
information. However, he will be entitled to rely on work performed by others, provided he exercises
adequate skill and care.
g. Documentation: The auditor should document matters which are important in providing evidence that the
audit was carried out in accordance with the basic principles.
h. Planning: The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of the client’s business.
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i. Audit Evidence: The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to
base his opinion on the financial information.
j. Accounting System and Internal Control: Management is responsible for maintaining an adequate accounting
system incorporating various internal controls to the extent appropriate to the size and nature of the business.
The auditor should reasonably assure himself that the accounting system is adequate and that all the
accounting information which should be recorded has in fact been recorded. Internal controls normally
contribute to such assurance.
k. Audit conclusions and reporting: The auditor should review and assess the conclusions drawn from the audit
evidence obtained and from his knowledge of business of the entity as the basis for the expression of his
opinion on the financial information. The audit report should contain a clear written opinion on the financial
information and if the form or content of the report is laid down in or prescribed under any agreement or
statute or regulation, the audit report should comply with such requirements.
List down the differences between Final & Continuous Audit
Continuous Audit Final Audit
Periodical Execution of Audit Audit conducted at the year end
Can cover more number of transactions Has to go for selective basis of verification
Detects misstatements at the earliest Detection of misstatements after year end
Increased cost Reduced cost
Disturbs the clients routine works Comfortable for the client
Develops informal relation with client’s staff Less chances of informal relation with client’s staff
In depth examination might not be possible In depth examination possible
Chances of manipulation of audited books No chances of manipulating audited books
Lacks continuity of work Audit is completed at a stretch
Reliable financial information at any time Reliable financial information after year end
Write about Audit Methods
1. Inspection: Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection is mainly used with respect
to verification of documents and tangible assets.
2. Inquiry: Inquiry consists of seeking information of knowledgeable persons, financial and non- financial, within
the entity or outside the entity. Inquiries may range from formal written inquiries to informal oral inquiries.
Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence.
3. Observation: Observation consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the performance of
control activities.
4. External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party in paper form, or by electronic or other medium.
5. Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
6. Re-performance: Re-performance involves the auditor’s independent execution of procedures or controls that
were originally performed as part of the entity’s internal control.
7. Analytical Procedures: Analytical procedures consist of analysis of significant ratios and trends.
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Write about Surprise Check

 Surprise check refers to verification of certain areas without any prior intimation to the client.
 The surprise check is normally conducted in areas such as cash, inventory and internal controls.
 Through performing these surprise checks the moral check on employees will increase and more over
certain frauds can be identified only through these surprise checks.
 While carrying out these surprise checks the auditor has to keep time and areas of verification as surprise
elements.
 As per ICAI’s guidelines the auditor must try and carry out the surprise check at least once in every audit.
However the auditor may consider increasing the frequency of these surprise checks considering the
volumes of transactions, Internal Controls weaknesses and management’s instructions.
 The observations during the surprise check have to be reported to the appropriate level of management
and TCWG.
What is In-depth Examination?
It implies examination of a few selected transactions from the beginning to the end through the entire flow of the
transaction, i.e., from initiation to the completion of the transaction by receipt of payment of cash and delivery or
receipt of the goods. This examination consists of studying the recording of transactions at the various stages
through which they have passed. At each stage, relevant records and authorities are examined; it is also judged
whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the
prescribed procedure. For example, if payment to a creditor is to be verified “in depth”, it would be necessary to
examine the following documents:
 The invoice and statement of account received from the supplier.
 The entry in the inventory record showing that the goods were received.
 The Goods Received Note and Inspection Certificate showing that the goods on receipt were verified and
inspected.
 The copy of the original order and authority showing that the goods in fact were ordered by an authority
which was competent to do so.
It is to be emphasized that, so far as the management is concerned, the internal control should have willing
acceptance at the hands of the employees and there should exist proper mechanism for such motivation.
List down the situations where the Engagement Letter has to be re circulated in case of Recurring Audits
In case of a recurring audit, the auditor may decide not to send a new engagement letter each period. However,
the following factors may make it appropriate to send a new letter:
 Any indication that the client misunderstands the objective and scope of the audit
 Any revised or special terms of the engagement.
 A recent change in senior management, board of directors or ownership.
 A significant change in nature or size of the client’s business.
 Changes in Legal requirements, ICAI’s pronouncements
Should the auditor accept the changes requested by the management in engagement letter?
An auditor who, before the completion of the engagement, is requested to change the engagement to one which
provides a lower level of assurance, should consider the appropriateness of doing so.
The auditor would consider carefully the reason given for the request, particularly the implications of a restriction
on the scope of the engagement, especially any legal or contractual implications.
If the auditor concludes that there is reasonable justification to change the terms of engagement he will prepare
and give a new letter of engagement to the management. If the auditor is unable to agree to a change of the terms
of the audit engagement and is not permitted by management to continue the original audit engagement, the
auditor shall:
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(a) Withdraw from the audit engagement where possible under applicable law or regulation; and
(b) Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to
other parties, such as those charged with governance, owners or regulators.
What are the factors to be considered while deciding upon Materiality?
Materiality is a relative term and it differs from one audit to another and one area to another. The following
aspects must be taken into consideration while deciding up on the materiality
 At times the financial reporting framework applicable to the entity may mention the materiality levels for
certain areas. If that is the case the auditor can adopt those materiality levels.
 Most of the time the materiality is decided on the basis of the amounts involved.
 Sometimes even a small amount may become material considering its nature.
 The items which are material in the previous year will be considered material even for the current year.
What are the factors that influence the extent of reliance on Analytical Procedures?
The extent of reliance on analytical procedures depends upon the materiality, strengths and weaknesses of
internal control system, time availability to perform other audit procedures, risks involved and accuracy of
prediction. (Write in detail)
What is Audit risk and its components?
Audit risk is the risk that some of the material misstatements may remain undetected and the auditor gives an
audit opinion which is not appropriate. Audit risk arises due to the following risk factors -
Inherent risk is the risk that there will be material misstatement in accounting process when there were no related
controls.
Control Risk is the risk that internal control existing will fail to control misstatements.
Detection risk is the risk that substantive test of details will fail to detect misstatements.
Write about Risk Assessment Procedures
Risk Assessment Procedures and Related Activities:
a. Risk assessment procedures are those audit procedures which are carried out to identify the risks involved
in an audit. Risk assessment procedures by themselves do not provide sufficient appropriate audit
evidence on which to base the audit opinion
b. The risk assessment procedures shall include the following:
o Inquiries of management, and of others within the entity
o Analytical procedures.
o Observation and inspection
o Discussion among the engagement team.
o Using previous experiences
c. The engagement partner and other key engagement team members shall discuss the susceptibility of the
entity’s financial statements to material misstatement.
Write about Assertion level and Financial Statement level risks
The auditor has to assess the effect of identified risks both at financial statement level and assertions level.
A. Financial Statement Level:
a. Risks of material misstatement at the financial statement level refer to risks that relate pervasively to
the financial statements as a whole and potentially affect many assertions. Risks of this nature are
not necessarily risks identifiable with specific assertions at the class of transactions, account balance,
or disclosure level.
b. The following risks are some examples for risks at financial statement level
o Concerns about the integrity of the entity’s management
o Concerns about the conditions and reliability of an entity’s records
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o Unusual pressures on the management

o Nature of the entity’s business
o Factors affecting the industry in which the entity operates.
B. Assertion Level:
a. Risks of material misstatement at the assertion level for classes of transaction, account balances and
disclosures need to be considered.
b. Some of the examples for assertion level risks are
o Quality of accounting system, i.e., financial statements susceptibility to misstatements.
o Complexity of transactions requiring the work of an expert.
o The degree of judgment involved in determining account balances.
o Susceptibility of assets to loss or misappropriation.
o Transactions not subject to ordinary processing
What are the precautions to be taken while preparing an Audit Programme?
As per SA 300 the auditor has to consider the following aspects while planning an audit.
 The auditor has to first decide up on whether or not to accept or continue the audit engagement. The
auditor has to take this decision by keeping in mind firm’s policy, legal requirements, ethical
requirements, previous experiences and communication with the previous auditors
 After deciding up on acceptance or continuance of the audit, the letter of engagement has to be prepared
and submitted to appropriate levels of management and TCWG
 The auditor has to obtain the knowledge of business of the entity. The knowledge of business is very
helpful in understanding the risks that may exist in the entity that should be considered while planning.
The knowledge about business can be obtained by referring to preliminary documents such as
MOA/AOA/bye laws, Annual reports, previous working papers, industrial journals inquiring management
and TCWG etc.
 To plan his audit the auditor has to first understand his scope of work. He has to carry out compliance
procedures, risk assessment procedures and analytical procedures in order understand the risks involved.
 On the basis of risks involved the auditor has to decide upon nature, extent and timing of the audit
procedures.
 The audit programme prepared has to be changed from time to time depending up on the results from
carrying out the programmed audit procedures.
 The audit programme and changes made during the course of audit along with the reasons behind those
changes have to be documented properly.
 While planning an audit the auditor has to involve the audit team and has to conduct periodical meeting
with them during the course of the audit to review their work.
List down the limitations of Internal Control System
 The potentiality for human error.
 The possibility of dilution of controls through collusion.
 The possibility that a person exercising control could abuse (misuse) that authority.
 The possibility that control procedures may become outdated.
When a company is required to have an Internal Auditor? (Important for Practical Questions)
As per section 138 of the Companies Act, 2013 the following class of companies shall be required to appoint an
internal auditor or a firm of internal auditors, namely:-
 every listed company
 every unlisted public company having-
o paid up share capital of fifty crore rupees or more during the preceding financial year; or
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o turnover of two hundred crore rupees or more during the preceding financial year; or
o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
o outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year;
 every private company having-
o turnover of two hundred crore rupees or more during the preceding financial year; or
o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year:
What are the methods to verify Internal Control System?
Narrative record: The narrative record is a complete and exhaustive description of the system as found in
operation by the auditor. Actual testing and observation are necessary before such a record can be developed. It
may be recommended in cases of small business.
Check list: A checklist is a series of instructions or questions, which a member of the auditing staff must follow and
answer. When he completes instruction, he initials the space against the instruction. Answer to the checklist
instructions are usually Yes, No or Not Applicable. A few examples of checklist instructions are given hereunder:
 Are tenders called before placing orders?
 Are the purchases made on the basis of a written order?
 Are purchase order forms pre-numbered?
 Are the stock control accounts maintained by persons who have nothing to do with: Custody of work,
Receipt of stock, Inspection of stock, Purchase of stock.
Questionnaire: It refers to a list of questions prepared by the auditor in respect of which the answers are to be
provided by the client. ICQ can be prepared for the following areas. Cash and bank balances, Purchases, Sales,
Payroll, Inventory, Fixed assets, Investment. ICQ contains questions which are arranged in logical and sequential
manner in order to know about the working of internal control system. It consists of 3 vertical columns: Column 1 -
Questions, Column 2 - Space for answers, Column 3 - Remarks. Usually the answers are provided by the client in
the form of 'yes' 'no' or 'not applicable'.
Where the system has inherent defect the same is described in detail in the remarks column. ICQ is narrative in
nature. The auditor should be careful while framing the questions because if they are not properly related to each
other they may not bring out the defects existing therein thereby defeating the purpose of ICQ itself.
The main advantage of ICQ is that it can be prepared for any system whether simple or complicated. The main
disadvantage is that it is highly narrative in nature. Finally, the auditor has to report to the management the
weakness observed by him through ICQ.
Flow chart: A flow chart is a symbolic representation of flow of a transaction i.e. this refers to the pictorial
description of an existing system. It is one of the methods of evaluation of IC system of the client. It is giving more
emphasis on diagrammatic representation rather than narrative description
It involves the range of various symbols and signs. It discloses the document and information flow. For eg. In the
case of flow chart for purchases it shows how the various documents such as purchase orders, GRN are generated,
recorded, followed up and disposed of. It shows the origin of the document and the ultimate disposal thereof. The
main advantages of IC flow chart are diagrammatic in nature. However, it has a defect also that everyone cannot
understand it as it involves usage of symbols. Moreover, it cannot be applied in the case of simple systems.
Internal Control Evaluation: It is a summary document prepared by the auditor containing his major observations
during internal controls verification. It contains a set of questions formed in a negative manner which high light the
major weaknesses in the system.
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P ltd., a garment exporter, asked their internal auditor, a practicing chartered accountant, to conduct physical
verification of the yearend inventory and the report of such verification was handed over to the statutory
auditor for their view and use. Can statutory auditor rely on such report?
To determine the adequacy of specific work performed by the internal auditors for the external auditor’s purposes,
the external auditor shall evaluate whether:
 The nature and scope of specific work performed, or to be performed, by the internal auditors;
 The assessed risks of material misstatement at the assertion level for particular classes of transactions,
account balances, and disclosures.
 The work was performed by internal auditors having adequate technical training and proficiency.
 The work was properly supervised, reviewed and documented.
 Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable
conclusions.
 Conclusions reached are appropriate in the circumstances and any reports prepared by the internal
auditors are consistent with the results of the work performed.
 Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.
What are the factors determining the reliability of an Audit Evidence
The Appropriateness depends on relevance and reliability of audit evidence. The reliability of audit evidence again
is a relative term which can be decided based upon the circumstances by keeping in mind the following rules
(Reliability Standards)
 External evidence is more reliable than internal evidence.
 Internal evidence is more reliable when related internal control system is working satisfactorily.
 Evidence obtained by the auditor himself is more reliable than obtained from the entity.
 Documentary evidences are more reliable than oral evidences.
 Original documents are more reliable than photo copies.
 If the evidence received from different sources/forms is consistent there is a high level of reliance.
What are different types of Confirmation Requests?
 Positive confirmation request asks the third party to reply to the auditor in all cases either by indicating
agreement / disagreement with the given information or by asking third party to provide information. A
response to positive confirmation request is ordinarily expected to be reliable. If reply to a request is not
received in reasonable time, he may send an additional confirmation request.
 Negative confirmation request asks the third party to respond directly to the auditor only if there is
disagreement with the information provided in the request. It is considered to be less persuasive than the
positive confirmation request. Auditor should use them only if risk of misstatement is low, I.C. are
effective, Item contains small amount, Low exception rate is expected, No reason to believe that recipient
may disregard the request.
What are Auditor’s duties with respect to using External Confirmations?
While using external confirmations the auditor should decide the following
 Areas where confirmation technique has to be used
 Parties from whom confirmation has to be obtained
 Form of confirmation request has to be spent
 Date of confirmation
 Follow up action in case confirmation is not received
If the management restricts the auditor from obtaining confirmation the auditor has to inquire for the reasons. If it
is found to be intentional the auditor should reassess his risk. He must try and obtain the evidence from other
sources, if it is not possible the auditor may consider modifying his opinion in this regard.
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The auditor need not verify the Accounting policies every year - Comment
 The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies
reflected in the opening balances have been consistently applied in the current period’s financial
statements, and whether changes in the accounting policies have been properly accounted for and
adequately presented and disclosed in accordance with the applicable reporting framework.
 If the current period’s accounting policies are not consistently applied in relation to opening balances in
accordance with the applicable financial reporting framework; or a change in accounting policies is not
properly accounted for or not adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified opinion or an adverse opinion.
How should the auditor deal whenever there is a modification in the previous auditor’s report?
If the predecessor auditor’s opinion regarding the prior period’s financial statements included a modification to
the auditor’s opinion that remains relevant and material to the current period’s financial statements, the auditor
shall modify the auditor’s opinion on the current period’s financial statements.
List down the situations where sampling is not suitable
 Opening and closing balances.
 Matters involving estimation and computation. Example, depreciation, taxation etc.
 Presentation and disclosure of information in the financial statements.
 Items which are material.
 Transactions which the auditor is expected to check as required by law
 Transactions of non-recurring nature (like export sales) or exceptional transactions.
What precautions the auditor should take when adopting Audit Sampling
 The auditor must review the existence, system of internal control. If he finds that the system is either
defective or ineffective, he should not apply test checking.
 He should apply test checking if he finds that the transactions to be checked are homogeneous in nature.
 The sample of records selected for test checking should be taken on random basis and should be as far as
possible representative in nature.
 The sample selected should be representative in character i.e., work of almost all employees, all periods
and all the books should be included.
 The time available at the disposal of auditor is also to be considered while applying test check technique.
 The auditor must always review the results of test checking with a view to find whether there is any
further scope of checking records, not checked so far. The nature of errors detected through the test
checks may reveal this if they are probed carefully.
What are the advantages of Statistical Sampling?
 The sample size does not increase in proportion to the increase in the size of population.
 The selection is more objective and is based on mathematical law of probability.
 This method gives a minimum sample size associated with a specified risk and precision level.
 It also provides a means for taking a calculated risk and corresponding precision i.e., the probable
difference in the result due to checking of transaction on sample basis in lieu of checking the entire
universe.
 It may provide a better description of large mass of data than a complete examination of all the data.
Write about Audit Note Book & Audit Completion Memorandum
Audit Note Book:
The audit notebook contains auditor’s specific observations on matters in respect of which satisfactory explanation
was not readily or immediately available. In the course of follow-up of the observations recorded in the audit note
book, many of them get settled with explanations and evidences produced by the management latter, while
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deleting any such observation, the auditor also records against each of such observation the reasons for deletion.
Thereafter, the auditor is left with only the unsettled observations and considers them from various relevant
angles for preparing the audit report.
Significance:
 It is useful as evidence in the court, in case client files a case against the auditor.
 Therefore the audit notebook forms an important evidence of work done and points considered in the
course of an audit.
 The audit note book is also a very useful document to design the next audit programme so as to concrete
on debatable issues.
Audit Completion Memorandum
It is a summary that describes the significant matters identified during the audit and how they were addressed, or
that includes cross references to other relevant supporting audit documentation that provides such information.
Significance:
 Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation,
particularly for large and complex audits.
 Further, the preparation of such a summary may assist the auditor’s consideration of the significant
matters.
 It may also help the auditor to consider whether, in light of the audit procedures performed and
conclusions reached, there is any individual relevant SA objective that the auditor has not met or is unable
to meet that would prevent the auditor from achieving the auditor’s overall objective.
What factors the principal auditor should consider while relying upon the work of Another Auditor?
 Principal auditor should advise another auditor regarding use to be made of his report, Areas requiring special
consideration, Time Table for completion of audit, Significant accounting auditing and reporting requirement.
 Principal auditor should ask another auditor regarding any limitation on his work.
 Auditor should consider his findings. He may discuss them with him and branch officials.
 Principal auditor may require another auditor to submit questionnaire w.r.t. work performed by him.
 Principal auditor may require supplement tests to be performed by Another auditor ; or himself
 In case of foreign component, he should consider another auditor’s qualification and experience.
 If there is modification in another auditor’s report then, principal auditor should consider whether
modification in his report is required. If the principal auditor is unable to use the work of another auditor and
also unable to perform other audit procedures, he may consider modifying his opinion treating it as a
limitation on scope.
Write about the following
Opening or Introductory Paragraph
The Report should identify the financial statements that have been audited including the following:
 Entity
 Title of each component of financial statements
 Summary of accounting policies and explanatory information
 Date & Period covered by each financial statement
 Fact that financial statements have been audited
Management Responsibility Paragraph
It states that management is responsible for:
 Preparation of financial statements as per applicable FRF
 Design, implementation & maintenance of internal controls
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 Fair presentation of financial statements (in case, financial statements are prepared as per fair presentation
framework)
Auditor’s Responsibility Paragraph
 Responsibility is to express an opinion on the financial statements
 Audit was conducted in accordance with SA issued by ICAI
 Auditor complied with ethical requirements
 Auditor obtained reasonable assurance as to whether financial statements are free from material
misstatements
 Audit involves procedures to obtain evidences about amounts & disclosures in financial statements
 Procedures depend on the auditor’s judgement including RAP
 Auditor considers internal controls but do not express opinion thereon (if he is supposed express an opinion
there on he shall omit this phrase)
 Audit includes evaluation of accounting policies, accounting estimates & overall presentation of financial
statements
 Auditor believes that audit evidences are sufficient & appropriate to provide the basis for auditor’s report.
Emphasis of Matter Paragraph
The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention,
when in the auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s
report, to a matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that is fundamental to user’s understanding of the financial statements.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
 Include it immediately after the opinion paragraph in the auditor’s report;
 Use the heading “Emphasis of Matter”, or other appropriate heading;
 Include in the paragraph a clear reference to the matter being emphasised and to where relevant disclosures
that fully describe the matter can be found in the financial statements;
 Indicate that the auditor’s opinion is not modified in respect of the matter emphasised.
Limitation on scope refers to a situation where the auditor is unable to carry out some or all of his planned audit
procedures. In this situation the auditor will not be able to obtain sufficient and appropriate audit evidences which
are necessary in forming his opinion. Where there is a limitation on scope on auditor’s work which is of material
effect the auditor has to express a qualified opinion, whereas if it is of pervasive effect the auditor has to disclaim
his opinion.
Disagreement with management refers to a situation where in the auditor has identified certain misstatements
during the course of his audit and communicated the same to appropriate level of management & TCWG, however
they have not rectified the said misstatement. When the uncorrected misstatements are of material effect the
auditor has to qualify his opinion, however if it is of adverse effect the auditor must express an adverse opinion.
What are the payments restricted as per Companies Act 2013
 Under sub-section (1) of section 143, Clause (e) whether personal expenses charged to the revenue account of
a company should be reported.
 Under section 180, the Board of Directors of a company except with the consent of the company by a special
resolution exercises the following powers.
 To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings.
 To invest otherwise in trust securities the amount of compensation received by it as a result of any
merger or amalgamation;
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 To borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans
obtained from the company’s bankers in the ordinary course of business:
Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of
money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or
otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of
this clause.
 To remit, or give time for the repayment of, any debt due from a director.
 Under section 181, the Board of Directors of a company except with the prior permission of the company in
general meeting, contribute to the Bonafide charitable and other funds any amount in any financial year, the
aggregate of which exceeds 5% of its average net profits for the three immediately preceding financial years.
 Section 182 deals with prohibition and restriction regarding political contributions. According to this section, a
government company or any other company which has been in existence for less than three financial years
cannot contribute any amount directly or indirectly to any political party. In other cases, contribution in any
financial year should not exceed 7½ % of average net profits during the three immediately preceding financial
years.
Section 183 permits the Board and other person to make contributions to the National Defence Fund or any other
Fund approved by the Central Government for the purpose of National Defence to any extent as it thinks fit.
Write about Cut off Procedures
Business is a continuous affair involving various activities such as purchase, manufacture, selling etc.
Consequently, accounting of these transactions is also a continuous affair. It is necessary that the transactions
relating to different periods are segregated so that true and fair profit can be arrived at.
 The accounting process by which such segregation takes place is called cut off procedure. Such procedure is
adopted in respect of purchases, sales, and inventory.
 Ex 1: while closing the books of accounts for the year ending 31st March 2002, the company should ensure
that the sales made in the month of April are not considered in the accounts and at the same time the sales
made in the month of March are not included in the subsequent years accounts.
 By adopting this procedure, the auditor is in a position to satisfy himself that the profit or loss disclosed by
financial statements is not affected by fictitious entries.
Some of Important Areas in Vouching
Advertisement Expenses
 Obtain the complete list of media of advertisement i.e., newspaper, slides, hoardings, magazines,
television, radio etc. showing the dates, exact location, timings, etc. along with the amounts paid in
respect of each category.
 The auditor should see that the advertisement has been authorised by a responsible officer.
 See that the advt. exp. incurred for acquisition of capital asset is added to cost of such asset.
 Where an advance for advt. is paid for, the auditor should see that the same is adjusted latter.
 If there is a regular contract with an advertising agency, see that regular statements are obtained from
the agency showing the advertising media and amounts debited to the client.
 See that the voucher is supported by the receipts or paper-cuttings of all the advertisements.
 See that the disclosure requirements of Sch.III have been complied with or not.
Travelling Expenses
 Refer to the travel policy of the client.
 See whether the travel is authorised by responsible official.
 Check the calculations in the travelling expenses statements.
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 See whether the reports of travelling expenses, submitted by the employees are supported with all the
possible evidences for the amounts spent.
 Whether amount claimed for sundry expenses such as tips etc. is reasonable.
 See whether personal expenses of the employees are claimed.
 Where an advance for traveling expenses is given to the employee, see that the same is adjusted latter.
 Where the traveling allowance is given in the place of traveling expenses see the calculations.
 If the company had booked tickets or hotel room and made payments directly, see that these have not been
claimed again as reimbursement by the employee.
Government Grants
 Note the amount of Subsidy and the conditions subject to which it is sanctioned.
 The application for subsidy submitted to the authorities should be studied.
 It should be ascertained whether the grant is of a capital nature for funding assets or of a revenue nature.
Mere computation formula of quantum of grant with reference to the cost of project of itself will not make
the grant a capital nature ipso facto.
 The accounting of grant should be in accordance with AS 12 “Accounting for Government Grants” of ICAI. The
revenue grant can be taken to income statement, with appropriate disclosure.
 The capital grant may be adjusted against cost of asset or may be kept in a capital reserve to be transferred to
profit and loss account each year in proportion to depreciation of that asset charged in profit and loss account.
 The receipt of the subsidy should be checked with bank statement.
 The conditions attached to subsidy should be fulfilled by the company. The auditor should check whether any
liability or refund of grant for breach of conditions could arise
Payment of Income Tax
 Check the computation of income tax.
 Check the tax rates applicable for the concerned period.
 Check the Income Tax return filed by the client.
 Check the adjustment of advance taxes and tax deductions at source before arriving at the final liability.
 Check the challans supporting the payment of income tax.
 If the income tax is paid against any demand notice issued by the department verify the same.
 Ensure that the payment of income tax has been duly accounted and adjusted to the provision created in the
previous year.
 Reporting Requirements as per Clause – 7 or CARO 2015
Selling Agents Commission
 Ensure that the payment is properly authorised.
 Check the agreements with the agent and see whether they are complied with.
 Check the correctness of the calculations.
 In case commission is given only on the realisation from the debtors verify the amounts received and check
the calculations accordingly.
 Check the adjustments w.r.t bad debts, sales returns & Cancelled orders.
Insurance Premium
 See whether the payment is properly authorised.
 Check the policy document physically.
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 See that the voucher is supported with the receipt for the premium paid.
 Find out whether the insurance coverage is adequate.
 See that the insurance premium paid for the part of the next year is debited to prepaid expenses account.
 Where the policy is not renewed the auditor should enquire into the reasons.
Payment of Gratuity
 Understand the policy of the entity. Examine the basis on which the gratuity payable to employees is worked
out.
 Check the computations/amount of gratuity paid to employees who were retired during the year with
reference to number of years of service rendered by them.
 See that the annual contributions have been charged to Profit and Loss Account in case the concern is making
the contributions to an outside fund.
 See that the annual premium has been charged to Profit and Loss Account in case the concern has taken a
policy from LIC.
 See that the contributions/premium paid is adequate.
 See that gratuity is recognized on accrual basis.
 See that the provisions of the gratuity act have been complied with.
 The auditor should treat the actuary as an expert and conduct procedures relevant to checking the opinion of
an expert in accordance with SA 620.
 The auditor should check the technical competence of actuary, the input fed to the actuary, the assumptions
made by the actuary, the methodology adopted by the actuary, opinion given etc.
 The auditor should bear in mind the relevant pronouncements of AS 15 “Employee benefits” in this regard. He
should check whether the expenses of provision for gratuity are towards a defined benefit plan or
contribution plan.
Write about Impairment of assets
 Besides charging annual depreciation by the reason of wear and tear etc., to re-instate the correct value of the
assets, impairment loss needs to be provided.
 The difference between the carrying amount of an asset and recoverable amount is termed as Impairment
Loss.
 The treatment of impairment loss is similar to depreciation except that impairment loss can be re-instated in
future if the recoverable amount of the asset exceeds the carrying amount.
 Various external and internal sources of information can be taken as the basis of determining the impairment
for Assets.
 The auditor must ensure that provisions of AS 28 are followed.
Some important areas in Verification
Tangible Assets
 Carry out Physical Verification.
 Verify ownership of plant and machinery by inspecting the purchase invoices.
 Register: In case number of P & M owned is large, a Register is generally maintained by the entity. The auditor
should also examine it to ascertain existence & ownership.
 Verify the purchases by checking Board resolution & supporting evidences like invoices etc.
 In case of sale check the authority for sale with the board resolution and Supporting evidences such as cash
receipt.
 See whether proper depreciation is provided in the accounts.
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 Ensure that the expenses incurred for installation of the machinery have been capitalised.
 In case the plant and machinery is self generated see that no profits have been booked and only the cost
incurred have been capitalised.
 Review the repairs account to confirm that distinction is made between capital & revenue expenses.
 The auditor should also look into insurance policies taken for P & M.
 Ascertain the charges, if any. Sometimes, a floating charge may be created over such assets. If they exist, see
that the provisions companies act have been complied with.
 Ensure that the assets are properly disclosed in the as per Schedule III.
 In case of vehicles verify the registration documents and vehicle log book maintained by the entity.
 In case of Land, verify the registration deed and ensure that no depreciation is claimed.
 In case of Buildings, verify the registration deed and municipal tax receipts.
 In case of Lease Hold Property, verify the lease agreement and also compliance of AS 19.
 In case of fixed assets situated abroad, ensure that the FEMA rules and RBI’s regulations have been complied
with.
 In case of assets acquired on Hire Purchase system, verify the Hire Purchase agreement and ensure that the
asset is accounted at its cash price.
Intangible Assets
 In case the number of patents is large, the auditor can obtain a schedule of patents.
 The auditor can verify the existence & ownership of a patent by examining certificates issued upon the
registration of the patent.
 In case patent rights have been purchased, the assignment deed surrendering seller’s right should be
examined.
 The cost of a patent purchased includes its purchase price and the registration cost.
 The cost of a patent if developed by the client it self, all research and development expenses, including
registration fees and other direct costs incurred in creating it, should be capitalised.
 The auditor should ensure that renewal fees paid have been debited to profit and loss account. The latest
renewal receipt should also be examined to ensure that patent rights are ‘alive’.
 The auditor should ensure that patents are being shown at cost less amortisation charges.
 The cost should be written off over the legal term of its validity or over its useful commercial life, whichever is
shorter.
 However, if it is found that the patent rights have already lost substantial part of their commercial value, it
would be proper to value it at their residual commercial value, when it is less than the book value.
 In case the product covered by the patent rights does not have any sale value then patents should be shown at
nil valuation notwithstanding any residual life.
Investments in securities
 Obtain the schedule of investments in hand containing description, date of purchase, face value, book value,
market value, rate of interest, date of payment of interest etc.
 Examine whether the objective clause of MOA permits the company to make the investments.
 See that purchases/sales are made only after the sanction of proper authority.
 Carry out physical verification of the investment certificates or title deeds of immovable properties.
 Check the prices paid/received with reference to the broker’s contract note.
 See that the expenditure incurred on account of transfer fees, stamp duty etc. is included in the cost of
investments.
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 Special attention should be paid to investments purchased or sold cum-dividend, ex- dividend, cum-interest,
ex-interest, cum rights/ex-rights or cum bonus /ex-bonus.
 Other’s name: If the entity is holding investments otherwise than in the name of the enterprise, the auditor
should try to ascertain the reasons for the same and examine relevant documentary evidence.
 Other’s custody: The auditor should see the justification for keeping the investments in the custody of third
parties.
 Satisfy that the investments are properly valued (AS-13) & disclosed (Schedule III).
 In case of Investments in Subsidiary, verify the compliance of AS 21 and also obtain confirmation from the
concerned subsidiary.
 In case of Investments in Associate, verify the compliance of AS 23 and also obtain confirmation from the
 In case of Investments in Joint Venture, verify the compliance of AS 27 and also obtain confirmation from the
In case of Investments in Partnership Firm, verify the partnership deed and also obtain latest financial statements
of the concerned firm to ensure that the share of profit or loss has been properly accounted in company’s books.
Inventory
 Examine the existence & efficiency of internal control procedures in relation to the custody of stock in trade.
 The extent of auditor’s attendance at stocktaking would depend upon his assessment of the efficiency of
relevant internal control procedures, and the results of his examination of the stock records maintained by the
entity.
 See that the instructions issued by the management are being actually followed. Perform test counts to satisfy
himself about the effectiveness of the count procedures.
 See that the discrepancies (differences) noticed on physical verification have been investigated and properly
accounted for.
 Where stocks of the entity are held by third parties the auditor should also examine the justification for keep-
ing the stock in the custody of third parties. Also obtain written confirmation directly from third parties on the
stocks held.
 See that adequate provision has been made for obsolete and spoiled stock.
 See that the write off’s made against the proper authority.
 See that the stock is properly insured.
 See that valuation is made at Cost or NRV whichever is lower. See the compliance of AS – 2
Bills receivable
 Obtain the schedule of Bills receivable in hand containing name of the parties, date of bill drawn, Amount, rate
of interest, due date etc.
 Carry out a physical verification of the bills receivable on hand.
 See that they are in Safe custody.
 See that they are drawn under proper authority.
 See that they are properly drawn, stamped, duly accepted etc.
 Obtain confirmation certificate from bankers in case they are lying with bankers for collection.
 See that bills discounted by proper authority & the accounting entries passed are correct.
 If discounted bills have been dishonoured, the auditor should ensure adequate provision has been made for
irrecoverable amount.
 The auditor should see that amount of bills discounted is shown as a contingent liability.
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Loans given
 Examine whether the objective clause of MOA permits the company to lend the loans.
 Obtain confirmation from the borrowers for the amount of loan.
 Check the title deeds of the land mortgaged or other securities.
 Check the entries in the Loan register.
 Examine the mortgage deed and find out whether it is properly executed. If it is a second mortgage, check
whether the first mortgagee has been informed of the second mortgage and whether he (the first mortgagee)
has the title deeds relating to the property.
 See whether amount is being repaid as per the mortgage deed & if not whether reasonable steps have been
taken by the company for recovery of the principal and interest.
 See whether loans given to other companies are at a rate of interest not less than the bank rate in case of
Inter Corporate loans.
 Compliance of Section .143(1).
 In case the loan is give to a director, verify the recoveries made and also ensure the disclosure requirements
as per AS 18.
Loans taken
 Reconcile the balances in the loan account with that shown in the pass books.
 Confirm it by obtaining a certificate from the bank.
 Verify the authority under which the loan has been raised. In the case of a company, only the Board of
Directors is authorised to raise a loan from a bank.
 Ensure compliance with Companies Act provisions
 See that the purpose for which loan has been raised and the manner in which it has been utilised.
 See that the terms & conditions of the loan agreement have been complied with or not. (For example,
restrictions as to dividend payment, maintenance of debt equity ratio etc.).
 Secured loan: Where the market value of an asset offered as a security against loan has fallen below the
amount of a loan outstanding, the auditor should ensure that the loan is classified as secured only to the
extent of market value of security.
 If any loan has been discharged get it confirmed with the loan discharge certificate.
 In case the loan is taken from a subsidiary, ensure the compliance with AS 18.
 In case of Foreign Currency Loans, ensure that the closing balances are restated as per AS 11.
 In case of short term loans like over drafts & cash credits, the stock statements submitted to the bank have to
be verified.
Final and Interim Dividend
 Examine the company’s Memorandum and Articles of Association to ascertain the dividend rights of different
classes of shares.
 Confirm that the profits appropriated for payment of dividend are distributable having regard to the
provisions contained in Section 123 If the company proposes to pay the dividend out of past profit in reserves,
see that either this is in accordance with the rules framed by the Central Government in this behalf or the
consent of the Government has been obtained.
 Inspect the shareholders’ Minute Book to verify the amount of dividend declared and confirm that the amount
recommended by the directors.
 If a separate bank account was opened for payment of dividends, check the transfer of the total amount of
dividends payable from the Dividends Accounts.
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 Check the particulars of members as are entered in the Dividend Register or Dividend List by reference to the
Register of Members, test check the calculation of the gross amount of dividend payable to each shareholder
on the basis of the number of the shares held and the amount of CDT, if applicable. Verify the casts and cross
cast of the different columns.
 Check the amount of dividend paid with the dividend warrants surrendered. Reconcile the amount of dividend
warrants outstanding with the balance in the Dividend Bank Account.
 Examine the dividend warrants in respect of previous years, presented during the year for payment and verify
that by their payment, any provision contained in the Articles in the matter of period of time during which
amount of unclaimed dividend can be paid had not been contravened.
 According to section 123, as it is compulsory for a company to transfer the total amount of dividend which
remains unpaid or unclaimed, within thirty days of the declaration of the dividend to a special bank account
entitled “Unpaid Dividend Account of .... Company Limited/Company (Pvt.) Limited”. Such an account is to be
opened only in a scheduled bank. The transfer must be made within 7 days from the date of expiry of thirty
days.
 The expression “dividend which remains unpaid” means any dividend the warrant in respect thereof has not
been enchased or which has otherwise not been paid or claimed.
 In case any money transferred to the unpaid dividend amount of a company remain unpaid or unclaimed for a
period of seven years from the date of such transfer shall be transferred to Investor Education and Protection
Fund established under section 125 of the Act.
 Ensure the compliance, in case dividend is paid in case of inadequate profits.
 A company may distribute part of its profits during the two annual general meetings. That means, a company
may declare dividends before the close of the accounting year and finalisation of accounts. Board may from
time to time pay to the members such interim dividend as appeared to be justified by the company.
Sweat equity shares
 The shares must be of the class already issued i.e. the sweat equity shares issued by the company must be are
of a class of shares already issued.
 At least 1 year must have completed since the Co. became entitled to commence business.
 The shareholders shall pass a special resolution authorizing the issue of such shares.
 The resolution authorising the issue should specify the number of shares, current market price, consideration,
if any, and the class of directors or employees to whom such equity shares are to be issued.
 If the company is listed on stock exchanges, sweaty equity shares can be issued as per the regulations made by
SEBI.
 In the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat
equity shares are issued in accordance with the prescribed guidelines.
Bonus shares
 The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
 It complies with such conditions as may be prescribed like the company which has once announced the
decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
 The bonus shares shall not be issued in lieu of dividend.
Reduction of Share capital
 To verify that the alteration of capital is authorised by the Articles.
 See that the procedure prescribed by the articles is complied with.
 To inspect the minutes of the shareholders meeting authorising the alteration.
 Examining the order of the Court confirming the reduction.
 See that the necessary intimation to the Registrar is made.
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 Vouching the journal entries recorded to reduce the capital and to write down the assets by reference to the
resolution of shareholders and other documentary evidence.
 Verifying the adjustment made in the members’ accounts in the Register of Members and confirming that
either the paid up amount shown on the old share certificates have been altered or new certificates have been
issued in lieu of the old, and the old ones have been cancelled.
 Confirming that the words “and reduced”, if required by the order of the Court, have been added to the name
of the company in the Balance Sheet.
Utilization of Security Premium Account
Companies Act merely discusses the restriction on utilisation of share premium as contained in Sec.52. The
securities premium account can be utilised only for any of the following purposes:
 Issuing fully paid bonus shares to members.
 Writing off of the balance in preliminary expenses of the company.
 Writing off of the commission paid or discount allowed, or the expenses incurred on issue of shares or
debentures of the company.
 For providing the premium payable on redemption of any redeemable preference shares or debentures of
the company.
 For buy back of shares u/s 68.
Reissue of Forfeited Shares
 See that the articles permit such reissue.
 Check whether proper notice was given to member who has defaulted in payment.
 Refer to the resolution of the Board of Directors, re-allotting forfeited shares. See that Reissue is made at a
price such that the total sum paid by the original owner of shares together with the reissue price is not less
than the par value. In other words, the discount on re-issue should not exceed the amount forfeited on those
shares.
 See that the profits resulting on the reissue of shares credited to the Capital Reserve Account.
 Ensure the compliance with Sec 53 of the companies Act.
Some Important Areas in Special Audits
Educational Institutions
 The educational institutions are mostly formed as a society or trust. The auditor must refer the preliminary
documents like Byelaws or trust deeds in order understand the objectives of the educational institution and its
rules and regulations. He must also refer to the minutes of the meetings of governing body or managing
committee. In case of university verify the provisions of corresponding statute.
 Verification of Fees Receipts: The auditor before verifying the fees receipts must understand the different
types of fees that have to be collected from the students as per the rules of the institution (Eg: Admission fees,
Tution fees, Material Fees and Hostel Fees etc..). He has to verify the following aspects w.r.t fees receipts
o Verify copies of fees receipts
o Cross verification of number of students with class registers
o Over all reconciliation of fees collections
o In case of reimbursements from Government the documents collected in that regard
o In case of fees dues pending for long periods, the reasons for the same.
o See that free studentship and concessions have been granted by a person authorised to do so, having
regard to the Rules prepared by the Managing Committee.
o Confirm that fines for late payment or absence, etc. have been either collected or remitted under
proper authority.
 Verification of Donations & Grants received: Auditor has to verify the following aspects
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o Receipts in Bank statements

o Verify terms of Grant sanction letter and its compliance
o Verify whether the donations are used for the purposes for which they have been given
o Verify the accounting of donations
 Verification of Investment Income: Auditor has to verify the following aspects
o Understand the entity’s investment policy
o Conduct physical verification
o Verify the entries in Investment registers
o Ensure that the incomes are properly recognized on accrual basis periodically.
 Verification of Other Incomes: Auditor has to verify the following aspects
o Verify rental income from landed property
o Verify receipts from sale of waste papers in cash book
 Verification of Expenses: Auditor has to verify the following aspects
o Verify the governing body approvals for all the capital expenditure incurred
o Compare the actual amounts of expenses with that of budgeted amounts and inquire the abnormal
deviations
o Verify the calculations of salaries
o Ensure that the amounts of provident fund, ESI, professional tax have been properly deducted from
the employees’ salaries
o Verify the depreciation calculations
o Verify the fixed assets register and ensure that all the fixed assets are properly insured
o Verify the controls in Library with respect issue and recovery of books
 The educational institutions can avail tax benefits under Income tax act, the auditor has to ensure that the
available benefits are properly claimed and the conditions if any for claiming those benefits are properly
fulfilled.
 The auditor must also verify that the income tax refunds receivable are received properly. If the refunds are
pending for long periods the reasons have to be inquired.
 The auditor should ensure that the financial statements are properly prepared and all the funds have been
properly disclosed.
Hospitals
 Hospitals are mostly formed as a society or trust. The auditor must refer the preliminary documents like
Byelaws or trust deeds in order understand the objectives and its rules and regulations. If the hospital is
registered as a company the auditor has to go through its memorandum and articles of association. He must
also refer to the minutes of the meetings of governing body or managing committee.
 Verification of Consultancy Fees Receipts: The auditor before verifying the fees receipts must understand the
rules of the hospital and the rates of its consultancy fees. In case of multi specialty hospitals the auditor has to
understand the different services that are rendered and its respective consultancy fees. He has to verify the
following aspects w.r.t consultancy fees receipts
o Verify copies of fees receipts
o Ensure that the hospital is having proper controls to ensure that all the services rendered to a patient
are properly billed
o Cross verification of consultancy fees received with patients registers
o In case of reimbursements from Government or Insurance companies the documents collected in that
regard
o See that free consultancy if any have been granted by a person authorised to do so, having regard to
the Rules prepared by the Managing Committee.
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 Verification of Donations & Grants received: Auditor has to verify the following aspects
o Verify terms of Grant sanction letter and its compliance
o Verify whether the donations are used for the purposes for which they have been given
 Verification of Incomes from Laboratory and Pharmacy: These laboratories or pharmacies may be maintained
by the hospitals on their own or else out sourced. If they are out sourced the auditor has to verify the sharing
agreement with the party and ensure that the hospital’s share of income is properly received.
If they are maintained on own the auditor has to verify the controls with respect to billing. He has to verify
that the inventories lying in pharmacy are properly valued. He has to ensure that the medicines which passed
their expiry date are not shown in the inventory balances.
 The auditor has to check whether the receipts of participation fee for seminars conducted by the hospital are
properly accounted and are in accordance the rules and regulations framed.
deviations
o Verify the payments made to specialists, surgeons with the help of bank statement and the
agreements with the concerned parties
 Hospitals can avail tax benefits under Income tax act, the auditor has to ensure that the available benefits are
properly claimed and the conditions if any for claiming those benefits are properly fulfilled.
properly disclosed.
Hotels
 A Hotel is usually constituted as a company. Therefore, various provisions of the Companies Act, 2013 relating
to the audit of accounts of companies are also applicable to its audit. The auditor has to refer memorandum
and articles of association along with minutes of its board meetings to understand the rules and regulations of
the Hotel.
 Verification of Room Rentals & Banquet Hall Rentals: The auditor has to ensure that the entity is having
proper control to identify the services provided to the guests and bill them properly. The auditor for this has
to understand the different kinds of suites that are available and the tariff rates for the same. He has to verify
the following aspects
o Duplicate copies all bills acknowledging the receipt from guests.
o Corresponding receipts in Cash book or Bank book.
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o Compare the tariff rates throughout the year and obtain the reasons for abnormal differences if any in
this regard.
o Compare the room occupancy ratios for different periods and obtain reasons for any abnormal
deviations.
o For ledgers coming through travel agents or other booking agencies the bills are usually made on the
travel agents or booking agencies. The auditor should ensure that money are recovered from the
travel agents or booking agencies as per the terms of credit allowed.
o The auditor should ensure that proper records re-maintained for booking of halls and other premises
for special parties and recovered on the basis of the tariff.
o The auditor should ensure that proper valuation of occupancy-in-progress at the balance sheet date is
made and included in the accounts.
 Verification of Incomes from Bars & Restaurants: These may be maintained by the Hotel on their own or else
out sourced. If they are out sourced the auditor has to verify the sharing agreement with the party and ensure
that the share of income is properly received.
If they are maintained on own the auditor has to verify the controls with respect to billing. The existence of
system of KOT/BOTs and their daily reconciliation has to be ensured. He has to check whether there are
proper controls with respect to storage and issue of stock.
o Check whether the entity is having proper controls w.r.t parking receipts. Ensure that the parking
receipts are duly accounted in cash book.
o Verify rental income received from rental of space to ATMs, showrooms etc.
o Verify the monies received in cash book or bank statement for sale of scrap.
o In large hotels it is usual to operate a booth to facilitate conversion of foreign currencies to Indian
rupees. The auditor should ensure compliance with the various applicable provisions of Foreign
Exchange Management Act, 1999 and the rules framed by Foreign Exchange Dealers Association.
o Verify the approvals for all the capital expenditure incurred
o Check whether the entity is claiming higher depreciation rates for its furniture & fittings.
o Commission, if any, paid to travel agents or booking agents should be checked by reference to the
agreement on that behalf.
o The auditor should see that costs of renovation and redecoration are treated as deferred revenue
expenditure, where as costs of major alterations and additions to the hotel building and facilities
capitalised.
o The inventories in any hotel are both readily portable and saleable particularly the food and beverage
inventories. It is therefore extremely important that all movements and transfers of such inventories
should be properly documented
o Pilfering is one of the greatest problems in any hotel and the auditor has to ensure that the hotel is
having proper control system in operation to address these petty losses.
o The auditor has to ensure whether all the applicable licenses have been properly obtained and
renewed periodically
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o The food cost percentages throughout the period have to be compared and abnormal deviations if any
have to be inquired for.
o Ensure that the entity is collecting all the applicable taxes properly and remitting the same to the
concerned authorities within due dates.
Charitable Institutions
 The Charitable institutions are mostly formed as a society or trust. The auditor must refer the preliminary
documents like Byelaws or trust deeds in order understand the objectives of the educational institution and its
rules and regulations. He must also refer to the minutes of the meetings of governing body or managing
committee.
 Verification of Subscriptions & Donations received: Auditor has to check whether the entity is having proper
internal control system with respect to collection of subscriptions & donations. He has verify the following
aspects
o Verify the counterfoils
o Controls on donation receipts books
o Cross verify the entries in subscriptions & donations registers
 Verification of Grants received: Auditor has to verify the amounts of grants received with Bank statements
and corresponding grant sanction letters.
o Verify rental income with the help of rental agreements.
o Examine the system of internal check regarding moneys received from box collections, flag days, etc.
and checking the amount received from representatives, with the correspondence and the official
receipts issued.
o Legacies - Verifying the amounts received by reference to correspondence with any figures and other
available information.
o Vouching gross receipts and outgoings in respect of any special functions, e.g. concerts, dramatic
performance, etc., held in aid of the charity with such vouchers and cash statements as are necessary.
In particular, verifying that the proceeds of all tickets issued have been accounted for, after making the
allowance for returns.
deviations
o Ensure that all the expenses incurred by the entity are for the purposes for which the charitable
institution is formed.
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 Charitable Institutions can avail tax benefits under Income tax act, the auditor has to ensure that the available
benefits are properly claimed and the conditions if any for claiming those benefits are properly fulfilled.
properly disclosed.
Government Expenditure audit
 Audit against rules and orders: In this auditor looks for whether the expenditure incurred complies with the
relevant provisions of the act and in accordance with the financial rules and regulations.
These rules and orders mainly fall under the following categories:
o Rules and orders dealing with the making of the claims against government, withdrawing moneys from
the Consolidated Fund, Contingency Fund.
o Rules and orders regulating the powers to incur and sanction expenditure from the Consolidated Fund
of India or of a State and the Contingency Fund of India or of a state.
o Rules and orders regulating the conditions of service, pay and allowances and pensions of government
servants.
Duty of auditor in this regard:
o It is the function of the government executives/employees to frame rules and orders, which are to be
observed by its subordinate authorities. The auditor is to see that these rules and orders are complied
with by the subordinates. It is, however, not the function of auditor to prescribe what such rules &
orders shall be.
o In this the auditor will see that they are not inconsistent with any provisions of the Constitution or
laws or rules made by any higher authority.
 Audit of Sanctions: The government auditor has to ensure that the expenditure is subject to proper sanction
by competent authority. It is a two-fold aspect to be covered namely.
o Existence of sanction &
o Sanction should be by appropriate authority.
 Audit against Provision of Funds: In this the auditor looks for that the expenditure incurred has been for the
purpose for which the grant has been provided and the amount of expenditure does not exceed the amount
provided for.
 Propriety Audit: The term propriety refers to reasonableness or appropriateness. The Government auditor
tries to bring about instances of improper, avoidable, useless expenditure. Government auditor should not
only see the regularity aspect, but also match with the various standards of propriety. (i.e. Instead of too much
dependence on documents, vouchers, etc. it shifts the emphasis to the substance of transactions and looks
into financial prudence, public interest and the need of expenditure.)
Government audit is basically performed by combining both the angles of regularity and propriety. It is seen
whether every officer has exercised the same care in respect of expenditure as a person of ordinary prudence
(carefulness) would exercise in expenditure of his own money.
There cannot be any precise rules in regard of propriety. However some general rules can be framed which are
given below:
o The expenditure should not be prima facie more than the occasion demands.
o No authority should sanction the expenditure so that it will be a direct or indirect benefit to him.
o Public money should not be utilised for the benefit of a particular person or section of the community
unless:
The amount of expenditure is insignificant.
The expenditure incurred is to comply with a recognised policy or custom.
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The claim for the expenditure can be enforced even in the court of law.
o The amount of allowances, such as traveling expenses should be so controlled that the allowances are
not the sources of profit to the recipients.
 Performance Audit: Performance Audit involves preliminary study, planning & execution of audit and
reporting. It aims to ascertain that government programmes have achieved the desired objectives at the
lowest cost and given the intended benefits. It includes:
o Efficiency audit: The efficiency audit finds out whether the various projects are executed and
operations conducted efficiently. In other words a constant comparison is made between the input
and output. The object of efficiency audit is to find out the extent to which operations are carried out
in an efficient manner.
o Economy audit: It finds out whether the government has acquired the financial, human and physical
resources in the most economic manner and whether the sanctioning and spending authorities have
observed economy.
Effectiveness audit: It is aimed at carrying out an appraisal of the performance of programmes, schemes and
projects with reference to over all objectives as well as efficiency of the means adopted for the attainment of the
objectives.
Special elements in Local Bodies Audit
The objective of local body’s budgetary procedure is financial Accountability, control of expenditure, and to
ensure that funds are raised and moneys are spent by the executive departments in accordance with the rules
and regulations and within the limits of sanction and authorization by the legislature or Council. Different
aspects covered in budgeting are - determining the level of taxation, fees, rates, and laying down the ceiling
on expenditure, under revenue and capital heads.
At the State and Central level, there is a clear demarcation between the legislature and executive. In local
body, legislative powers are vested in the council where as executive powers are delegated to the officers, e.g.
Commissioners. All matters of regular Revenue and expenditures are generally delegated to the executive
wing. For special situations like, reduction in property taxes, refund of security deposits, etc. sanction from the
legislative wing is necessary.
Municipal Accounting System has been conventionally prepared under the Cash System. In the recent past
however, it is being changed to the accrual system of accounting. The accounting system is characterised by:
o Subsidiary and statistical registers for taxes, assets, cheques etc.,
o Separate vouchers for each type of transaction,
o Compulsory monthly bank reconciliation,
o Submission of summary reports on periodical basis to different authorities at regional state level.
Write about different approaches of audit in EDP environment
Audit around Computer - The Black Box Approach: In early days of data processing applications, computers could
be considered as another type of book keeping machine. Computer functions used to replicate manual processes
in a straightforward way. Thus, the auditor completely ignores what is happening inside the computer.
 Since this approach completely relies on non - EDP segment of a system, it is commonly known as auditing
around the computer. Under this approach auditing is done in usual traditional way. No attempt is made to
test the client’s EDP system and to use the computer for auditing purpose.
 In this approach the auditor does not verify the processing part of the computer application programs but
verifies the controls that exist.
 Audit around the computer can be followed when:
o Source documents are available in a non machine language.
o The documents are maintained in such a way that it is possible to read manually.
o It is possible to trace individual transactions from source documents to output and vice versa.
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o Auditing around the computer is acceptable approach when the information needs of client’s organisation
require it to maintain the necessary source documents, detailed outputs and the system is batch oriented
and simple.
 The advantages of this approach are:
o This method is fast, easy and inexpensive,
o It requires less knowledge of computers,
o Since the source documents are available in non-machine language, audit trails are easy to trace,
o There is no possible risk of tampering with client’s data.
Audit through computer: This approach involves running the auditor’s program on a controlled basis in order to
verify the client’s data recorded in the computer. The auditor can perform different kinds of tests and other
functions with such computer program. These include:
o There are several circumstances where it is compulsory to use auditing through computer:
o The application system processes large volumes of input and produces large volumes of output,
o Significant parts of the internal control system are embodied in the computer system,
o The logic of the system is complex and
o Because of cost-benefit considerations, there are substantial gaps in the visible audit trail.
The primary advantage of this approach is that the auditor has increased power to effectively test a computer
system. Thus the auditor acquires great confidence that data processing is correct.
The primary disadvantage of this approach is that it is very costly and it requires expert technical knowledge. The
most serious problem in this approach is to obtain a suitable program at a reasonable cost. Three options are
available:
o Use the client’s program.
o Write a program specifically for the audit.
o Use computer assisted audit techniques (CAATs)
In first 2 options the auditor should have expert knowledge in the area of computers. However, Computer Assisted
Audit Software is readily available which do not need expert knowledge.
Write about CAAT
The use of computers may result in the design of systems that provide less visible evidence than those using
manual procedures. CAATs are such techniques applied through the computer which are used in verifying the data
being processed by it. System characteristics resulting from the nature of EDP processing that demand the use of
Computer Aided Audit Techniques (CAAT) are:
 The absence of input documents (e.g. order entry in on-line systems) or the generation of accounting
transactions by computer programs (e.g. automatic calculation of discounts) may preclude the auditor from
examining documentary evidence.
 The lack of a visible audit trail will preclude the auditor from visually following transactions through the
computerized accounting system.
 The lack of visible output may necessitate access to data retained on files readable only by the computer.
Advantages of CAAT:
 Audit effectiveness: The effectiveness and efficiency of auditing procedures will be improved through the use
of CAAT in obtaining and evaluating audit evidence.
 Savings in time: The auditor can save time by reviewing the EDP controls using CAAT than using other audit
procedures.
 Effective test checking and examination in depth: CAAT permits effective examination in depth of selected
transactions since the auditor constructs the lost audit trail.
Audit Trail in EDP Environment
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 Audit Trail’ refers to a situation where it is possible to relate, on a “one-to-one” basis, the original input with
the final output.
 In a manual accounting system, it is possible to relate the recording of a transaction of each successive stage
enabling an auditor to locate and identify all documents from beginning to end for the purpose of examining
documents, totaling and cross-referencing.
 In first and early second generation computer systems, a complete audit trail was generally available.
 However, with the advent of modern machines, the EDP environment has become more complex.
 This led to use of exception reporting by the management which effectively eliminated the audit trail between
input and output.
Write about Engagement Quality Control Review SA 220
1. For audits of financial statements of listed entities and those other audit engagement quality control
reviews is required, the engagement partner shall:
o Determine that an engagement quality control reviewer has been appointed,
o Discuss significant matters with the engagement quality control reviewer, and
o Not date the auditor report until the completion of the engagement quality control review.
The engagement quality control reviewer shall evaluate the following:
o Discussion of significant matters with the engagement partner
o Review of the financial statements and the proposed auditors report
o Review of selected audit documentation and
o Conclusions reached in formulating the auditor’s report and consideration of whether the
proposed auditor’s report is appropriate.
o The engagement team’s evaluation of the firms independence
o Whether appropriate consultations has taken place and the conclusions arising from those
consultations
o Whether audit documentation selected for reviews reflects the work performed and supports
the conclusions reached.
What is Professional Skepticism – SA 240
o The auditor shall maintain an attitude of professional skepticism throughout the audit.
o He should recognize the possibility that a material misstatement due to fraud could exist.
o If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
o Where responses to inquiries of management or TCWG are inconsistent, the auditor shall investigate
the inconsistencies.
List down the Indicators for Non Compliance of Laws & Regulations – SA - 250
 Investigations by regulatory organisations & government departments or payment of fines or penalties.
 Payments for unspecified services or loans to consultants, related parties, employees or government
employees.
 Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid by the entity
or in its industry or to the services actually received.
 Purchasing at prices significantly above or below market price.
 Unusual payments towards legal and retainer ship fees.
 Unusual transactions with companies registered in tax havens.
 Payments without proper exchange control documentation.
 Existence of an information system which fails to provide adequate audit trail or sufficient evidence
 Unauthorised transactions or improperly recorded transactions.
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 Adverse media comment.

Auditor’s duties when a non compliance of Law is detected – SA 250
 Reporting Non – Compliance to Those Charged with Governance:
o Unless all of those charged with governance are involved in management of the entity, the auditor
shall communicate with those charged with governance matters involving non compliance with laws
and regulations that come to the auditor’s attention.
o If, in the auditor’s judgment, the non-compliance is believed to be intentional and material, the
auditor shall communicate the matter to those charged with governance as soon as practicable.
o If the auditor suspects that management or those charged with governance are involved in non-
compliance, the auditor shall communicate the matter to the next higher level of authority at the
entity, if it exists, such as an audit committee or supervisory board. Where no higher authority exists,
or if the auditor believes that the communication may not be acted upon, the auditor shall consider
the need to obtain legal advice.
 Reporting Non-Compliance in the Auditor’s Report on the Financial Statements:
o If the auditor concludes that the non-compliance has a material effect on the financial statements,
and has not been adequately reflected in the financial statements, the auditor shall, express a
qualified or adverse opinion on the financial statements.
o If the auditor is precluded by management or those charged with governance from obtaining
sufficient appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an
opinion.
o If the auditor is unable to determine whether non-compliance has occurred because of limitations
imposed by the circumstances rather than by management or those charged with governance, the
auditor shall evaluate the effect on the auditor’s opinion.
 Reporting Non-Compliance to Regulatory and Enforcement Authorities: If the auditor has identified or
suspects non-compliance with laws and regulations, the auditor shall determine whether the auditor has a
responsibility to report the identified or suspected non-compliance to parties outside the entity.
Responsibilities of Joint Auditors - SA 299
The joint auditors will have individual responsibility if the work is properly divided among them.
However in the following cases the joint auditors will have joint responsibilities
 With respect to undivided work
 With respect to planning nature, extent and timing of audit procedures
 With respect to the work agreed to be verified jointly
 With respect to presentation and disclosure
 Reporting responsibilities
If there is any difference of opinion among the joint auditors then those who differ from the opinion must submit a
separate audit report.
Test of Controls or Compliance Procedures – SA 330
o An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion level.
o If there have been changes in the controls, the auditor shall test the controls in the current audit.
o If there have not been such changes, the auditor shall test the controls at least once in every third
audit, and shall test some controls each audit.
o When the auditor plans to rely on controls over a significant risk, the auditor shall test those controls
in the current period.
o Auditor should consider whether misstatements that have been detected indices that controls are
not operating effectively. Even if there are no identified misstatements, controls may not be effective
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o
The auditor shall communicate material weakness in internal control identified during the audit on a
timely basis to management at an appropriate level and TCWG.
How to identify Related Parties in an audit of entity – SA 550
 Review working papers of prior years for the names of known related parties
 Evaluate the company’s procedures for identifying & proper accounting of related party transactions
 Ask for the list of related parties from appropriate management personnel
 Inquire as to the affiliation of directors and key management personnel
 Review shareholders’ records to determine the name of major and influential share holders
 Review minutes of meeting of board of directors, executive committees and share holders
 Review the papers or prospectus file with SEBI
 Review the statutory records maintained for interested parties
 Review joint venture and other agreements
 Review accounting records for long, unusual or non-recurring transactions
 Review major investment transactions during the year
 Review income-tax return and assessment proceedings of the entity.
Explain the concept of Dual Dating – SA 560
Dual Dating: The auditor amends the auditor’s report to include an additional date restricted to that amendment;
the date of the auditor’s report on the financial statements prior to their subsequent amendment by management
remains unchanged because this date informs the reader as to when the audit work on those financial statements
was completed. However, an additional date is included in the auditor’s report to inform users that the auditor’s
procedures subsequent to that date were restricted to the subsequent amendment of the financial statements.
Illustration of such an additional date “(Date of Auditor’s report), except as to Note Y, which is as of (date of
completion of audit procedures restricted to amendment described in Note Y)”
Indicators indicating risk for Going Concern – SA 570
Financial Indicators Operational Indicators Other Indicators
 Negative worth/working  Management intentions to
Net  Pending legal proceedings;
capital; liquidate the entity or to cease  Change in law or regulations or
 Arrears/discontinuance of operations. Government Policy affecting the
Dividends;  Loss of key management and no entity adversely; or
 Adverse financial ratio; replacement available;  Non – compliance with
 Substantial operating losses;  Loss of major market or supplier; Statutory requirements
 Borrowing approaching maturity  Labour difficulties, strikes etc; or
without any chance of  Loss of major licence, franchise,
renewal/repayment; etc.
 Short term borrowing for long  Shortages of important supplies
term asset financing;  Emergence of a highly successful
 No payment to creditors on due competitor.
date.
 Non compliance with terms in
loan agreement;
 Negative cash flow from
operations;
 Rearrangement with creditors
for reduction in liability; or
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 Change from creditors to cash

on delivery transaction with
supplier.
Factors to be considered while using the work of an Expert – SA 620

 In case, auditors considers that using the work of auditors expert is necessary, he shall determine whether
the work of that expert is adequate by considering the following:
o Competence, capability and objectivity of auditor’s expert’s:
o He shall evaluate whether expert is having necessary skills & objectivity.
o He should inquire regarding expert’s objectivity also.
o He should be aware of the relationships that may hamper expert’s independence.
 Understanding the field of expertise of auditor’s expert:
o He should understand the field of expertise of that expert through discussion with him.
o This understanding will help the auditor in evaluating the adequacy of work of auditor’s expert.
 Agreement with Auditor’s expert: Auditor shall agree with auditor’s expert on following matters:
o Nature, scope & objectives of that expert’s work.
o The role & responsibilities of auditor & that expert.
o Timing etc. of communication (including report to be provided by expert) between the auditor &
that expert.
o Need for auditor’s expert to observe confidentiality.
 Evaluating Adequacy of auditor’s expert’s work:
o Reasonableness of expert’s findings.
o Consistency of findings of that expert with other evidences.
o Reasonableness of assumptions used by expert,
o Reasonableness & accuracy of source data used by expert
o If auditor determines that work of expert is not adequate, he shall perform further procedures.
Some Important Areas in Company Audit
Disqualifications (Important for Practical Questions)
Important Areas – Indebtedness, Holding Security, Business Relations,

Restricted Services, Ceiling Limit on audits
Body Corporate A body corporate is disqualified to be appointed as auditor of a
company because of the limited liability which may increase the
negligence while performing the audit.
However a LLP is eligible to be appointed as auditor of a
company even though it comes under the meaning of Body
Corporate.
Officer or Employee Officer or Employee and their employees and partners are
Partner or Employee of the above disqualified bearing in mind their independence.
Securities held by Person, Partner or A person is disqualified to be appointed as auditor of a company
Relative if he himself or his relative or his partner holds any security or
interest in such company or its subsidiary or its holding or its
other subsidiary or its associate.
This disqualification is framed keeping in mind the
independence of the auditor.
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However there are some relaxations with respect to securities

held by Relative:-
 Relative can hold securities whose face value does not
exceed Rs 1,00,000 /-
 If in case after the appointment of the auditor, the
relative of such auditor acquires the securities in excess
of the limit mentioned above then the corrective action
must be taken within sixty days of such acquisition.
Indebtedness of Person, Partner or Relative This disqualification is designed keeping in mind the
to the company independence of the auditor.
The disqualification will be attracted if the indebtedness is in
excess of Rs 5,00,000/-
Even the advance receipt of audit fees is treated as
indebtedness. However the auditor will be disqualified if he has
received any progressive payment of audit fees.
Guarantee provided by a person, his partner This disqualification is designed keeping in mind the
or his relative to the company independence of the auditor.
The disqualification is attracted when the guarantee is provided
on behalf of a third party to the company.
Business relation with the company Any firm or person having business relationship with the
company or its subsidiary or its holding or its other subsidiary or
its associate or the subsidiary of its associate.
The term “business relationship” shall be construed as any
transaction entered into for a commercial purpose, except
 commercial transactions which are in the nature of
professional services permitted to be rendered by an
auditor or audit firm under the Act and the Chartered
Accountants Act, 1949 and the rules or the regulations
made under those Acts;
 Commercial transactions which are in the ordinary
course of business of the company at arm’s length price
- like sale of products or services to the auditor, as
customer, in the ordinary course of business, by
companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such
other similar businesses.
Relative of Director or KMP This disqualification is framed keeping in mind the
independence of the auditor.
Person in full time employment This disqualification is framed keeping in mind objectivity of the
auditor
Ceiling limit on number of audits A person cannot hold more than 20 companies audits at a time.
However it does not include
 One person company
 Dormant company
 Small company
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 Private limited company with paid up capital less than

100 crores
In case of a firm of chartered accountants then the each partner
will have 20 audits.
Convicted for an offence A person who has been convicted by a Court of an offence
involving fraud and a period of ten years has not elapsed from
the date of such conviction.
Person providing restricted services to the The person must not provide the following services either
company directly or indirectly
o Accounting and book keeping services;
o Internal audit;
o Design and implementation of any financial
information system;
o Actuarial services;
o Investment advisory services;
o Investment banking services;
o Rendering of outsourced financial services;
o Management services; and
o Any other kind of services as may be prescribed.
Appointment of Auditors
Appointment of First Auditors in the case of a company, other than a Government Company:
As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed by
the Board of Directors within 30 days from the date of registration of the company. In the case of failure of the
Board to appoint the auditor, it shall inform the members of the company.
The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor.
Appointed auditor shall hold office till the conclusion of the first annual general meeting
Appointment of First Auditors in the case of Government Company:
As per Section139 (7) provides that in the case of a Government company or any other company owned or
controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or
partly by the Central Government and partly by one or more State Governments, the first auditor shall be
appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the
company.
In case the Comptroller and Auditor-General of India do not appoint such auditor within the above said period, the
Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure
of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall
appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the
conclusion of the first annual general meeting.
Appointment of subsequent auditors in case of Non-Government Companies:
Section139(1) provides that every company shall, at the first annual general meeting appoint an individual or a
firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting.
The following points need to be noted in this regard-
 The company shall place the matter relating to such appointment of ratification by member at every Annual
General Meeting. It is hereby clarified that, if the appointment is not ratified by the members of the company,
the Board of Directors shall appoint another individual or firm as its auditor or auditors.
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 Before such appointment is made, the written consent of the auditor to such appointment, and a certificate
from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed,
shall be obtained from the auditor. The certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141.
 The company shall inform the auditor concerned of his or its appointment, and also file a notice of such
appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.
 A retiring auditor may be re-appointed at an annual general meeting, except in the following circumstances-
o A specific resolution has not been passed to reappoint the retiring auditor
o The auditor proposed to be reappointed does not possess the qualification prescribed under section 141
of the Companies Act, 2013.
o The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and 144 of the
Companies Act, 2013.
o He has given to the company notice in writing of his unwillingness to be reappointed.
o A resolution has been passed in AGM appointing somebody else or providing expressly that the retiring
auditor shall not be reappointed.
o A written certificate has not been obtained from the proposed auditor to the effect that the
appointment or reappointment, if made, will be in accordance within the limits specified under section
141(3)(g) of the Companies Act, 2013.
 If at an AGM retiring auditor is not reappointed or new auditor is not appointed it is deemed that the retiring
auditor is reappointed.
Appointment of subsequent auditors in case of Government Companies:
As per Section 139(5), in the case of a Government company or any other company owned or controlled, directly
or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, the Comptroller and Auditor-General of India shall, in
respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this
Act, within a period of 180 days from the commencement of the financial year, who shall hold office till the
conclusion of the annual general meeting.
Filling up casual vacancy
 In the case of a company other than a Government company, Casual vacancy is filled by the Board of Directors
within 30 days.
 If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved
by the company at a general meeting convened within three months of the recommendation of the Board and
he shall hold the office till the conclusion of the next annual general meeting.
 In the case of a Government company casual vacancy in Auditor’s Office is filled by the Comptroller and
Auditor-General of India within thirty days. In case C&AG fail to do so the Board of Directors shall fill the
vacancy within next 30 days.
 As per section 140 (2) the auditor who has resigned from the company shall file within a period of thirty days
from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in
case of Government companies the auditor shall also file such statement with the Comptroller and Auditor
General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. In
case of failure the auditor shall be punishable with fine which shall not be less than fifty thousand rupees but
which may extend to five lakh rupees as per section 140 (3).
Removal of Auditors (Important for Theoretical Questions)
Section 140 lays down procedure to appoint an auditor other than retiring auditor who was removed:
 Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person
other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except
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where the retiring auditor has completed a consecutive tenure of five years or as the case may be, ten years,
as provided under subsection (2) of section 139.
 On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring
auditor.
 Where notice is given of such a resolution and the retiring auditor makes with respect thereto representation
in writing to the company (not exceeding a reasonable length) and requests its notification to members of the
company, the company shall, unless the representation is received by it too late for it to do so,-
o In any notice of the resolution given to members of the company, state the fact of the representation
having been made; and
o Send a copy of the representation to every member of the company to whom notice of the meeting is
sent, whether before or after the receipt of the representation by the company. and if a copy of the
representation is not sent as aforesaid because it was received too late or because of the company's
default, the auditor may (without prejudice to his right to be heard orally) require that the representation
shall be read out at the meeting.
o If a copy of representation is not sent as aforesaid, a copy thereof shall be field with the Registrar.
Removal after expiry of term
According to Section 140 (1) the auditor appointed under section 139 may be removed from his office before the
expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central
Government in that behalf as per Rule 7 of CAAR, 2014:
 The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be
accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees)
Rules, 2014.
 The application shall be made to the Central Government within thirty days of the resolution passed by the
Board.
 The company shall hold the general meeting within sixty days of receipt of approval of the Central
Government for passing the special resolution. It is important to note that before taking any action for
removal before expiry of terms, the auditor concerned shall be given a reasonable opportunity of being heard.
Duties of Auditor
Important Areas – 143(1), 143(3) clauses: e, g, I, j ; 143(12)
1. Section 143(1) Duty of Auditor to Inquire on certain matters:
a. whether loans and advances made by the company on the basis of security have been properly secured
and whether the terms on which they have been made are prejudicial to the interests of the company or
its members;
b. whether transactions of the company which are represented merely by book entries are prejudicial to the
interests of the company;
c. where the company not being an investment company or a banking company, whether so much of the
assets of the company as consist of shares, debentures and other securities have been sold at a price less
than that at which they were purchased by the company;
d. whether loans and advances made by the company have been shown as deposits;
e. whether personal expenses have been charged to revenue account;
f. Where it is stated in the books and documents of the company that any shares have been allotted for
cash, whether cash has actually been received in respect of such allotment, and if no cash has actually
been so received, whether the position as stated in the account books and the balance sheet is correct,
regular and not misleading.
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The auditor is not required to report on the matters specified in sub-section (1) unless he has any special
comments to make on any of the items referred to therein.
2. Duty to Sign the Audit Report:
The person appointed as an auditor of the company shall sign the auditor's report or sign or certify any other
document of the company, in accordance with the provisions of sub-section (2) of section 141 and the
qualifications, observations or comments on financial transactions or matters, which have any adverse effect
on the functioning of the company mentioned in the auditor's report shall be read before the company in
general meeting and shall be open to inspection by any members of the company.
3. As per sub section 3 of section 143, the auditor’s report shall also state –
a. whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the
effect of such information on the financial statements;
b. whether, in his opinion, proper books of account as required by law have been kept by the company so far
as appears from his examination of those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
c. whether the report on the accounts of any branch office of the company audited under sub-section (8) by
a person other than the company’s auditors has been sent to him under the proviso to that sub-section
and the manner in which he has dealt with it in preparing his report;
d. whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
e. whether, in his opinion, the financial statements comply with the accounting standards;
f. The observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;
g. whether any director is disqualified from being appointed as a director under subsection (2) Of the
section 164;
h. any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith;
i. whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls;
j. Such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014
prescribes the other matters to be included in auditors report.
o whether the company has disclosed the impact, if any, of pending litigations on its financial position
in its financial statement;
o whether the company has made provision, as required under any law or accounting standards, for
material foreseeable losses, if any, on long term contracts including derivative contracts;
o Whether there has been any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company.
4. Duty to state the reason for qualification or negative report: As per sub section 4 of Section 143, where any
of the matters required to be included in the audit report is answered in the negative or with a qualification,
the report shall state the reasons there for.
5. Duty to comply with Auditing Standards: Every auditor shall comply with the auditing standards. CG may
prescribe the standards of auditing or any addendum thereto, as recommended by the ICAI in consultation
with and after examination of the recommendations made by the National Financial Reporting Authority.
6. Duty to report on frauds: As per sub section 12 of section 143 of the Companies Act, 2013, if an auditor of a
company, in the course of the performance of his duties as auditor, has reason to believe that an offence
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involving fraud is being or has been committed against the company by officers or employees of the company,
he shall immediately report the matter Central Government immediately but not later than sixty days of his
knowledge and after following the procedure indicated herein below:
o auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately
after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;
o on receipt of such reply or observations the auditor shall forward his report and the reply or observations
of the Board or the Audit Committee along with his comments on such reply or observations of the Board
or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or
observations;
o in case the auditor fails to get any reply or observations from the Board or the Audit Committee within
the stipulated period of forty-five days, he shall forward his report to the Central Government along with
a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee
for which he failed to receive any reply or observations within the stipulated time.
o Further, the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed post followed by an email in confirmation of the
same. This report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
The report shall be in the form of a statement as specified in Form ADT-4.
o If any auditor does not comply with the provisions of sub-section (12) of section 143, he shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five
lakh rupees)
7. Duty to report on any other matter specified by Central Government: The Central Government may, in
consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of
such class or description of companies, as may be specified in the order, that the auditor's report shall also
include a statement on such matters as may be specified therein.
CARO, 2015
Important Areas: Applicability of CARO, Clauses – 1,2,3,7 and 8

The Central Government, after consultation with the Institute of Chartered Accountants of India, has issued the
Companies (Auditor’s Report) Order, 2015, (CARO, 2015) under section 143(11) of the Companies Act, 2013, dated
10th April, 2015. The requirements of the Order are supplemental to the existing provisions of section 143 of the
Act regarding the auditor’s report.
Applicability of the Order
The order applies to every company including a foreign company.
However, the Order specifically exempts the following class of companies-
(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938;
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the Companies Act;
(v) a small company as defined under clause (85) of section 2 of the Companies Act;
(vi) a private limited company with a paid up capital and reserves not more than Rs 50 lakh and which
does not have loan outstanding exceeding Rs 25 lakh from any bank or financial institution and does not
have a turnover exceeding Rs 5 crore at any point of time during the financial year.
Matters to be included in the Auditor’s Report
i. a) Whether the company is maintaining proper records showing full particulars, including quantitative
details and situation of fixed assets;
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b) Whether these fixed assets have been physically verified by the management at reasonable intervals;
whether any material discrepancies were noticed on such verification and if so, whether the same
have been properly dealt with in the books of account.
ii. a) Whether physical verification of inventory has been conducted at reasonable intervals by the
management;
b) Are the procedures of physical verification of inventory followed by the management reasonable and
adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in
such procedures should be reported;
c) Whether the company is maintaining proper records of inventory and whether any material
discrepancies were noticed on physical verification and if so, whether the same have been properly dealt
with in the books of account.
iii. Whether the company has granted any loans, secured or unsecured to companies, firms or other parties
covered in the register maintained under section 189 of the Companies Act. If so,
(a) Whether receipt of the principal amount and interest are also regular; and
(b) If overdue amount is more than rupees one lakh, whether reasonable steps have been taken by the
company for recovery of the principal and interest.
iv. Is there an adequate internal control system commensurate with the size of the company and the nature
of its business, for the purchase of inventory and fixed assets and for the sale of goods and services.
Whether there is a continuing failure to correct major weaknesses in internal control system.
v. In case the company has accepted deposits, whether the directives issued by the Reserve Bank of India
and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the
rules framed there under, where applicable, have been complied with? If not, the nature of
contraventions should be stated; If an order has been passed by Company Law Board or National
Company Law Tribunal or Reserve Bank of India or any court or any other tribunal,
Whether the same has been complied with or not?
vi. Where maintenance of cost records has been specified by the Central Government under sub-section (1)
of section 148 of the Companies Act, whether such accounts and records have been made and
maintained.
vii. Is the company regular in depositing undisputed statutory dues including provident fund, employees'
state insurance, income-tax, sales-tax, wealth tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues with the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of
more than six months from the date they became payable, shall be indicated by the auditor.
In case dues of income tax or sales tax or wealth tax or service tax or duty of customs or duty of excise or
value added tax or cess have not been deposited on account of any dispute, then the amounts involved
and the forum where dispute is pending shall be mentioned.
Whether the amount required to be transferred to investor education and protection fund in accordance
with the relevant provisions of the Companies Act, 1956 and rules made there under has been transferred
to such fund within time.
viii. Whether in case of a company which has been registered for a period not less than five years, its
accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and
whether it has incurred cash losses in such financial year and in the immediately preceding financial year.
ix. Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture
holders? If yes, the period and amount of default to be reported.
x. Whether the company has given any guarantee for loans taken by others from bank or financial
institutions, the terms and conditions whereof are prejudicial to the interest of the company.
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xi. Whether term loans were applied for the purpose for which the loans were obtained.
whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and the
amount involved is to be indicated.
Some of true or false statements (Given in RTPs)
a) The remuneration of subsequent auditor appointed under the companies act, 2013 shall be fixed by the
board - Incorrect
b) Sales invoice is an example of external evidence - Incorrect
c) The risk of not detecting an error is higher than not detecting a fraud - Correct
d) Events occurring after balance sheet date must be disclosed in the FS - Incorrect
e) If the auditor has detected any fraud committed by the officer or employees of the company, he shall
immediately report the same to Audit committee - Incorrect
f) In case board fails to appoint the first auditor, they shall immediately inform to the share holders - Correct
g) Copies of communication with other auditors, experts, and other third parties are part of permanent audit
file - Incorrect
h) The primary objective of an audit is to detect fraud and error in FS - Incorrect
i) Audit procedures and Audit techniques are not one and the same - Correct
j) Where a person appointed as an auditor of a company incurs any disqualification after his appointment, he
shall vacate his office as such auditor - Correct
Also refer the following areas
 Cost audit
 Rotation of auditors (especially the provision for existing auditors)
 Audit of a small company
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40

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Important Areas for CA – IPC

CA ARUN KUMAR THIRAKKANAM

Some General Points

Wishing you all the success

What are the advantages of an Independent Audit?

Write about Surprise Check

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o Receipts in Bank statements

 Adverse media comment.

 Change from creditors to cash

Factors to be considered while using the work of an Expert – SA 620

Important Areas – Indebtedness, Holding Security, Business Relations,

However there are some relaxations with respect to securities

 Private limited company with paid up capital less than

Important Areas: Applicability of CARO, Clauses – 1,2,3,7 and 8

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